Insurer Need Not Show Prejudice from Insured’s Late Notice, New Jersey Supreme Court Holds

The New Jersey Supreme Court has ruled that an insurance company need not show that it was prejudiced by a sophisticated insured’s failure to comply with the notice provision in a “claims made” insurance policy.

The Case

Templo Fuente De Vida Corp. and Fuente Properties, Inc. (“plaintiffs”) retained a finance company to secure funding for the purchase of property. Plaintiffs were unable to obtain adequate sources of financing at closing and the sellers terminated the purchase agreement.  Plaintiffs sued the finance company and others.  They served a first-amended complaint on February 21, 2006.

The finance company had a $1 million directors, officers, and private company liability insurance policy from National Union Fire Insurance Company of Pittsburgh, PA, covering the time period from January 1, 2006 through January 1, 2007. The policy was a “claims made and reported” policy that required, as a condition precedent to coverage under the policy, “written notice to the Insurer of any Claim made against an Insured as soon as practicable.”

On August 28, 2006, more than six months after being served with the first amended complaint, but within the policy period, the finance company provided notice of the plaintiffs’ claims to National Union.

National Union denied coverage, asserting, among other defenses, that notice of the claims had not been given to National Union “as soon as practicable.”

The plaintiffs settled with defendants for more than $3 million. Defendants committed to pay the plaintiffs a portion of that amount. To cover the remainder, the insured finance company assigned to the plaintiffs its rights and interests under the National Union policy.

The trial court ruled that coverage was barred because the insured had not provided National Union with notice of the plaintiffs’ claims “as soon as practicable,” as required by the policy. In addition, the trial court concluded that National Union did not need to “show appreciable prejudice in order to avoid coverage based on a failure to meet the notice requirement of a claims made policy,” and that “to hold that such unambiguous [notice] language is unenforceable absent appreciable prejudice would be an unjust and inequitable expansion of the coverage provided.”

An intermediate appellate court affirmed, and the dispute reached the New Jersey Supreme Court.

The New Jersey Supreme Court’s Decision

The New Jersey Supreme Court affirmed, finding that National Union did not have to establish prejudice before denying coverage based on the insured’s failure to comply with the notice condition in its “claims made” policy.

In its decision, the court first found that the “unexplained six-month delay” before notice was given to National Union did not satisfy the policy’s “as soon as practicable” notice requirement.

The court then noted the “importance of the characteristics” of the insured, observing that it was not an individual and that the policy was not a “simple personal liability insurance policy.” Rather, the court recognized that the insured was an incorporated business entity that engaged in “complex financial transactions.” It had not obtained the policy on its own, but had sought out a broker, who procured the policy on its behalf.

Accordingly, the court enforced the “plain and unambiguous” terms of the negotiated “claims made” insurance contract entered into between “sophisticated business entities.” It held that the insured’s failure to comply with the notice provisions of the National Union claims made policy constituted a breach of the policy, and that National Union could decline coverage without having to demonstrate appreciable prejudice.

The case is Templo Fuente De Vida Corp. v. National Union Fire Ins. Co. of Pittsburgh, PA, No. A-18 Sept. Term 2014 (N.J. Feb. 11, 2016).

Rivkin Comment

Some courts have drawn a distinction between claims-made and reported policies, and claims-made policies.  To prevail on a late notice defense, these courts have required insurers to demonstrate prejudice under a claims-made policy, but not under a claims-made and reported policy.  That’s because reporting a claim within the policy period is an essential element of a claims-made and reported policy.

The policy in Templo Fuente was a claims-made and reported policy, but the reporting element did not seem to factor into the New Jersey Supreme Court’s analysis and decision.   Instead, the court distinguished between “occurrence” policies and “claims-made” policies, noting that the vast majority of policyholders under “occurrence” policies are unsophisticated.  The court recognized that a different conclusion may have been reached in other jurisdictions, but stated “our jurisprudence has never afforded a sophisticated insured the right to deviate from the clear terms of a ‘claims made’ policy.”