A New York federal judge recently ruled that an insurer waived its late notice defense because a generic reservation of rights was insufficient to preserve it. As a result, the policyholder’s claim was preserved despite being submitted more than three months after the loss—a delay which would ordinarily be fatal under New York law. The decision underscores the importance both of timely submission of claims and careful attention to reservation of rights letters.

Background

Mave Hotel Investors LLC (“Mave”) owns a small hotel in Manhattan that was insured by Certain Underwriters at Lloyd’s, London (“Lloyd’s”). From October 2017 to October 2020, Mave contracted with a housing network to temporarily house homeless families and their children in the hotel. When the contract with the housing network terminated in October 2020, Mave alleged that the rooms were severely damaged and that it had to pay $1.4 million to repair them.

In January of 2021, Mave notified Lloyd’s of the damage and sought coverage under its general property insurance policy. Lloyd’s denied coverage on the ground that the alleged damage was caused by ordinary wear-and-tear—a category of damage that was excluded under Mave’s policy. Mave sued Lloyd’s in the Southern District of New York, and Lloyd’s moved for summary judgment on three grounds: (1) Mave failed to provide evidence that the loss occurred during the policy period; (2) Mave failed to provide timely notice of the loss; and (3) Mave failed to rebut Lloyd’s expert testimony that the damage was caused by ordinary wear-and-tear.

The court denied Lloyd’s motion on the first and third issues, finding that factual issues precluded a grant of summary judgment. While the court described its ruling on these questions as “close calls,” it had no trouble finding the late notice defense was waived.

Generic Reservation of Rights Does Not Preserve Late Notice Defense

Mave’s policy required it to provide “prompt notice” of a loss, and Lloyd’s argued that Mave’s delay in reporting the damage should bar the claim. In fact, New York courts routinely hold that delays of less than three months create grounds to deny coverage where the policy includes a “prompt notice” requirement.

While Mave largely conceded that its notice was not prompt, it argued that Lloyd’s waived the defense by not raising it when it disclaimed coverage. Instead, the disclaimer letter cited the wear-and-tear exclusion as the basis for the denial and included a general reservation of rights.

The court found the disclaimer insufficient to preserve the late notice defense. While it noted that “there is a strong policy rationale for allowing insurers broad discretion to rely on reservations-of-rights letters during their initial investigation,” i.e., so insurers are not incentivized to disclaim coverage immediately, the court found that it did not make sense to allow insurers to rely on boilerplate disclaimers in their final coverage determination. It reasoned that by the time the final coverage determination is made, the insurer already has a full record and has conducted an investigation. As a result, “there is much less reason why insurers should be allowed to ‘reserve’ generic unnamed defenses in the event of a later court challenge.”

Takeaways

While Mave was saved by Lloyd’s generic reservation of rights, the court’s decision highlights the importance of letting an insurer know of a potential loss as soon as possible, especially where the policy includes a prompt notice provision and is governed by New York law. Policyholders should involve coverage counsel early to ensure compliance with all policy provisions. Coverage counsel can also identify potential weaknesses in an insurer’s denial.