Insurer Under “Claims Made” Policy Issued to Sophisticated Insured Need Not Show Prejudice From Late Notice of Claim in Order to Disclaim Coverage

Templo Fuente De Vida Corp. v. Nat’l Union Fire Ins. Co., 224 N.J. 189 (2016).  Insurance policies normally require insureds to provide timely notice of claims against them to their insurer.  If timely notice is not given, the insurer may be able to deny coverage based on the insured’s breach of policy obligations.

In this case, which involved a “claims made” directors and officers insurance policy, the insured was required to give notice of a claim “as soon as practicable.”  The insured did not do that, instead waiting six months, without explanation, to submit a notice of claim.  The insured later settled with the plaintiffs and gave them an assignment of the insured’s rights against the insurer.  Plaintiffs then sought to recover under the policy, but the defendant insurer denied coverage because its insured had not given timely notice of the claim.

Plaintiffs contended that in order to avoid coverage, the insurer had to show prejudice from the failure to give timely notice.  The Law Division disagreed and entered summary judgment for defendant.  The Appellate Division affirmed.  The Supreme Court granted certification and, today, affirmed in an opinion by Justice Solomon.  The Court applied the de novo standard of review that applies to rulings on summary judgment.

Justice Solomon began by reciting the familiar standards for review of interpretation and construction of insurance policies. If the policy language is clear, a court must apply that language rather than rewriting it.  If there is ambiguity, however, the court can look to extrinsic evidence to aid in determining the meaning of that language.

Justice Solomon then addressed the rationale for notice provisions in “claims made” policies, distinguishing such policies from “occurrence” policies.  “Claims made” policies tend to require insureds to provide notice “of a claim or potential claim ‘promptly’ or the like.”  Such notice provisions aim to “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,” as well as to “mark the point at which liability for the claim passes to an ensuing policy, frequently issued by a different insurer.”  The “event that invokes coverage” under a “claims made” policy is the notice of claim.

In the different context of “occurrence” policies, the Supreme Court ruled in Cooper v. Government Employees Ins. Co., 51 N.J. 86 b(1968), that an insurer must show “appreciable prejudice” from untimely notice of claim in order to disclaim coverage.  But in two subsequent cases, Zuckerman v. Nati’l Union Fire Ins. Co., 100 N.J. 304 (1985), and Werner Indus., Inc. v. First State Ins. Co., 112 N.J. 30 (1988), the Court declined to extend Cooper to “claims made” policies.

Justice Solomon first agreed with the lower courts that the unexplained six-month delay meant that the notice of claim here was not given “as soon as practicable.”  He emphasized that this was a decision on these undisputed facts, not a “bright line” for timely compliance.

Turning to the question of the need for prejudice, Justice Solomon observed that “the vast majority” of “occurrence” policies involve “unsophisticated consumer[s] unaware of all the policy’s requirements.”  In contrast, “claims made” policies involve “particularly knowledgeable insureds, … [who] are much better able to deal with the insurers on an equal footing.”  The insured here was such a sophisticated party.  For that reasons, Justice Solomon said, the Court “need not make a sweeping statement about the strictness of enforcing the ‘as soon as practicable’ notice requirement in ‘claims made’ policies generally.”  Instead, the Court simply enforced the plain language of this policy, made between two sophisticated parties.

Plaintiffs had cited cases from other jurisdictions that had reached a different conclusion.  Justice Solomon recognized those cases, but stated that “our jurisprudence has never afforded a sophisticated insured the right to deviate from the clear terms of a ‘claims made’ policy.”  Accordingly, plaintiffs’ claim here, based on the inaction of the sophisticated insured, failed.

The Court left open how late notice under “claims made” policies covering unsophisticated insureds will be treated.  That is likely to entail a fact-intensive, case by case analysis.