“Better Late Than Never” Doesn’t Work for Claims Made Policies

The New Jersey Supreme Court recently held that an insurance company was not required to show it was prejudiced by an insured’s late notice in order to deny coverage under a claims made policy.  In Templo Fuente de Vida Corp. v. National Union Fire Insurance Company, Templo Fuente de Vida Corp. (“Templo”) engaged Morris Mortgage Inc. (“MMI”) to find a funding source for Templo’s purchase of real estate.  MMI identified Merl Financial Group, Inc. (“Merl”) as a possible funding source.  However, Merl was unable to fund the loan to allow Templo to purchase the property.  Templo’s seller terminated the purchase agreement and, as a result, Templo sustained losses.

Templo sued Merl.  Merl, which was restructured and renamed to First Independent Financial Group (“First Independent”), had a $1 million Directors and Officers liability insurance policy from National Union Fire Insurance Company of Pittsburgh (“National Union”) that was a claims made policy.  The policy required the insured to provide notice of a claim to National Union during the policy period and as soon as practicable.

First Independent provided notice to National Union during the policy period but more than six months after the first complaint was filed against it by Templo.  First Independent subsequently settled with Templo and, as part of that settlement, First Independent assigned its rights in the National Union policy to Templo.

Templo subsequently sued National Union seeking coverage.  National Union moved for summary judgment and the trial court dismissed Templo’s complaint, finding that Templo failed to provide notice of the claim “as soon as practicable” as required by the policy.  The trial court, relying on Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304 (1985), held that National Union was not required to show prejudice to avoid coverage.  The Appellate Division affirmed the trial court’s holding and the Supreme Court granted Templo’s petition for certification.

Templo argued that the issue of whether a claim was reported as soon as practicable is a fact-sensitive determination.  Templo urged the court to consider the circumstances and the length of delay in providing notice to National Union.  The court, however, noted that Templo failed to provide any facts as to “why the delay occurred.”  Accordingly, the court held that the “six month delay did not satisfy the policy’s notice requirement.”  The court further noted that its decision was not a bright line test for determining compliance with the “as soon as practicable” notice provision under a claims made policy.

The court next addressed whether National Union had to show prejudice in order to deny coverage.  Templo argued that the court should distinguish Zuckerman and extend the holding of Cooper v. Government Employees Ins. Co., 51 N.J. 86 (1968) to claims made policies.  The New Jersey Supreme Court in Cooper requires an insurer under an occurrence policy to show appreciable prejudice to deny coverage for late notice.  The New Jersey Supreme Court in Zuckerman ruled that an insurer does not have to show prejudice where an insured reports a claim outside the policy period.  In this case, Templo argued that because notice was given during the policy period, the insurer must show prejudice to deny coverage.

In addressing this issue, the court noted the difference between occurrence based policies and claims made policies, and explained why it required appreciable prejudice under an occurrence based policy for an insurer to deny coverage for late notice.  Next, the court observed that unlike occurrence based policies, claims made policies are typically negotiated and involve sophisticated policy holders that use a broker in securing coverage.  As such, the concerns articulated by the court in imposing an appreciable prejudice standard on occurrence based policies do not exist with claims made policies.  Thus, the court concluded that it could enforce the provisions and terms of the claims made policy in the same fashion as it would for any other type of contract.  The court held that First Independent failed to provide timely notice, and that National Union did not have to show it was prejudiced to deny coverage.

The take away from this recent case is that if an insured knows of a claim against it, the insured should not delay in providing notice to its insurer.  To do otherwise risks having the insurance company deny coverage for failing to provide timely notice.