MATTER OF WORCESTER INSURANCE CO. v. BETTENHAUSER, N.Y., Judgment, Law, casemine.com

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Attorney(S)

Russo, Fox Karl, hauppauge (Kevin M. Fox of counsel), for appellant. Frankfort Koltun, Deer Park (Robert D. Frankfort and Patrick J. McGrath of counsel), for respondent.

Judges

Judith S. Kaye

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Smart Summary

Factual and Procedural Background

On November 22, 1995, Thomas Bettenhauser was seriously injured in a two-car accident while driving his own vehicle. The other driver's insurance policy had a $10,000 limit, and Bettenhauser's own policy did not include underinsurance coverage for his own vehicle. On February 1, 1996, Bettenhauser filed an underinsurance claim under his parents' policy with Worcester Insurance Company, as he lived with them at the time. Bettenhauser complied with discovery and medical examination requests, and in December 1996, with Worcester's consent, settled his negligence claim against the other driver for the policy limit.

After settlement negotiations on the underinsurance claim stalled, Bettenhauser demanded arbitration scheduled for March 24, 1997. Worcester then initiated a special proceeding seeking a permanent stay of arbitration, arguing for the first time that no coverage existed because Bettenhauser was operating his own vehicle, not a vehicle owned by the policyholder. The Supreme Court granted the stay, and the Appellate Division affirmed by a divided vote. Worcester's position was that the policy excluded coverage for family members driving vehicles not insured under the policy. This appeal followed, and the Court of Appeals reversed the lower courts' rulings.

Legal Issues Presented

Whether Worcester Insurance Company was required to timely deny coverage under Insurance Law § 3420(d) before invoking a policy exclusion to avoid arbitration of an underinsured motorist claim.
Whether the insurer's failure to timely disclaim coverage precludes reliance on the policy exclusion that excludes coverage for family members driving their own vehicles not insured under the policy.
Whether the underinsurance claim falls within the scope of coverage or outside it such that a disclaimer under Insurance Law § 3420(d) is necessary.

Arguments of the Parties

Respondent Worcester Insurance Company's Arguments

The policy unambiguously excludes coverage for family members driving their own vehicles that are not insured under the policy.
Because Bettenhauser was driving his own vehicle, Worcester argues it had no duty to arbitrate or to timely deny coverage.
Relied on precedents that did not involve bodily injury claims implicating Insurance Law § 3420(d), contending those cases support its position.

Appellant Thomas Bettenhauser's Arguments

Worcester waived its right to invoke the policy exclusion by failing to timely deny coverage pursuant to Insurance Law § 3420(d).
Bettenhauser's claim falls within the policy's coverage provisions, triggering the insurer's duty to timely disclaim coverage if relying on an exclusion.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308	Interpreted insurer's duty to disclaim coverage; did not involve bodily injury claims under Insurance Law § 3420(d).	Court found Worcester's reliance misplaced as the case did not involve bodily injury claims triggering § 3420(d).
Schiff Assocs. v. Flack, 51 N.Y.2d 692	Addressed insurer disclaimers but not in the context of bodily injury claims under Insurance Law § 3420(d).	Rejected Worcester's reliance since the case did not implicate the statutory duty under § 3420(d).
Crouse West Holding Corp. v. Sphere Drake Ins. Co., 92 N.Y.2d 1017	Reviewed insurer disclaimers; no occasion to assess disclaimer timing under § 3420(d) in relation to Appellate Division's decision.	Not applicable to the present case's disclaimer issue.
Zappone v. Home Ins. Co., 55 N.Y.2d 131	Distinguished between lack of coverage in the first instance and lack of coverage due to an exclusion requiring timely disclaimer under § 3420(d).	Used to illustrate that no disclaimer is needed when coverage never existed; but disclaimer is required when denial is based on an exclusion.
Handelsman v. Sea Ins. Co., 85 N.Y.2d 96	Clarified that when a claim meets coverage conditions but is excluded, insurer must timely disclaim or lose right to rely on exclusion.	Applied to hold Worcester's failure to timely disclaim precluded reliance on the policy exclusion.
Jerge v. Buettner, 90 N.Y.2d 950	Supported the principle that failure to timely disclaim bars insurer from denying coverage based on exclusions.	Reinforced the necessity of timely disclaimer in cases involving policy exclusions.
Sphere Drake Ins. Co. v. Block 7206 Corp., 265 A.D.2d 78	Related to insurer disclaimer obligations.	Referenced as supporting precedent for disclaimer requirements.
Government Empls. Ins. Co. v. Kolodny, 269 A.D.2d 564	Addressed insurer's disclaimer obligations under similar circumstances.	Supported the court's reasoning on the necessity of timely disclaimers.

Court's Reasoning and Analysis

The Court began by examining the Worcester insurance policy's "Underinsured Motorists Coverage" endorsement, which provides coverage to "insureds," defined as the policyholder or any family member residing in the household, for bodily injury caused by an underinsured motor vehicle. The policy also contains an exclusion for bodily injury sustained while occupying or struck by a vehicle owned by the insured or a family member that is not insured under the policy.

