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February 18, 2016

NJ High Court Rules No Prejudice Needed to Enforce Late Notice Provision of Claims-Made Policy

In a victory for insurers, the New Jersey Supreme Court ruled that an insurer can deny coverage under a claims-made policy for the failure to provide timely notice without proving it was prejudiced by the delay. See Templo Fuente De Vida Corp., et al. v. Nat. Union Fire Ins. Co., Case No. 074572 (N.J. Feb. 11, 2016).  The insured, First Independent, purchased a claims-made Directors and Officers liability policy from National Union, effective from January 1, 2006 to January 1, 2007.  The policy stated that, as a condition precedent to coverage, the insured must give written notice of any Claim made against it “as soon as practicable” either during the policy period or within 30 days after the policy expired.

On or about February 21, 2006, First Independent was served with a complaint, but waited about six months to provide notice to National Union.  National Union denied coverage, asserting, among other defenses, that First Independent failed to provide notice “as soon as practicable” due to the six month delay in reporting the suit, even though the claim was still reported during the policy period.  After First Independent settled the claims against it and assigned its rights under the policy, the underlying plaintiffs sought declaratory judgment against National Union for coverage.  The trial and appellate courts found in favor of National Union.

The New Jersey Supreme Court affirmed, holding that “an insurance company under a ‘claims made’ policy need not show prejudice before it may disclaim coverage on the basis of an insured’s failure to provide notice ‘as soon as practicable.'”  In support of its decision, it first distinguished New Jersey precedent requiring prejudice to the insurer in order to enforce notice provisions under occurrence policies.  In doing so, the court reiterated its prior ruling that under an occurrence policy notice is “subsidiary to the event that invokes coverage,” while under a claims-made policy, coverage is invoked by “transmittal of the notice of the claim,” resulting in timely notice being a critical condition precedent to coverage.

It further held that First Independent, unlike individual members of the public, was sophisticated enough to appreciate that distinction, such that relieving the insurer of the need to show prejudice would not be contrary to First Independent’s objectively reasonable expectations.  Given the court’s analysis, disputes may arise in the future as to whether a policyholder is sophisticated enough for the “no prejudice” rule to apply, though the test does not appear to be an onerous one. The fact that First Independent was a commercial entity that purchased the policy through a broker was deemed sufficient.

While it is clear that late notice will bar coverage under a claims-made policy without the need for the insurer to show it was prejudiced, one issue left unresolved is what exactly constitutes late notice.  While First Independent asserted it was error to find its delay untimely “without regard to the circumstances,” the court noted that First Independent failed to explain its delay sufficient to constitute a factual dispute as to timeliness.  Thus, it concluded that “we not need and do not draw any ‘bright line’ on these facts for timely compliance with an ‘as soon as practicable’ notice provision.”  Accordingly, a policyholder could potentially argue that it had an acceptable explanation for its delay, seeking to avoid a determination that notice was late in the first instance.  No doubt future litigation and decisions will provide additional guidance.