The Supreme Court of New Jersey – the highest court in New Jersey – held that the failure to comply with the notice provisions of the claims-made policy constitutes a breach of the policy, permitting the insurer to decline coverage to a sophisticated insured without demonstrating prejudice to the insurer caused by the delay.

We previously reported on where the Appellate Division ruled, in Templo Fuente de Vida Corp. and Fuente Properties, Inc., that for a claims-made policy, the policy holder is to provide notice of a claim: (1) during the same policy period in which the policyholder received the claim and (2) “as soon as practicable.” Otherwise, the claim may be denied because of late notice. The New Jersey Appellate Division determined that six months or more is not “as soon as practicable.”

Underlying facts: In 2005, Templo Fuente de Vida Corp. and Fuente Properties, Inc. (jointly, “Templo”) filed a lawsuit against Morris Mortgage, Inc. and its affiliates (jointly, “Morris”) regarding a failed real estate purchase. After being served with the complaint, Morris waited more than six months to provide notice of the lawsuit to its Directors and Officers (“D&O”) insurance carrier, National Union Fire Insurance Company of Pittsburgh, P.A. (“National Union”). National Union disclaimed coverage on multiple grounds, including that Morris did not provide notice “as soon as practicable” as required under the D&O policy.

In June 2009, Templo and Morris settled their dispute for approximately $3.6 million. Morris paid Templo approximately $100,000 and assigned to Templo their claims against National Union for coverage under the D&O policy regarding the remaining $3.5 million.

Templo then sued National Union. The trial court granted summary judgment to the insurer. The trial court found that coverage was barred under New Jersey precedent holding that a 5-½-month delay was not “as soon as practicable.” The trial court ruled that the insurer did not have to show that it was prejudiced by the late notice.  The Appellate Division agreed.

Analysis:  The Supreme Court rejected the insured’s argument based on “equitable concerns” that unsophisticated consumers are unaware of all the policy’s requirements regarding providing notice.  Here, the Supreme Court focused on the policy at issue – a Directors and Officers claims-made policy – where the policyholders are particularly knowledgeable insureds purchasing their insurance requirements through sophisticated brokers.  Significantly, the Court stated that it was not making “a sweeping statement” about the strictness of enforcing the “as soon as practicable” notice requirement in claims-made policies generally (i.e., for unsophisticated consumers).  That issue apparently remains unresolved.

Lesson:  The sophistication of the parties may be significant as to whether prejudice will be required by New Jersey courts to deny coverage for late notice under a claims-made policy.  By declining to make a “sweeping statement” about the strictness of enforcing the notice requirement generally, the Supreme Court left room to either follow or depart from this rule in the context of unsophisticated insureds.  However, the best course of action is always to provide prompt notice of any claim.