New York Statutory Remedy Limited to a Single Policy Period

In a win for Wiley’s client, the New York Supreme Court Appellate Division affirmed a trial court’s determination that New York Insurance Law Section 3426’s prohibition on coverage reductions in renewal policies where notice was not sent directly to the insured applies only for a single policy term, and not to subsequent renewals containing that same reduction. Florence Cap. Advisors, LLC v. Thompson Flanagan & Co., LLC, 2023 WL 2530495 (N.Y. App. Div. Mar. 16, 2023). The court reasoned that reading the statute differently would effectively create “perpetual coverage.”

An insurer issued a series of professional liability policies to an investment advisor annually from 2017 to 2020. The insurer added a hedge fund exclusion to the 2018 policy, which remained on the 2019 and 2020 policies. In 2020, the insureds faced a lawsuit from a former client based on advice to invest in a fund that ultimately became insolvent. The insurer denied coverage based on the hedge fund exclusion, which applied on its face. The insureds filed a coverage action asserting that the hedge fund exclusion had been added in violation of New York Insurance Law Section 3426, which provides that insurers must give specific notice of certain new terms in policy renewals, such as exclusions, directly to the insured. The insureds asserted that notice to their brokers was insufficient and that the insurer could not rely on the hedge fund exclusion in any subsequent policy periods unless and until the insurer cured the asserted statutory violation. The insurer moved to dismiss on the basis that, even if the exclusion were added in violation of Section 3426, the statute only prevented application of the coverage reduction in the single policy period when the alleged statutory violation occurred (i.e., the 2018 Policy) and not in perpetuity (i.e., the subsequent renewals). The trial court granted the insurer’s motion, and the insureds appealed.

The Appellate Division affirmed, holding that, even if the hedge fund exclusion had been added in violation of Section 3426, the statute would only prevent the exclusion’s application in one additional policy period. Citing analogous New York case law and noting that “courts around the country have disfavored notions of perpetual coverage,” the court held that the insurer was entitled to rely on the 2020 policy’s exclusion, as the asserted Section 3426 violation had occurred more than a year prior to the issuance of that policy, when the 2018 policy was issued.