The Court noted that Worcester argued the exclusion negated coverage for Bettenhauser because he was driving his own vehicle not insured under the policy. However, the Court emphasized that under Insurance Law § 3420(d), an insurer must timely disclaim or deny coverage for claims involving bodily injury, or it waives the right to rely on policy exclusions.

The Court distinguished between claims that fall outside the coverage portion of a policy (requiring no disclaimer) and claims that fall within coverage but are excluded by specific policy terms (requiring timely disclaimer). It relied on precedents such as Zappone and Handelsman to illustrate this distinction.

In this case, Bettenhauser's claim met the coverage conditions of the policy's insuring agreement, making him an insured entitled to recover for bodily injury caused by an underinsured motorist. Worcester's denial was based on a policy exclusion, not an absence of coverage. Since Worcester failed to timely disclaim coverage and delayed denying coverage for over a year while participating in discovery and consenting to settlement of the underlying negligence claim, the insurer waived its right to rely on the exclusion.

The Court concluded that Worcester's delay prejudiced Bettenhauser, contrary to the purpose of Insurance Law § 3420(d), which protects injured claimants from such prejudice. Therefore, Worcester could not now escape liability by invoking the exclusion.

Holding and Implications

The Court REVERSED the order of the Appellate Division and DISMISSED the petition to permanently stay arbitration.

The direct effect of this decision is that Worcester Insurance Company must proceed with arbitration of Bettenhauser's underinsured motorist claim and cannot rely on the policy exclusion to avoid coverage due to its failure to timely disclaim under Insurance Law § 3420(d). The opinion does not establish new precedent beyond reaffirming the established distinction between lack of coverage and exclusions requiring timely disclaimers, nor does it discuss broader implications beyond the parties involved.

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IN THE MATTER OF WORCESTER INSURANCE COMPANY, Respondent, v. THOMAS BETTENHAUSER, Appellant. KEVIN M. FOX, FOR Appellant. ROBERT D. FRANKFORT, FOR Respondent.

KAYE, CHIEF JUDGE:

While driving his own automobile on November 22, 1995, appellant Thomas Bettenhauser was seriously injured in a two-car accident. The other driver's insurance policy had a $10,000 limit, and Bettenhauser's policy did not include underinsurance coverage. Accordingly, on February 1, 1996, Bettenhauser, who lived with his parents at the time of the accident, filed an underinsurance claim pursuant to their policy with respondent Worcester Insurance Company. Over the next several months, Bettenhauser responded to Worcester's demands for discovery and for a medical examination. In December 1996, with Worcester's consent, Bettenhauser settled his negligence action against the other driver for the policy limit of $10,000.

After settlement negotiations on the underinsurance claim stalled, Bettenhauser served Worcester with a demand for arbitration, and the arbitration was set down for March 24, 1997. Worcester then commenced this special proceeding to permanently stay arbitration, urging for the first time that "no coverage exists in respect to Thomas Bettenhauser's claim for underinsured motorist benefits in that [he] was operating his own vehicle at the time of the accident and was not operating a vehicle owned by the policyholder." Supreme Court granted the stay, concluding that the policy did not provide coverage "for family members driving an automobile not covered by [the] policy." A divided Appellate Division affirmed. Because Worcester failed to timely deny coverage, we now reverse.

Analysis begins with the Worcester policy. The "Underinsured Motorists Coverage" endorsement opens with the following "Insuring Agreement:"

"A. We will pay damages which an `insured' is legally entitled to recover from the owner or operator of an `underinsured motor vehicle' because of `bodily injury:'

1. Sustained by an `insured;' and

2. Caused by an accident.

* * *

"B. `Insured' as used in this endorsement means:

1. You or any `family member.'"

The policy defines "family member" as "a person related to you by blood, marriage or adoption who is a resident of your household."

Following the "Insuring Agreement" paragraphs is a section labeled "Exclusions," which reads in part:

"A. We do not provide Underinsured Motorists Coverage for `bodily injury' sustained by any person:

1. While `occupying' or when struck by, any motor vehicle owned by you or any `family member' which is not insured for this coverage under this policy."

Worcester urges that, read as a whole, the policy unambiguously indicated lack of coverage where, as here, a family member was involved in an accident while driving his own car that was not insured under the policy. Consequently, Worcester maintains that it had no duty whatever — whether to arbitrate or timely deny coverage — with respect to Bettenhauser's claim. Bettenhauser, on the other hand, argues that Worcester waived its right to invoke a policy exclusion by failing to timely deny coverage pursuant to Insurance Law § 3420(d). We agree with Bettenhauser and disagree with Worcester.

Insurance Law § 3420(d), applicable only to claims for "death or bodily injury," reads:

Worcester's reliance on New York Univ. v. Continental Ins. Co. ( 87 N.Y.2d 308, 323) and Schiff Assocs. v. Flack ( 51 N.Y.2d 692, 697-699) is misplaced. Neither case involved a claim for bodily injury implicating Insurance Law § 3420(d). Reliance onCrouse West Holding Corp. v. Sphere Drake Ins. Co. ( 92 N.Y.2d 1017) is also unwarranted as we had no occasion in that case to review the Appellate Division's determination regarding the insurer's disclaimer (see, Crouse West Holding Corp. v. Sphere Drake Ins. Co., 248 A.D.2d 932, appeal dismissed, lv. denied 92 N.Y.2d 941).

