Everyone has chimed in on the recent New Jersey Supreme Court decision upholding a finding that an insurer need not demonstrate prejudice to disclaim coverage for late notice of a claim under a claims-made directors and officers liability policy issued to a sophisticated insured. Templo Fuente De Vida Corp., v. Nat’l Union Fire Ins. Co. of Pittsburg, Pa, No. A-18-14 (074572), 2016 N.J. LEXIS 144 (N.J. Feb. 11, 2016). On its face, it looks like the New Jersey Supreme Court is bucking the trend of requiring insurers to demonstrate prejudice before they can disclaim based on late notice. But is New Jersey bucking the trend?
The Tempo decision is a well thought out and articulate dissertation on the distinction between occurrence-based policies and claims-made policies. It is also provides an excellent analysis on the theories behind requiring insurance companies to show prejudice when their insured’s are late in noticing a claim. It is worth the read whether you agree with its outcome or not.
Tempo involved a D&O policy issued to a corporate entity. Not the biggest company in the world, but nevertheless a sophisticated company that used a professional insurance broker to place its D&O insurance. The D&O policy was, of course, issued as a claims-made policy, which is how most professional liability and D&O policies have been issued for the past 20 or more years. The insured entered into a transaction that went bust and was sued. The insured settled the suit and assigned its rights under its D&O policy to the plaintiff.
The D&O policy had the typical notice clause found in most D&O policies, when required notice of claim as soon as practicable. There was no dispute that notice came more than 6 months after the insured was served with the first amended complaint and had retained counsel to answer the complaint. No excuse was given for the late notice.
All the courts that reviewed the case found in favor of the insurer based on the notice clause. Notice was late and there was no reason in a claims-made policy that the insurer had to demonstrate prejudice before disclaiming coverage. Basically, as described by the Supreme Court, here, where you have sophisticated parties entering into a claims-made policy, the peril being insured is the insured’s making of the claim within the terms and conditions of the claims-made policy. Unlike an occurrence policy, where the peril is the occurrence that may be incurred within the life of the policy coverage and the insurance contract is between a sophisticated insurer and a less than sophisticated individual insured with limited or no bargaining power, a claims-made policy is typically issued to a sophisticated insured. Thus, the equitable and public policy reasons for protecting an unsophisticated individual insured against an insurance company taking advantage of late notice to disclaim coverage just don’t exist with most claims-made insurance policies and their sophisticated policyholders.
As the Tempo court said: “In this instance we need not make a sweeping statement about the strictness of enforcing the “as soon as practicable” notice requirement in “claims made” policies generally. We need only enforce the plain and unambiguous terms of a negotiated Directors and Officers insurance contract entered into between sophisticated business entities. Its notice conditions contain mutual rights and obligations and a clear and unambiguous requirement that the insured report a claim to the insurer “as soon as practicable,” pursuant to section 7, thereby preserving the insurer’s rights, under section 8, to associate and influence how the litigation proceeds from its inception.” Finding that the insured here breached the condition precedent of timely notice and breached the contract’s notice provisions, the court found in favor of the insurer.
The court concluded by recognizing that other jurisdictions might rule differently, but stuck to its precedents and the requirement that a sophisticated insured must adhere to the clear terms of a claims-made policy.