On February 11, 2016, the Supreme Court of New Jersey in Templo Fuente de Vida Corp. v. National Union Fire Ins. Co. of Pittsburgh, declared that an insurance company was not required to show it suffered prejudice before disclaiming coverage on the basis of the insured's failure to give timely notice of the claim under a Directors and Officers claims made policy. In reaching its decision, the state’s highest court explained that it was “not mak[ing] a sweeping statement about the strictness of enforcing the ‘as soon as practicable’ notice requirement in ‘claims made’ policies generally” but was “only enforc[ing] the plain and unambiguous terms of a negotiated Directors and Officers insurance contract entered into between sophisticated business entities.”
The underlying litigation was brought by Templo Fuente De Vida Corp. and Fuente Properties, Inc. to recover losses sustained in an attempt to secure financing from National Union's insured, First Independent Financial Group.
Prior to the filing of the complaint, First Independent purchased a $1 million Directors, Officers and Private Company Liability Insurance Policy from National Union Fire Insurance Company of Pittsburgh. The policy was a “claims made” policy, which provided coverage for claims made against the insured during the policy period. As a condition precedent to coverage, under the notice provision of the policy, the insured was required to give written notice to the insurer of any claim “as soon as practicable.”
More than six months after having been served with the first amended complaint, retaining counsel and filing an answer, First Independent provided notice of the plaintiff’s claims to National Union. National Union denied coverage, asserting, among other defenses, that notice of the claims was not given to National Union “as soon as practicable.”
Plaintiffs and several defendants, including First Independent, ultimately reached a settlement agreement in the underlying litigation. Under the agreement, First Independent assigned to plaintiffs its rights and interests under the policy.
The Notice Requirement Under a Claims Made Policy
The Supreme Court of New Jersey granted the plaintiffs' petition for certification in order to address whether an insurance company must establish prejudice before denying coverage based upon the insured's failure to comply with a notice condition in a “claims made” policy when the claim is reported within the policy period.
The court first concluded that First Independent failed to give notice of the claims against it “as soon as practicable,” because it was undisputed that First Independent failed to notify National Union of the claims until six months later. In reaching its conclusion, the court explained that it did not need to and was not “draw[ing] any ‘bright line’ on these facts for timely compliance with an ‘as soon as practicable’ notice provision.”
The court then addressed whether an insurer would be permitted to disclaim coverage without showing that it was prejudiced by the delay. In reaching its decision, the court looked to the conceptual differences between “claims made” and “occurrence” policies. The court noted that the distinctive roles reporting requirements play in “claims made” versus “occurrence” policies not only address the basic difference between the two policies, but inform judicial interpretation of those requirements. According to the court, the prompt notice requirement and the requirement that a claim be made within the policy period in “claims made” policies “maximiz[e] the insurer's opportunity to investigate, set reserves, and control or participate in negotiations with the third party asserting the claim against the insured” and “mark the point at which liability for the claim passes to an ensuing policy, frequently issued by a different insurer, which may have very different limits and terms of coverage.”
The court further noted that claims made policies represent a negotiated contract between two sophisticated business entities. Because of the nature of “claims made” policies, the court explained that it only needed to “enforce the plain and unambiguous terms of a negotiated Directors and Officers insurance contract.” According to the court, the notice conditions contained mutual rights and obligations and a clear and unambiguous requirement that the insured report a claim to the insurer “as soon as practicable.”
Therefore, the court found that when First Independent began defending against plaintiffs’ claims without first notifying National Union, it violated a condition precedent of timely notice, which breached the policy's express condition requiring notice of the claim. Accordingly, the court held that First Independent's failure to comply with the notice provisions of the policy constituted a breach, which allowed National Union to decline coverage without demonstrating prejudice. In reaching its decision, the Supreme Court explained that the state’s jurisprudence “has never afforded a sophisticated insured the right to deviate from the clear terms of a ‘claims made’ policy.”
As a result of the court’s decision, insurers will be able to enforce against sophisticated insureds, the literal terms of the “as soon as practicable” reporting requirements, without being required to show prejudice. The decision also signals that New Jersey courts will strictly enforce the requirement that a claim be “first made” within the policy period.