Insurer Need Not Demonstrate Prejudice from Late Notice Under a Claims Made Policy, New Jersey Appeals Court Rules

July 31, 2014 | Insurance Coverage

An appellate court in New Jersey, affirming a trial court’s decision, has ruled that an insurance company that had issued a “claims made” policy and that had not received notice of a claim “as soon as reasonably practicable” did not have to demonstrate that it had been prejudiced by the late notice to be able to disclaim coverage.

The Case

Templo Fuente De Vida Corporation, a New Jersey company that operates a church and child day care center, decided to relocate and to construct a new church and day care center. Toward that end, Templo entered into an agreement with Morris Mortgage, Inc. (“MMI”), under which MMI agreed to secure the loans Templo needed to purchase the land and complete the project. In connection with the transaction, Templo created Fuente Properties, Inc., to acquire the property.

MMI allegedly indicated that it had obtained financing from Merl Financial Group, Inc., but the sale never closed.

On November 22, 2005, Templo and Fuente filed a complaint alleging breach of contract and tort claims in a New Jersey state court against MMI, MMI’s principal, Merl, Merl’s affiliates, and their principals. Templo and Fuente never served this complaint, but filed an amended complaint on December 2, 2005 that added two John Doe defendants.

Templo and Fuente served the amended complaint, and the corporate entities and individuals allegedly covered by an insurance policy issued in favor of Merl’s successor, First Independent Financial Group, acknowledged receipt of the amended complaint on February 21, 2006. They did not provide notice of the complaint to the insurer until August 28, 2006.

The insurer disclaimed coverage, and was sued. The trial court ruled against the plaintiffs, finding that notice had not been provided to the insurer “as soon as practicable,” as required by the policy.

The dispute reached a New Jersey appeals court.

The Appellate Court’s Decision

The appellate court affirmed.

In its decision, the appellate court observed that, under the policy, the insureds had to notify the insurance carrier of the claim as soon as practicable. The appellate court pointed out, however, that the insurer had not been provided with notice of the claim until more than six months after the first amended complaint had been served, and that “[n]o explanation for this lengthy delay was provided.”

The appellate court then explained that the policy in this case was a “claims made” policy. The appellate court rejected the plaintiffs’ argument that the insurer only could disclaim coverage if it could demonstrate that it had been prejudiced by the failure to provide notice as soon as practicable.

Requiring an insurer under a claims made policy to make such a showing would constitute “an unbargained-for expansion of coverage, gratis, resulting in the insurance company’s exposure to a risk substantially broader than that expressly insured against in the policy,” the appellate court concluded.

The case is Templo Fuente De Vida Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. A-4516-12T1 (N.J. App. Div. June 6, 2014).

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