Policyholders often are cautioned to provide notice of a claim to their insurance carrier as soon as possible to avoid the risk that the carrier will deny coverage due to late notice. A recent court decision in New Jersey highlights the importance of this practice. The Superior Court of New Jersey, Appellate Division, held in Templo Fuente de Vida Corp. v. National Union Fire Insurance Company of Pittsburgh, P.A., that notice of a claim was not provided “as soon as practicable” when sent six months after service on the insureds of the underlying complaint. The court further held that an insurer on a claims-made policy does not have to show that it was prejudiced by the late notice. Courts in other states may have come out the other way on both of these issues, but given the patchwork of varying state law, and the fact that there is often a dispute as to which state’s law governs, a policyholder’s standard practice should be to promptly notify its carrier of a claim.
The coverage action arose from a lawsuit initially filed in 2005 by Templo Fuente de Vida Corp. and Fuente Properties, Inc. (collectively, “Templo”) against Morris Mortgage, Inc. and certain of its affiliates (collectively, “Morris”) involving a failed real estate purchase for which Morris was to obtain financing, but failed to do so. The Morris defendants were served with Templo’s complaint in the underlying action on February 21, 2006, but did not provide notice of the complaint to their Directors and Officers (“D&O”) insurance carrier, National Union Fire Insurance Company of Pittsburgh, P.A. (“National Union”), until six months later, in August. National Union then sent Morris letters on three separate occasions between September 2006 and March 2009 disclaiming coverage on various 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 roughly $3.6 million. Morris agreed to pay approximately $100,000 and assigned to Templo their claims against National Union for coverage under the D&O policy with respect to the remaining $3.5 million. Templo then sued National Union, but the trial court entered summary judgment in favor of the insurer. The trial court observed that Morris offered no explanation for the six-month delay in providing notice of Templo’s claim to National Union, and 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 also rejected Templo’s argument that the insurer had to show that it was prejudiced by the late notice.
On June 6, 2014, the New Jersey appellate court affirmed the trial court’s ruling. The appellate court first held that “the policy . . . clearly required that the notice be provided both within the policy period and as soon as practicable” and because Morris, and by extension their assignees, Templo, did not meet the second requirement, National Union properly denied coverage.
Next, relying on the New Jersey Supreme Court’s 1985 holding in Zuckerman v. National Union Fire Insurance Co., the appellate court rejected Templo’s argument that an insurer can only disclaim coverage if it can demonstrate that it was prejudiced by the insureds’ failure to provide notice as soon as practicable. InZuckerman, the New Jersey Supreme Court distinguished between occurrence policies, where an insurer must establish prejudice to avoid coverage, and claims-made policies (like the one at issue) where “an insurer need not show that it was prejudiced by an insured’s failure to provide notice ‘as soon as practicable.’” The appellate court found no basis to distinguish Zuckerman and held that it was “bound to follow and enforce the decisions of the Supreme Court.”
The result reached in Templo Fuente likely would have been different in many other jurisdictions. In states following the “notice-prejudice” rule, such as New York (by statute for certain policies issued after 2009) and California, insurers, including carriers issuing claims-made policies, must establish that they were prejudiced by the insured’s late notice before they can avoid coverage. Moreover, the court’s holding that the provision of notice six months from service of a claim is not “as soon as practicable” is questionable at best. Nonetheless, the law differs from state to state and policyholders would be well advised to notify their carrier of a claim at the earliest possible opportunity. Moreover, anyone willing to accept an assignment of insurance claims to settle a dispute with the policyholder should always first confirm that the policyholder provided prompt notice to its insurance carrier.