Why it matters: In a recent loss for policyholders, the New Jersey Supreme Court has declared that an insurer is not required to demonstrate prejudice to deny coverage for late notice under a claims made policy, even if the claim was made during the policy period. Financing company First Independent purchased a Directors and Officers policy from National Union Fire Insurance Company that required the insured to provide notice of any claims "as soon as practicable" and no later than 30 days after the claim had been made as a condition precedent of coverage. The insurer relied upon this language when denying coverage for a lawsuit filed by Templo Fuente De Vida Corporation over problems with financing for a real estate transaction, arguing that First Independent waited six months to provide notice. The parties in the underlying litigation settled and First Independent assigned its rights against the insurer to Templo Fuente, which sued. But a trial court judge granted summary judgment to the insurer and an appellate panel and the state's highest court affirmed. Unlike an "occurrence" policy, the claims made policy at issue did not require proof of prejudice to the insurer, the court held, as the policyholders "are particularly knowledgeable insureds" who "are much better able to deal with the insurers on an equal footing" and can be expected to understand the terms and conditions of their policy, including the notice requirements.
Detailed discussion: Must an insurance company demonstrate it was prejudiced by an insured's failure to comply with the notice provision in a Directors and Officers "claims made" policy? The New Jersey Supreme Court recently answered in the negative.
The dispute began when Templo Fuente De Vida Corporation engaged a mortgage company to find funding sources for the purchase of property to relocate its church and daycare centers. Templo Fuente made a down payment and entered into a purchase agreement to buy a property, conditioned upon mortgage financing.
Over the course of several months, the financing company—today known as First Independent Financial Group—gave Templo Fuente a series of funding commitments. But on the final closing date, none of the financial sources were able to fund the loan to purchase the property. Templo Fuente sued First Independent to recover its losses.
First Independent purchased a Directors and Officers policy from National Union Fire Insurance Company for the time period of January 1, 2006 through January 1, 2007. The "claims made" policy required that, as a condition precedent to coverage, the insured must "give written notice to the Insurer of any Claim made against an Insured as soon as practicable and either: (1) anytime during the Policy Period or during the Discovery Period (if applicable); or (2) within 30 days after the end of the Policy Period or the Discovery Period (if applicable), as long as such Claim is reported no later than 30 days after the date such Claim was first made against an Insured."
The insurer denied coverage to First Independent based on this provision. The policyholder waited more than six months after being served with the first amended complaint—even retaining counsel and filing an answer—to provide notice to National Union, which was certainly not "as soon as practicable," the insurer said.
Templo Fuente and the insured settled, with a portion of First Independent's liability satisfied by the assignment of its rights against the insurer, and Templo Fuente sued. A trial court judge granted National Union's motion for summary judgment and dismissed the complaint with prejudice. The intermediate appellate panel affirmed and, in a unanimous opinion, so did the New Jersey Supreme Court.
The court emphasized the differences between the "claims made" policy at issue and "occurrence" policies to hold that National Union was not required to demonstrate prejudice to deny a claim for late notice.
"Occurrence" policies were created to offer coverage for harms caused by collision, fire, and other similar acts, with liability triggered by an easily identifiable event, the court explained. Occurrence policies insuring against professional negligence trended out of favor due to the difficulties for underwriters facing an unlimited tail extending beyond the policy period, and insurance companies began to shift to "claims made" policies for professionals.
Because of the different risks, the reporting requirements for the policies differ, with "claims made" policies typically having an additional provision requiring that insurers be notified promptly and within the policy period. Such requirements maximize the insurer's opportunity to investigate and control or participate in negotiations with the third party, the court said.
In New Jersey, the courts have long taken the position that public interest requires an insurer to show prejudice to forfeit coverage for an insured's breach of the notice provision in an occurrence policy. Part of the reasoning is that such policies are generally adhesion contracts with a "stark imbalance" between insurance companies and insureds in terms of their respective understanding of the terms and conditions of the policy, the state's highest court wrote.
However, those same policy concerns do not apply with equal force to claims made policies, the court said, as demonstrated in a 1985 decision in Zuckerman v. National Union Fire Insurance Company concluding that an insurer was not required to demonstrate prejudice in such cases.
With this background, the New Jersey Supreme Court had no problem siding with the insurer as a matter of contract interpretation. "By the terms of the policy, National Union agreed to provide First Independent coverage for acts or omissions taking place at any time so long as the claim was made and reported to National Union both within the policy period and 'as soon as practicable,'" the court wrote.
Despite Templo Fuente's argument that whether a claim was reported "as soon as practicable" was a fact-sensitive issue, the court noted that Templo Fuente did not argue that the notice provision was ambiguous, and conceded during oral argument that First Independent did not notify the insurer "as soon as practicable." The insured also did not explain why the delay occurred. Thus, because no factual dispute existed that notice was not timely, the court held that the six-month delay did not satisfy the policy's notice requirement. However, the court refused to draw a "bright line" for timely compliance with an "as soon as practicable" notice provision.
Turning to the issue of prejudice, the court reiterated the differences between occurrence and claims made policies, particularly the characteristics of the parties involved. "[I]n the vast majority of 'occurrence' policies, the policyholders are 'unsophisticated consumer[s] unaware of all of the policy's requirements,'" the New Jersey Supreme Court said. Courts therefore take special consideration that such policyholders are unlikely to be conversant with the fine print of their policies and "[w]e have historically approached 'claims made' and 'occurrence' policies differently due in large part to the differences between the policyholders themselves."
But First Independent was not an unsophisticated consumer, the court said. "First Independent is not an individual and this policy is not a simple personal liability insurance policy," the court wrote. "To the contrary, the insured was an incorporated business entity that engaged in complex financial transactions," and used a broker to procure the policy on its behalf.
"Those equitable concerns based on the nature of the parties do not control in our analysis of the 'as soon as practicable' notice requirement of the Directors and Officers 'claims made' policy here, where the policyholders 'are particularly knowledgeable insureds, purchasing their insurance requirements through sophisticated broker[s].' In this arena, insurers are 'dealing with a more sophisticated clientele, [who] are much better able to deal with the insurers on an equal footing[.]'"
In the case at hand, a "sweeping statement" about "the strictness of enforcing the 'as soon as practicable' notice requirement in 'claims made' policies generally" was unnecessary, the court said. "We need only enforce the plain and unambiguous terms of a negotiated Directors and Officers insurance contract entered into between sophisticated business entities."
First Independent "violated a condition precedent of timely notice to National Union, and thus breached the policy's express condition of notice of a claim in order for coverage to attach," the unanimous court wrote. "[W]e conclude that the notice requirement within the contract of insurance sold by National Union to First Independent sufficiently conformed to the objectively reasonable expectations of the insured and, hence, did not violate the public policy of New Jersey."
A different conclusion may have been reached in other jurisdictions, the court added, "but our jurisprudence has never afforded a sophisticated insured the right to deviate from the clear terms of a 'claims made' policy."
To read the opinion in Templo Fuente De Vida Corp. v. National Union Fire Insurance Co., click here.