In a recent decision, the Second Department reminded defense attorneys and insurers that coverage analysis is a continuing obligation, not merely a binary yes or no decision at the time a claim is made.

The plaintiff in Mazl Bldg., LLC v. Greenwich Ins. Co. was added as an additional insured on a policy purchased from the defendant by a third party. Accordingly, when plaintiff was sued for personal injury, the defendant accepted plaintiff’s tender, agreeing to defend and indemnify plaintiff.

One year later, the defendant learned plaintiff had previously assigned its indemnification rights to a third party. Although this would be a basis to disclaim coverage and withdraw, the defendant continued to defend the case. In fact, defendant did not attempt to disclaim until almost four years after learning about plaintiff’s assignment, after jury selection had already been completed. Plaintiff was forced to settle the case out of pocket and pursue the defendant for reimbursement.

The Second Department affirmed plaintiff’s summary judgment motion in its resulting declaratory judgment action, ruling the defendant was estopped from disclaimer. The Court highlighted defendant’s failure to, at the very least, serve a Reservation of Rights promptly when it learned of a potential basis upon which to disclaim coverage.

While this decision does not posit a bright line rule or specific time period wherein an insurer should disclaim coverage when it learns of facts vitiating the policy, defense counsel and insurers should take note. Just because coverage may appear to exist at the outset of a case, new facts may arise which permit disclaimer at a later date. And should those facts arise, counsel and insurers must act promptly, or they may waive an opportunity to get out of a case. At a minimum, when in doubt, a reservation of rights could go a long way as a failsafe measure.

Thanks to Nicholas Schaefer for his contribution to this post. Please email Vito A. Pinto with any questions.