You can’t overstate the significance of the New York Court of Appeals’s late-2017 decision in Carlson v. American International Group. There New York’s highest court significantly expanded the reach of New York Insurance Law Section 3420(d). That’s that New York statute that can invalidate a disclaimer letter, for a bodily injury or wrongful death claim, that is not sent expeditiously. It is also the statute that can invalidate such a disclaimer letter where a copy of it was not sent to the claimants.

Many insurers have fallen afoul of Section 3420(d)’s requirements and paid for it. Carlson sets the stage for more of this to come. But not because Carlson expanded the requirements under Section 3420. Those remain unchanged.

Rather, Carlson’s impact is that it expanded the extent of situations in which the statute may be in play. Claims that you would have never before considered being subject to Section 3420(d) may now be. But that’s still not telling the whole story. The real issue presented by Carlson is that it did not provide any substantive guidance on whether one of these new “3420(d) situations” exists. This is a serious problem for insurers.

This issue was on display last week in Vista Eng’g Corp. v. Everest Indemnity Ins. Co., No. 302991/15 (N.Y. App. Div. May 24, 2018). The court addressed coverage for a general contractor, as an additional insured, under a policy issued to a subcontractor, for an injury sustained by an employee of the subcontractor on a New York construction site. The insurer for the subcontractor disclaimed coverage based on the policy’s “third party action over” exclusion.

Not so fast – literally -- said the general contractor. It commenced litigation and maintained that the insurer failed to timely disclaim coverage as required by Section 3420(d). The insurer responded that Section 3420(d) applies only to insurance policies “issued and delivered” in New York. As the insurer saw it, this was not a 3420(d) situation as it is a New Jersey insurer and the policy was issued to its insured, a New Jersey Company.

The trial court agreed with the insurer that the policy was issued and delivered outside of New York, so, therefore, the timeliness requirements of Section 3420(d) did not apply.

But the Appellate Division did not see it being so cut and dry. The court based its decision on Carlson, which is described holding as follows: “[T]he applicability of Insurance Law § 3420(d)(2) depends on (1) a policy covering risks located in New York, and (2) the insured being located in New York. The Carlson Court, for the first time, determined that a company was ‘located in’ New York if it had a ‘substantial business presence’ there.

To put it another way, prior to Carlson, the question whether 3420(d) was in play was a relatively objective test – a New York insurer or an insured with a New York address on its declarations page. Now the test is not so easy, and can’t be determined simply based on a zip code. Post-Carlson the question is whether the insured has a “substantial business presence” in New York. But what does that mean? How much of a presence is required to be substantial? It is not clear -- as Carlson does not set forth a specific definition of this term.

The Vista Eng’g Corp. seemed inclined to conclude that the insured had a “substantial business presence” in New York, pointing to the fact that the price under the subcontract was close to $1,000,000 and there was some evidence that it was the insured’s main job.”

However, the court was not willing to end it there. It held that “[b]ecause the Carlson Court did not set forth a specific definition of substantial business presence, and because the record is insufficiently developed concerning East Coast’s business presence in New York, we remand to allow the parties to develop the record and give Supreme Court an opportunity to meaningfully review the case in light of Carlson.”

A lengthy dissenting opinion, on the other hand, was willing to call it quits, concluding that 3420(d) applied and the case should be remanded to determine if the disclaimer was timely. This is a dissent worth reading for further guidance.

To put all of this into perspective… Section 3420(d), pre-Carlson, was a statute that presented challenges for insurers. And the consequences for failing to abide by it are draconian. Now, the number of claims potentially subject to Section 3420(d) has been expanded. But there is no clear guidance whether a claim comes within this new reach of 3420(d). This has to be figured out by the insurer, using the undefined “substantial business presence in New York” test. How can the insurer know this without getting a lot of information from the insured about its business? But it better do so, and quickly, as the clock is ticking on the insurer to comply with Section 3420, if so required.

The moral of the story is that some insurers will err on the side of caution and comply with Section 3420(d) so long as it might apply, such as in those cases involving a New York injury, despite the policy having been issued to a non-New York insured. You just don’t know if the insured has a substantial business presence in New York” test. And there’s probably not enough time to figure out.