On 10/22/14, the Court of Appeals heard argument in Sierra v. 4401 Sunset Park. The Court had granted Scottsdale leave to appeal from the Second Department’s ruling that Scottsdale’s disclaimer to GNY, which had tendered an additional insured claim on behalf of its insured, 4401 Sunset Park, was invalid under 3420(d) because the disclaimer was not sent to 4401 Sunset Park. For years, insurers have been tendering and responding to each other in this situation with nary a thought of the insured until GNY (as the likely party behind its insured's challenge) got the bright idea in this case to challenge the disclaimer on a 3420(d) technicality.
The Second Department considered that “under the circumstances of this case, GNY was not the real party in interest, such that the notice of disclaimer to GNY would be rendered effective as against 4401 and Sierra Realty.” The Court distinguished Excelsior where the tendering insurer was seeking to recoup a settlement it had paid, thus clearly making it the real party in interest. The insurer-to-insurer response passed muster under 3420(d) in that case.
At the argument in Sierra, the Court of Appeals pressed both sides hard making it impossible to predict how it will rule. Judge Pigott stated that it was “a commercially reasonable response” for Scottsdale to disclaim to the tendering party. Judge Smith noted that if GNY had cc’d its insured on the tender, the whole problem would have possibly been avoided.
The Court did not address the fact that the tendering insurer in this case, as in most cases, will in fact be the real party in interest because it will generally be the one to pay any settlement or judgment on behalf of its insured. More often than not, it is the one with the greater incentive and experience in such matters. The Court also did not address the Appellate Division case law holding that an insurer does not have to issue a disclaimer to parties that have not tendered to it. If an insured's notice obligation can be satisfied by its insurer, then it would certainly seem that the tendered-to insurer should be able to satisfy its disclaimer obligation by responding to that insurer. It should work both ways.
In the end, some members of the Court seemed to believe that the insured’s interest will not always be aligned with its insurer (citing only an excess exposure situation) and that the Court needed to enunciate one rule to cover all scenarios, which may be a rule saying that insurers must do what the statute says and respond to the insured with any disclaimer. There was no discussion about the significant potential ramifications of a decision by them changing the rules. Will a ruling invalidating Scottsdale's disclaimer cause parties to revisit past disclaimers causing a flood of new actions where the 6-year statute of limitations has not yet run. If they change the rules, will they make it prospective only to avoid such a problem? Time will tell...
