United States: NJ: Failure To Provide Timely Notice Under "Claims Made" Policy Constitutes Breach Of The Policy

Templo Fuente De Vida Corp v. National Union Fire Ins. Co. of Pittsburgh, PA., (A-18-14) (074572) decided February 11, 2016 involved a Directors & Officers "claims made" policy. In Templo, the insured who had been sued for damages entered into a settlement with and assigned its rights and interests under its D&O insurance policy to, plaintiffs. When plaintiff sought to recover under the D&O policy, the carrier denied the claim citing to the insured's breach of the notice provision; specifically finding that notice was not given "as soon as practicable."

In this case, plaintiff engaged Merl Financial Group ("Merl") to obtain funding for plaintiff's intended purchase of property. Merl was restructured at some point in time and was renamed First Independent Financial Group ("First Independent" or "FI"). First Independent represented that it secured the funding and charged plaintiffs several commissions However, on the closing date FI was unable to produce any source to fund plaintiff's purchase. Plaintiff filed a complaint against First Independent on or about February 21, 2006 for monetary damages related to the inability to close and various down payment forfeitures. As noted, First Independent settled the claims against it agreeing to pay a nominal amount and assign its remaining rights to plaintiff Templo.

First Independent purchased a $1 million D&O policy from National Union Fire covering the time period from January 1, 2006 through January 1, 2007. The policy was issue on a "claims made" basis provided that, as a condition precedent to coverage, the insured must:

"give written notice to the insurer of any Claims made against the insured as soon as practicable and either: (1) anytime during the Policy Period or during the Discovery Period (If Applicable); or (2) within 30 days after the end of the Policy Period or the Discovery Period (If applicable). As long as such claim is reported no later than 30 days after the date such Claim was first made against the insured."

The court found that the policy's notice provisions served the mutual interests of both the insured and the insurer. Specifically, among other things, the policy allowed the insured to "tender defense of the Claim to the insurer", but prohibited any action from the insured from the time it receives the claim until a defense is tendered by the insurance company, if so requested. This prohibition checks action by the insured that could prejudice the insurance company, the insured or both, such as interposing an ill-conceived defense strategy or engaging in settlement discussions.

On August 28, 2006, more than six (6) months after being served with the complaint, and after retaining private counsel and filing an answer, First Independent provided notice of the claim to National Union. National Union denied coverage, asserting the defense that notice of the claim was not given to National Union "as soon as practicable."

Plaintiff (to whom the insurance rights were assigned by FI) sued National Union seeking a declaratory judgment that First Independent was an insured under the policy, and that plaintiff, as assignee was entitled to coverage. The trial court granted National Union's motion for summary judgment and dismissed the complaint finding that notice of the claim was not made as soon as practicable, as required by the specific terms of the policy. The court cited to Associated Metal & Mineral Corp. v. Dixon Chemical Research, Inc., 82 N.J. Super 281, 316-317 (App. Div. 1963), certif. denied, 42 N.J. 501 (1964) in which the Appellate Division held that a five and one-half month delay in notice to an insurance company was not as soon as practicable. Additionally, and of particular note the trial court found that under Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304 (1985), National Union did not have to show "appreciable prejudice" in order to avoid coverage based upon late notice, and that to hold such unambiguous [notice] language is unenforceable, absent appreciable prejudice, would be an unjust and inequitable expansion of the coverage provided.

The Appellate Division affirmed noting the language of the "claims made" policy clearly required that notice be provided both within the policy period and as soon as practicable. The Appellate Division also relied on Zuckerman in rejecting plaintiff's argument that actual prejudice had to be shown by National Union before it could deny coverage under a "claims made" policy. The Appellate Division held that only "occurrence based policies require the insurance company to establish prejudice to avoid coverage."

The NJ Supreme Court affirmed the lower courts. The Court held that in interpreting insurance policies the plain language of the provision is ordinarily the most direct route. Chubb Custom Ins. Co. v. Prudential Ins. Co. of Am., 195 N.J. 231, 238 (2008). The court stated that it would not engage in a strained construction to support the imposition of liability or write a better policy for the insured than the one purchased. Ultimately, the court held that there are real conceptual differences between "claims made" and "occurrence" policies. The Court noted that "occurrence policies insuring against professional liability have fallen out of favor because of the difficulty underwriters face in setting premiums on policies with an unlimited tail that extended beyond the policy period and thus required insurance companies to forecast into the future "the costs of risks assumed." Zuckerman, supra, 100 N.J. at 311. This time lapse made it particularly difficult for insurance companies to accurately calculate premiums for latent injuries, where claims are frequently made years after the insured event.

Under "claims made" policies, the insurer possesses the ability to calculate risks with greater exactitude since the insurer's exposure ends at a fixed point, usually the policy termination date. In other words, although a "claims made" policy insures events that have already occurred, it is limited by the dates of the policy because the CLAIM MUST BE MADE AGAINST THE INSURED DURING THE POLICY PERIOD AND THE insured must provide notice of the claim within the SAME policy period. Zuckerman, supra, 100 N.J. at 310. If EITHER FACTOR IS ABSENT, there is no coverage under a "claims made" policy. 43 Am. Jur. 2d Insurance Section 681 (2013). The court found the six (6) month delay in providing notice to be objectively unreasonable and held that National Union properly denied coverage.

The typical A&E professional liability policy is a "claims made" policy. The Tempo decision makes clear that Architects & Engineers should be aware of the notice provisions in their policy and must be vigilant in submitting notice of professional liability claims (1) timely and (2) under the correct policy. Failure to do so may very well result in a declination of coverage, even, depending on the jurisdiction, in the absence of any prejudice to the insurance company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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