​A New Jersey trial court recently held that pre-tender defense costs are recoverable if the insurance company fails to establish that it suffered appreciable prejudice as a result of late notice of a claim. Policyholders can use the rationale of this decision to rebut insurance company arguments that they should not pay any pre-tender defense costs for claims where late notice is an issue.

Recently, the trial court in The Lewis Clinic for Education Therapy v. McCarter & English, LLP, et al., Docket No. MER-L-747-19 (Superior Court of New Jersey, Civil Division, Mercer County), dealt with the issues of late notice, voluntary payments, and pre-tender defense costs between the policyholder and its insurance company.

The insurance company asserted that the policyholder breached its obligation of providing timely notice and of not making any voluntary payments. The trial court disagreed and ruled that “not every breach of a contractual provision by an insured will permit a carrier to decline coverage.” Id. At 7. Citing Ohaus v. Cont’l Cas. Ins. Co., 292 N.J. Super 501,512 (App. Div. 1996), the trial court stated “[o]ur courts have consistently required that in order for coverage exclusionary provisions to apply, the insurer must show how it was [appreciably] prejudiced by the insured’s actions.” Id. In discussing appreciable prejudice, the trial court stated: ​

  • Appreciable prejudice “requires findings of ‘whether substantial rights have been irretrievably lost by virtue of the failure of the insured to notify the carriers in a timely fashion,’ and ‘the likelihood of success of the insurer in defending against the underlying claim.’” Ohaus v. Cont’l Cas. Ins. Co., 292 N.J. Super. 501,512 (App. Div. 1996) (citing Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sure. Co., 817 F. Supp. 1136, 1162-63 (D.N.J. 1993). The insurer must “establish more than the mere fact that it cannot employ its normal procedures in investigating and evaluating the claim.” Morales v. Nat’l Grange Mutual Ins. Co., 176 N.J. Super 347, 355 (Law. Div. 1980).

Id. At 7-8. The trial court then applied the appreciable prejudice standard to the notice and voluntary payments provisions in the insurance policy and ruled that the insurance company had not demonstrated the materiality of the breach of notice or voluntary payments provision.

The insurance company then argued that it was not responsible for any legal costs incurred prior to the date notice was given. The court applied the appreciable prejudice standard to this issue and granted the policyholder’s motion for summary judgment regarding the payment of pre-tender defense costs. The court found that the insurance company failed to establish that it suffered appreciable prejudice as a result of the policyholder’s delayed notice of the claim.

Courts in other jurisdictions have reached different conclusions with respect to the issue of an insurance company being obligated to pay pre-tender defense costs. The best way for policyholders to avoid insurance companies raising this coverage defense is to timely provide notice of its claims to its insurance companies. If notice is delayed, the Lewis Clinic for Educ. Therapy decision is helpful to policyholders if they can demonstrate that the breach of timely notice was not material and that the insurance company failed to establish that it suffered appreciable prejudice as a result of the late notice. Under those circumstances, at least in New Jersey, the insurance company remains obligated to provide coverage to the policyholder for the claim, including the payment of the pre-tender defense costs.