For the second time, the Second Circuit has confronted the question of how to apply Rule 3420 when a disclaimer is based on an auto exclusion and an endorsement that expands coverage to certain, but not all, classes of autos.

In Citizens Ins. Co. of Amer. v. Risen Foods, LLC, the insured sought coverage from a businessowners policy and a follow form umbrella policy for a car accident involving the insured’s employee and business vehicle. The businessowners policy contained the standard “Aircraft, Auto or Watercraft” exclusion that barred coverage for claims arising from an auto owned by the insured. By endorsement entitled “Hired Auto and Non-Owned Auto Liability – New York,” the businessowners policy expanded coverage to include claims arising from accidents involving hired or non-owned autos. Coverage under the umbrella policy was determined based on these provisions. On summary judgment, the District Court held the disclaimer was ultimately based on the auto exclusion, and ruled Citizens had a duty to defend under both policies because the disclaimer was untimely pursuant to N.Y. Ins. L. § 3420. On appeal, the Second Circuit reversed.

The Second Circuit previously encountered this issue in NGM Insurance Co. v. Blakely Pumping, Inc., 593 F.3d 150 (2d Cir. 2010). In NGM, the Second Circuit recognized that “[d]etermining whether there is no coverage by reason of exclusion as opposed to lack of inclusion can be problematic,” but ultimately held the endorsement and policy’s defined terms demonstrated that an employee’s auto “could never be covered….” (Emphasis in original). As a general rule, whereas § 3420 strictly requires timely notice of a disclaimer based on an exclusion, it does not apply when a disclaimer is based on the scope of coverage in the first instance (such as whether there is an “occurrence”). In Citizens, the Second Circuit reiterated its ruling in NGM and confirmed a narrow expansion to the general rule: “[n]otice is not required where there is no coverage by reason of lack of inclusion.” In other words, while the endorsement expanded coverage to accidents involving certain classes of autos, owned autos were not included and, therefore, the policies’ scope of coverage never included owned autos.

In New York practice, understanding and adhering to § 3420 is of paramount concern, and this narrow exception to the timeliness standard is of critical importance. If an endorsement re-writes the scope of coverage afforded by policy (as opposed to endorsements which add exclusions), disclaimers should be issued based on lack of inclusion to the endorsement in addition to any applicable exclusions.

Thanks to Chris Soverow for his contribution to this post.