VGFC Realty II, LLC v. D’Angelo, et al., Index No. 28211/2011 (Sup.Ct. Queens Cty. February 2, 2016)

A Queens Court granted a defendant’s motion for summary judgment, declaring that the insurer does not have a duty to defend or indemnify named insured property lessee in an underlying lawsuit.

The action concerned claims for insurance coverage for an underlying personal injury action. Defendant insurer had two named insureds on a commercial general liability policy. The two named insureds were related commercial entities. The injured plaintiff was an employee of the one named insured, and was injured during the course of his employment. The employer of the injured plaintiff notified its broker, which submitted a claim to the insurer on behalf of the employer, but not on behalf of the related named insured, who was the net lessee of the property. Shortly after that, a personal injury action was commenced against the net lessee.

The insurer denied coverage to the employer of the injured plaintiff and, separately, to the lessee, based upon its failure to provide timely notice. The net lessee then commenced an action seeking declaratory relief against the insurer and damages against the net lessee’s broker. After extensive discovery, the insurer moved for summary judgment.

Applying the common law rules that governed policies issued prior to amendments to New York Insurance Law section 3420, the Court found that the net lessee’s failure in providing notice voided coverage. The Court rejected arguments that the delay was excused because upon the interconnections between the net lessee and the employer of the injured plaintiff, permitted the net lessee to reasonably believe it could rely upon a workers compensation defense and thus would have no liability.

Reviewing an extensive record that included tax returns, policies, deposition transcripts, and an affidavit, the Court found no alter ego relationship. Furthermore, the Court noted, the net lessee’s managing member had been aware of the accident and even knew that an ambulance responded and that the injured worker had been hospitalized. Yet, the net lessee undertook no investigation of the accident and made no inquiry regarding the workers compensation defense it purported to rely upon.

The Decision in VGFC Realty arrives in the twilight of the era of New York’s ‘no prejudice rule’. January 17, 2009 marked the beginning of a new era, with amendments to New York Insurance Law section 3420 that abrogated the common-law rule coming into effect for policies issued after that date. The amendments prohibit a carrier from denying coverage based on late notice of under two-years, unless the insurer can establish material prejudice in connection with the delay.

If the delay is greater than two-years, the insured bears the burden of demonstrating that the insurer was not prejudiced by the delay. Most policies issued in the ‘pre-amendment’ period expired long ago, and claims that they apply to have been made and dealt with, or very likely waived. Thus, in the future, the courts will confront claims like that in VGFC Realty, requiring application of the old ‘no-prejudice’ rule, less and less frequently. Recognizing when each set of rules applies, and knowing how to apply them, stays critical.