The recent Roslyn, Long Island, school board corruption scandal illustrates the importance of placing insurance companies on notice of claims in a timely manner, especially when New York law potentially is applicable.

Roslyns insurance companies have denied coverage or reserved their right to do so, contending that the school board failed to immediately notify them of potential losses resulting from embezzlement and misappropriation of monies. These circumstances could potentially cost taxpayers millions of dollars in insurance purchased specifically to protect against employee dishonesty. In light of New York precedent interpreting notice provisions in insurance policies, Roslyn could face a substantial, and perhaps unnecessary, roadblock to reimbursement of the millions of dollars stolen from its coffers.

Staggering Level of Corruption

By all accounts, the level of alleged financial corruption that occurred in the Roslyn school system is staggering. Roslyn is a relatively small village on the North Shore of Long Island, with only about 18,000 people living in the village and surrounding communities comprising the school district. As reported in the press, several employees of the school district allegedly stole an estimated $11.2 million over a period of approximately seven years. Three of the former employees have pleaded guilty to larceny and are cooperating with prosecutors while awaiting sentence.

While the employees have agreed to pay a portion of the amounts stolen under their plea agreements, it is far from clear whether they have the assets to do so or how long it will take them to do so. The school district had purchased a type of policy known as fidelity bond or commercial crime insurance, which is designed to pay a policyholder for losses caused by its dishonest employees.

Had Roslyn provided prompter notice, its insurance companies might have agreed to indemnify the school district for millions of dollars stolen by its former employees. However, according to the New York Times, three of the school districts four insurers have apparently declined to pay their claims (the fourth has reserved its right to deny the claims) because Roslyns board of education decided not to file an insurance claim when it first learned that an employee had stolen approximately $250,000.

At that time, the New York Times story continues, the board of education reportedly chose not to file an insurance claim partly to avoid any publicity and partly because the employee promised to repay that amount. As the school district reportedly later uncovered, the scope of the theft was far greater than originally thought, prompting it eventually to submit substantial claims to its insurance companies. The three companies that have denied the claims argue the school informed them too late under their respective fidelity policies notice provisions.

Although policy language can vary substantially, a typical fidelity bond or commercial crime insurance policy requires, [u]pon knowledge or discovery of loss under this bond, the insured shall (a) give notice thereof to the underwriter as soon as practicable and (b) file detailed proof of loss, duly sworn to, with the underwriter within four months after the discovery of loss (U.S. Fidelity & Guar. Co. v. Macon Bibb County Economic Opportunity, Inc.).

As Soon as Practicable Defined

Most, if not all, insurance policies contain so-called notice provisions. New York policyholders should particularly be aware of the notice provisions found in their general liability insurance policies. The common general liability insurance policy explicitly requires a policyholder to notify its insurance company of a potential claim as soon as practicable after a coverage triggering event or occurrence.

While such insurance policies typically define occurrence as an accident, including continuous or repeated exposure to conditions, which results in [bodily injury or] property damage neither expected nor intended from the standpoint of the insured (Morton Intern., Inc. v. Gen. Acc. Ins. Co. of America), they do not define as soon as practicable.

Many insurance companies argue that as soon as practicable actually means immediately and have denied insurance coverage to policyholders who fail to provide immediate notice. Some New York courts have supported such denials under certain circumstances. Indeed, New Yorks highest court, the New York Court of Appeals, recently confirmed New Yorks minority rule position that as a matter of law, failure to provide prompt notice vitiates the coverage claim regardless whether or not a delay in notice caused the insurance company prejudice (Argo Corporation v. Greater New York Mutual Insurance Company). New Yorks law is in stark contrast to the law of its neighbor, New Jersey. New Jersey follows the majority rule that a policyholders late notice to its insurance company will not defeat insurance coverage unless such notice caused appreciable prejudice or harm to the insurance company (Cooper v. Govt Employees Ins. Co.).

While the school district contemplates how to respond to the three denials and negotiates with the fourth insurance company, prejudice or no prejudice, the denials of insurance coverage may well stand under New Yorks law governing late notice of insurance claims. The Roslyn situation illustrates how crucial it is for New York policyholders to be aware that, as construed by insurance companies, New York law may require policyholders to give very prompt notice of claims or losses.

Although a policyholder may expect that it must place its insurance company on notice of a loss or occurrence, it may not appreciate:

A possible denial of its coverage claim;

A potentially draconian interpretation of the notice provision of their insurance policy divesting it of its coverage even if late notice did not result in any prejudice to its insurance company.

Kwon is a partner and Pawlowski an associate in the Newark, N.J. office of Kirkpatrick & Lockhart Nicholson Graham LLP where they regularly represent policyholders in insurance coverage actions against their insurance companies.