Historically, in New York, an insurer disclaiming coverage based on its insured's late notice of claim was not required to establish that it had been prejudiced as a result of the insured's delay. This is termed the “no-prejudice rule,” and is a minority position among the states. New York courts justified the no-prejudice rule on the basis that strict enforcement of a policy's notice provisions protected insurers from fraud since it allowed them to investigate claims soon after the underlying events occurred, set reserves, and take an early role in settlement discussions. In re Brandon (Nationwide Mut. Ins. Co.), 97 N.Y.2d 491, 496 (2002).

In 2008, the New York legislature amended New York's insurance law to create a limited exception to the state's common law no-prejudice rule. 2008 Sess. Law News of N.Y. Ch. 388 (S. 8610) (McKinney). The legislature amended N.Y. Ins. Law §3420(a) by adding subparagraph (5), which provides that all liability policies issued or delivered in New York on or after Jan. 17, 2009, must include a provision that failure to give notice as required under the policy “shall not invalidate any claim … unless the failure to provide timely notice has prejudiced the insurer.” The legislature added that “[t]he insurer's rights shall not be deemed prejudiced unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim.” N.Y. Ins. Law §3420(c)(2)(C). When notice is provided within two years of the time required under the policy, it is the insurer's burden to establish prejudice, after which the burden shifts to the insured, injured party, or claimant to establish the insurer was not prejudiced by the delay. N.Y. Ins. Law §3420(c)(2)(A). The legislature also created an “irrebuttable presumption of prejudice” when “prior to notice, the insured's liability has been determined by a court of competent jurisdiction or by binding arbitration; or if the insured has resolved the claim or suit by settlement or other compromise.” N.Y. Ins. Law §3420(c)(2)(B).

In the decade since these new rules came into effect, courts have been required to explore largely uncharted waters to determine what constitutes prejudice to an insurer that would permit a disclaimer based on late notice in accordance with the statute when there is no liability finding or settlement to trigger the irrebuttable presumption of prejudice. One of the first decisions addressing New York's new prejudice rule was Atl. Cas. Ins. Co. v. Value Waterproofing, 918 F. Supp. 2d 243 (S.D.N.Y. Jan. 15, 2013). In Value Waterproofing, a roofing contractor performed work on a roof, and the roof subsequently collapsed. Despite being on notice of the collapse within hours of its occurrence, the contractor waited six months to place its liability insurer on notice. In that time, the premises where the collapse occurred was demolished pursuant to an order from the New York City Department of Buildings. Upon receiving notice, the insurer took various steps to investigate the claim—including visiting the site, asking for photographs of the site, and interviewing the insured's employees—before ultimately determining that these steps were insufficient. The insurer denied coverage based on the contractor's late notice and commenced suit seeking a declaration that it was not obligated to defend or indemnify its insured in connection with the collapse. The court determined that the insurer demonstrated that the delay prevented it from independently ascertaining potential causes of the collapse, thus satisfying its “heavy burden” of establishing prejudice by late notice as required under §3420 of the Insurance Law.