Many of the strict laws imposed against insurers in New York are found in NY Insurance Law § 3420 including, for example, the timeliness of the issuance of the disclaimers of coverage and the duty to notify a claimant of a disclaimer.

However, a recent decision by a federal district court in XL Specialty v Lakian, made clear that § 3420 is limited in its scope and does not apply to many types of insurance, including professional liability policies.

In Lakian, the insurer issued a professional liability insurance policy to Capital L Group, LLC.  Several allegations of mishandling of funds were asserted against individuals associated with Capital L.

The insurer filed an interpleader action after receiving multiple claims for the policy’s proceeds.  Several other parties filed motions to intervene.  Two such parties were default judgment creditors of Capital L who claimed that they were entitled to bring a direct action against the insurer under New York Insurance Law § 3420.  Indeed, under § 3420(a)(2), if a person or entity obtains judgment against an insured after 30 days “an action may … be maintained against the insurer under the terms of the policy or contract.”

But the Court refused to grant § 3420 an “expansive reading,” finding that no other court had “recognized a direct action Under Section 3420 in connection with the type of economic injury and financial services insurance policy at issue here.”  Quoting from § 3420, the Court determined that the statute only applied to policies “insuring against liability for injury to person … or against liability for injury to, or destruction of, property.”

Thanks to Steve Kaye for his contribution to this post.  Please write to Mike Bono for more information.