On Wednesday, July 23, 2008, New York Governor David A. Paterson signed legislation changing New York’s longstanding “no prejudice” rule, which for decades has strictly enforced the notice conditions of liability policies. The new legislation will prohibit a liability insurer from denying coverage based on the policyholder's failure to provide timely notice unless the insurer has been prejudiced by the late notice.

Additionally, the new legislation permits claimants in suits arising out of death or personal injury to maintain an action directly against an insurer to address the insurer's disclaimer based on the failure to provide timely notice.

The authors write that "New York's historical adherence to the "no prejudice" rule has been targeted by policyholders and claimants alike, in an effort to expand the available coverage and circumvent one of the strongest coverage defenses available to insurers in New York. This is the second time in the last two years that the New York legislature has sought to change New York's late notice jurisprudence and permit certain direct actions by claimants against insurers. Moreover, for many years, policyholder advocates have fought strenuously (although unsuccessfully) to overturn the no prejudice rule in the courts."

Further, the authors explain that, where it is applicable, the legislation signals a sea change in the approach to late notice under New York law. Proponents of the new bill argued that New York has been in the minority of the states in requiring no showing of prejudice to deny coverage based on late notice and that this permitted insurers to deny coverage based on what they deemed "an inconsequential technicality" while collecting billions of dollars annually in premiums.

However, timely notice is fundamental to the efficient and predictable administration of insurance contracts.

Prompt notice provides the insurer with an opportunity to investigate both coverage and the accident to prepare for potential claims, set up a defense where appropriate, engage in early settlement negotiations, to set appropriate premiums and establish adequate reserves, which benefits accrue to the policyholder and the insurer alike. The New York bill will remove incentives for policyholders to provide prompt notice, thereby undermining the important goals served by strict enforcement of notice requirements.

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