92 N.Y.2d 422 (1998)
An insurer must timely disclaim coverage under Insurance Law § 3420(d) when denying a claim based on a policy exclusion, if the claim would otherwise fall within the policy’s coverage provisions.
Summary
Thomas Bettenhauser, injured in a car accident while driving his own uninsured vehicle, sought underinsurance benefits under his parents’ policy with Worcester Insurance. Worcester initially processed the claim, requesting discovery and consenting to Bettenhauser’s settlement with the other driver. Over a year later, Worcester sought to stay arbitration, arguing the policy didn’t cover family members driving their own uninsured vehicles. The New York Court of Appeals held that Worcester’s failure to timely deny coverage, as required by Insurance Law § 3420(d), precluded them from later relying on a policy exclusion to deny the claim. This case clarifies the distinction between claims falling outside a policy’s initial coverage and those denied due to an exclusion.
Facts
Thomas Bettenhauser was injured in a two-car accident while driving his own automobile on November 22, 1995.
The other driver’s insurance policy had a $10,000 limit, and Bettenhauser’s policy did not include underinsurance coverage.
On February 1, 1996, Bettenhauser, who lived with his parents, filed an underinsurance claim under their policy with Worcester Insurance Company.
Worcester requested discovery and a medical examination, which Bettenhauser complied with over the next several months.
In December 1996, with Worcester’s consent, Bettenhauser settled his negligence action against the other driver for the policy limit of $10,000.
Procedural History
After settlement negotiations stalled, Bettenhauser demanded arbitration.
Worcester then commenced a special proceeding to permanently stay arbitration, arguing for the first time that the policy didn’t cover Bettenhauser because he was driving his own vehicle.
Supreme Court granted the stay, concluding the policy didn’t cover family members driving uninsured automobiles.
The Appellate Division affirmed.
Issue(s)
Whether an insurer must timely disclaim coverage under Insurance Law § 3420(d) when denying a claim based on a policy exclusion, if the claim would otherwise fall within the policy’s coverage provisions.
Holding
Yes, because Bettenhauser’s claim fell within the policy’s coverage provisions, and denial of coverage was predicated on a specific exclusion. Worcester’s failure to timely disclaim coverage as required by Insurance Law § 3420(d) precluded them from later relying on the exclusion to deny the claim.
Court’s Reasoning
The Court of Appeals reversed, holding that Worcester was required to timely deny coverage under Insurance Law § 3420(d). The court distinguished between situations where a claim falls outside the scope of the policy’s coverage portion (requiring no disclaimer) and where denial of coverage is based on a policy exclusion (requiring timely disclaimer).
The court emphasized that disclaimer is unnecessary when a claim falls outside the scope of the policy’s coverage portion because the insurance policy does not contemplate coverage in the first instance. By contrast, disclaimer is necessary when denial of coverage is based on a policy exclusion without which the claim would be covered. Failure to comply with section 3420(d) precludes denial of coverage based on a policy exclusion.
Referencing the case of Handelsman v Sea Ins. Co., the court noted “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.”
The court found that Bettenhauser’s claim fell within the policy’s coverage provisions in the “Insuring Agreement.” The relevant conditions of the Insuring Agreement were met. Denial of coverage was 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 court stated that Insurance Law § 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. The Court concluded that Worcester could not rely on the policy exclusion to escape liability because they did not comply with Insurance Law § 3420(d).