New Jersey Supreme Courtshoke2013
No Late Notice Prejudice Required for Claims-Made Coverage Involving “Sophisticated” Insured: Court bases different prejudice rule on fundamental differences between claims-made and “occurrence” policies.
The New Jersey Supreme Court, applying New Jersey law, held that National Union was not required to prove prejudice due to delayed notice prior to denying coverage under its claims-made policy. Templo Fuente De Vida Corp. and Fuente Properties, Inc. (collectively the “Plaintiffs”) sued the company now known as First Independent Financial Group (“First Independent”) due to the collapse of a real estate deal. The First Amended Complaint was filed in February 2006. First Independent purchased a $1,000,000 claims-made Directors, Officers and Private Company Liability Insurance Policy from National Union Fire Insurance Company of Pittsburgh, P.A. (“National Union”) covering the time period from January 1, 2006 through January 1, 2007. A condition precedent of coverage under the National Union policy required that the policyholder give written notice to the insurer of any claims made against the insured within the policy period and “as soon as practicable.” It was not until August 2006, more than six months after the amended complaint was filed, that First Independent provided National Union with notice of the Plaintiffs’ claim. National Union denied coverage asserting that the claims were outside of the policy period and that the notice of the claims was not given to National Union “as soon as practicable.”
First Independent then entered into a settlement agreement whereby it agreed to pay a portion of the more than $3,000,000 settlement and also assign its rights and interests under the National Union insurance policy to the Plaintiffs. However, when the Plaintiffs sought to recover under the policy, the insurer again denied coverage asserting that First Independent breached the policy’s notice conditions. The Plaintiffs then initiated the coverage action. The trial court dismissed the complaint with prejudice. The court found there was insufficient proof to establish whether the claims had been made outside the policy period; however, the claim for coverage was nevertheless barred because First Independent failed to provide National Union with notice of the Plaintiffs’ claims “as soon as practicable,” as required by the specific terms of the policy. The trial court concluded that under the New Jersey Supreme Court opinion in Zuckerman v. National Union Fire Insurance Co., an insurer doesn’t have to show prejudice in order to avoid coverage based on a policyholder’s failure to provide timely notice under a claims-made policy.
The Appellate Division affirmed the trial court, noting that the policy “clearly required that notice be provided both within the policy period and as soon as practicable.” Accordingly, the panel held that “coverage was properly denied to the insureds, and by extension, to the plaintiffs as their assigns.” The appellate panel, like the trial court, also relied on Zuckerman. The Appellate Division held that only occurrence-based policies require the insurance company to establish prejudice to avoid coverage because under occurrence-based policies coverage is triggered when the insured notifies the insurance company of a claim; while under claims-made policies, coverage is triggered if the act or omission giving rise to the claim occurred during the policy period.
The New Jersey Supreme Court upheld the lower courts’ decisions and found that the unexplained six-month delay did not satisfy the policy’s notice requirement and therefore the condition precedent to coverage was not met. According to the court, “[b]ecause plaintiffs fail to assert why the delay occurred, let alone why we should consider First Independent’s report of the claims to be ‘as soon as practicable’ under the ‘circumstances,’ there is no factual dispute that the notice given was not timely.” The New Jersey Supreme Court also upheld the lower courts’ decisions not to require National Union to prove prejudice prior to the denial of coverage under its claims-made policy. The court ruled: “We hold that because this Directors and Officers ‘claims made’ policy was not a contract of adhesion but was agreed to by sophisticated parties, the insurance company was not required to show that it suffered prejudice before disclaiming coverage on the basis of the insured’s failure to give timely notice of the claim.” The New Jersey Supreme Court concluded that the notice requirement at issue sufficiently conformed to the objectively reasonable expectations of the insured, and therefore, did not violate the public policy of New Jersey. Templo Fuente De Vida Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, P.A., No. 074572 (N.J. Feb. 11, 2016).