Second Circuit Highlights Importance of Preserving All Coverage Arguments for Appeal (NY)

In Harleysville v. Wesco, the Second Circuit upheld a District Court ruling that an insurance company must reimburse another insurance company for costs incurred defending and indemnifying their mutual insured.  In the underlying action, M&T, the mutual insured, was sued after delivering milk contaminated with metal filings to a client, causing extensive damage to their factory.  Wesco, who issued an auto liability policy to M&T, disclaimed coverage.  Harleysville, MT&T’s general liability carrier, assumed the defense and ultimately paid $180,000 in defense costs and $1 million in settlement.  It subsequently filed suit against Wesco, arguing it was Wesco’s policy, and not its own, covered the loss.

At the District Court level, Wesco had disputed the argument that their policy provided coverage.  On appeal, however, Wesco dropped that argument and instead asserted that Harleysville acted as a volunteer and thus could not pursue recovery under an assignment or subrogation theory.  The Second Circuit held that, while it had the authority to consider new arguments on appeal, this was not the appropriate case to do so.  Specifically, Wesco did not justify its decision to not raise the argument at the District Court level.  Further, while Wesco argued that its new argument presented a question of law, the Court could only exercise its discretion to decide purely legal issues where the resolution is beyond any doubt.  As Wesco was asking the court to essentially predict how the New York Court of Appeals would decide the issue, this was not “beyond any doubt.”  Finally, the Second Circuit rejected Wesco’s argument that no coverage exists because Harleysville failed to provide timely notice.  Under New York Insurance Law 3420(a)(5), Wesco was required to show that it was prejudiced by the late notice.  While Wesco asserted that it was prejudiced because they were unable to participate in discovery and the summary judgment briefing in the underlying action, the court held that “such a generalized assertion” is insufficient to establish prejudice under New York law.

Thus, this case highlights the importance of preserving all arguments for appeal, as well as further demonstrating the high bar insurers must clear in order to disclaim coverage based on late notice.

Thanks to Doug Giombarrese for his contribution to this post.  Please email Colleen Hayes with any questions.