"If under a liability policy delivered or issued for delivery in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant."

Disclaimer pursuant to section 3420(d) is unnecessary when a claim falls outside the scope of the policy's coverage portion. Under those circumstances, the insurance policy does not contemplate coverage in the first instance, and requiring payment of a claim upon failure to timely disclaim would create coverage where it never existed. By contrast, disclaimer pursuant to section 3420(d) is necessary when denial of coverage is based on a policy exclusion without which the claim would be covered (see,Zappone v. Home Ins. Co., 55 N.Y.2d 131, 134, 138 [construing former Insurance Law § 167(8), now Insurance Law § 3420(d)]; see also,Jerge v. Buettner, 90 N.Y.2d 950, 953; Handelsman v. Sea Ins. Co., 85 N.Y.2d 96, 102, rearg denied 85 N.Y.2d 924). Failure to comply with section 3420(d) precludes denial of coverage based on a policy exclusion.

As the split at the Appellate Division evidences, drawing the line between a lack of coverage in the first instance (requiring no disclaimer) and a lack of coverage based on an exclusion (requiring timely disclaimer) has at times proved problematic. Both are situations where there is no coverage.Zappone and Handelsman, however, illustrate the distinction and demonstrate why, in the case before us, timely denial of coverage was required.

In Zappone, the policy's coverage clause at the outset conditioned recovery on liability "arising out of the ownership, maintenance or use of [a covered] or a non-owned automobile" (see,Handelsman v. Sea Ins. Co., supra, 85 N.Y.2d, at 102). Because the automobile involved in the accident was owned by a family member and was not within the coverage clause, we concluded that there was never a contractual relationship between the carrier and the claimant giving rise to any duty, including the statutory duty to timely disclaim. We explicitly distinguished the situation where a claim would be covered but for a specific policy exclusion, explaining that "the carrier must deny coverage on the basis of the exclusion if it is not to mislead the insured and the injured person to their detriment" (Zappone v. Home Ins. Co., supra, 55 N.Y.2d, at 136).

In Handelsman, by contrast, the coverage portion of the insurance policy required payment for "`bodily injury' or `property damage' for which any `insured' becomes legally responsible because of an auto accident," and defined an "insured" as a "`family member' for the ownership, maintenance or use of any auto" (id., at 99-100). The policy also contained a "specific exclusion," stating that the coverage described elsewhere did not apply to the ownership or use of a vehicle "owned by any `family member'" that was not a "covered auto."

In Handelsman, a son was involved in an accident while driving his mother's car. Both mother and son filed a claim under the father's insurance policy, which did not specifically list the vehicle involved in the accident as a "covered auto." Because mother and son were "insureds" who satisfied all the conditions of the relevant coverage provisions — which did not contain any limitation with reference to vehicles — we concluded that a relationship between the carrier and the claimants existed, requiring timely denial of coverage based on the policy exclusion. We further explained that the carrier's failure to timely disclaim was "dispositive" and precluded subsequent reliance on the exclusion to avoid its obligations (see also, Jerge v. Buettner,supra, 90 N.Y.2d, at 952-953; Sphere Drake Ins. Co. v. Block 7206 Corp., 265 A.D.2d 78, 705 N.Y.S.2d 623; Government Empls. Ins. Co. v. Kolodny, 269 A.D.2d 564, 703 N.Y.S.2d 513).

This case is no different from Handelsman. Timely disclaimer was necessary because Bettenhauser's claim falls squarely within the policy's coverage provisions set out in the "Insuring Agreement." The relevant conditions of the Insuring Agreement — none of which depend on the vehicle driven — are met: Bettenhauser is defined as an "insured" entitled to recover from an owner or operator of an underinsured motor vehicle for "bodily injuries" caused by an accident. Denial of coverage is predicated on one of the designated "Exclusions." But for a specified circumstance — here, the use of a family-owned motor vehicle not insured by the policy — Bettenhauser's claim would have been covered.

The situation presented is precisely the one Insurance Law § 3420(d) was intended to avoid. Section 3420(d) was enacted to avoid prejudice to an injured claimant who could be harmed by delay in learning the insurer's position. Worcester waited more than a year to deny coverage, all the while subjecting Bettenhauser to discovery demands, and ultimately consenting to settlement of his action against the other driver. Having failed to comply with Insurance Law § 3420(d), Worcester cannot now rely on the policy exclusion to escape liability.

Accordingly, the order of the Appellate Division should be reversed, with costs, and the petition to stay arbitration dismissed.

Order reversed, with costs, and petition to stay arbitration dismissed. Opinion by Chief Judge Kaye. Judges Bellacosa, Smith, Levine, Ciparick, Wesley and Rosenblatt concur.

MATTER OF WORCESTER INSURANCE CO. v. BETTENHAUSER