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Vol. 5, Iss. 12
December 7, 2016

Templo Fuente De Vida Corp. v. National Union Fire Insurance Company, 129 A.3d 1069 (N.J. 2016)

Late Notice: A Tale Of Two Cites: Supreme Court Adds A Third

 

In many states, late notice law can be characterized as a tale of two cites: One involving “occurrence” policies, which require an insurer to prove that it was prejudiced, by an insured’s failure to provide notice of a claim as soon as practicable (or something along those lines), to be able to disclaim coverage. This can be a high burden for the insurer to meet. The other cite involves “claims made” policies, which do not require an insurer to prove that it was prejudiced, by an insured’s failure to satisfy the reporting requirement – such as, a claim must be made and reported during the policy period -- to be able to disclaim coverage. This is an easy burden. Just look at the calendar.

There may be no better example of this dichotomy of rules than New Jersey. There, an insurer seeking to disclaim coverage, under an “occurrence” policy, based on an insured’s failure to provide notice of a claim as soon as practicable, has a high burden: proof of a likelihood of appreciable prejudice from such untimely notice. Conversely, an insurer in the Garden State, seeking to disclaim coverage, under a “claims made” policy, based on the insured’s failure to satisfy the reporting requirement, has it easy: simply prove that the reporting requirement was not satisfied and there is no additional need for the insurer to prove that it was prejudiced by such failure.

These two general rules have been staked out nationally for a long time. But what happens when an insurance policy’s notice obligation contains both requirements – a claim must be reported to the insurer as soon as practicable (“occurrence” policy requirement) and within the policy period (“claims made” policy requirement)? What’s more, what happens when the state at issue is New Jersey, with such a high burden to disclaim coverage under an “occurrence” policy.

It is not surprising that an insurer would issue a policy containing such a hybrid or two-part notice provision. After all, simply because a claim is made and reported during the policy period does not mean that it was reported timely. A claim can be made against the insured during the first month of a one year claims made policy and reported to the insurer during the last month. While the claims made and reported requirement has been satisfied, the claim was still reported ten months late. A lot can happen in a case in ten months. Thus, because insurers may still want to disclaim coverage based on late notice, a policy of this type may be attractive to them. But that attractiveness is lost if the “as soon as practicable” portion of the notice provision requires that the insurer prove that it was prejudiced – which is often-times cannot do.

This was the issue before the New Jersey Supreme Court in Templo Fuente De Vida Corp. v. National Union. The court held that the “as soon as practicable” portion of the notice provision did not require the insurer to prove that it was prejudiced to disclaim coverage. Having done so, and especially against the backdrop of New Jersey law, with its high burden to disclaim coverage, under an “occurrence” policy, based on late notice, Templo Fuente may serve as encouragement for insurers to adopt policies with a hybrid or two-step notice provision. For this reason, the case was selected for inclusion here.

In Templo Fuente, an insured provided notice of a suit to its insurer six months after it had been served. Even if that were sufficient to satisfy the requirement, that the claim be made and reported during the policy period, it was conceded that such notice of the claim to the insurer was not “as soon as practicable.” But, as far as the insured was concerned, that should not have been fatal to coverage because, under New Jersey law, the insurer needs to prove that it was prejudiced by the insured’s failure to provide notice “as soon as practicable.”

The crux of the case is that, under New Jersey law, it is in fact clear that, for an insurer to disclaim coverage, under an “occurrence” policy, based on the insured’s failure to provide notice “as soon as practicable,” there must be proof of a likelihood of appreciable prejudice to the insurer. Thus, the issue was whether this rule applied when the “as soon as practicable” notice requirement was not satisfied -- but it was within the context of a “claims made” policy, where the “claims made and reporting” timing requirements have been satisfied.

The court applied the no prejudice rule, i.e., treating the policy as “claims made,” despite containing the “as soon as practicable” notice language that is akin to “occurrence” polices. The basis for the court’s decision was its characterization of the sophistication of insured parties. The insured was a 14 or so employee company, that engaged in complex financial transactions concerning financing, and the policy at issue was D&O.

To this point, the court explained: “We have historically approached ‘claims made’ and ‘occurrence’ policies differently due in large part to the differences between the policyholders themselves. For example, in Cooper, where the ‘occurrence’ policy at issue was a contract of adhesion entered into by parties with unequal bargaining powers, we required the insurer to show prejudice before denying coverage to prevent an unfair result. ... Indeed, in the vast majority of ‘occurrence’ policies, the policy holders are ‘unsophisticated consumer[s] unaware of all of the policy’s requirements.’ As a result, ‘courts have taken special consideration of the fact that the policy holders were consumers unlikely to be conversant with all the fine print of their policies’ and ‘found that strict adherence to the terms of the notice provisions would result too harshly against [such insureds.]’” (citations omitted).

In contrast, the court observed, “[t]hose equitable concerns based on the nature of the parties do not control in our analysis of the ‘as soon as practicable’ notice requirement of the Directors and Officers ‘claims made’ policy here, where the policyholders ‘are particularly knowledgeable insureds, purchasing their insurance requirements through sophisticated brokers[.]’ In this arena, insurers are ‘dealing with a more sophisticated clientele, [who] are much better able to deal with the insurers on an equal footing [.]”

Importantly, for policyholders, the court made the point that, “[i]n this instance we need not make a sweeping statement about the strictness of enforcing the ‘as soon as practicable’ notice requirement in ‘claims made’ policies generally. We need only enforce the plain and unambiguous terms of a negotiated Directors and Officers insurance contract entered into between sophisticated business entities. Its notice conditions contain mutual rights and obligations and a clear and unambiguous requirement that the insured report a claim to the insurer ‘as soon as practicable,’ pursuant to section 7, thereby preserving the insurer’s rights, under section 8, to associate and influence how the litigation proceeds from its inception.” Thus, the court seems to have left the door open to policyholders to attempt to distinguish Templo Fuente De Vida Corp. v. National Union.


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