Has notice of claim been provided “as soon as practicable” if it is sent to the insurer during the policy period but six months after service on the insured of the underlying complaint? Apparently not, at least according to a June 6, 2014 opinion of a New Jersey intermediate appellate court, applying New Jersey law. In addition, the New Jersey appellate court further held that an insurer on a claims made policy does not have to plead or prove that it was prejudiced by the late notice. The appellate court affirmed the trial court’s entry of summary judgment in favor of the insurer. A copy of the appellate court’s opinion can be found here.
I have to admit that I have some issues with this decision, for reasons discussed below.
The plaintiffs in the coverage action are assignees of the insured. The plaintiffs operate a church and child care center. The plaintiffs decided to relocate their operations and they entered a contract to buy a piece of land for the purpose. The plaintiffs also entered a separate arrangement to obtain financing for the land purchase from the insured, which is a mortgage financing company. The insured ultimately failed to provide the financing for the land transaction and the transaction fell through. The plaintiffs sued the insured to recover the various costs the plaintiffs had incurred in trying to complete the land transaction and the mortgage financing. Ultimately the insured settled with the plaintiffs for a small cash payment and for the assignment to the plaintiffs of its rights under its D&O insurance policy.
The insured’s insurance policy ran for the period from January 1, 2006 to January 1, 2007. The insured was served with the plaintiffs’ complaint in the underlying action on February 21, 2006. However, the insured did not provide notice of the complaint to its insurer until August 28, 2006. The insurer denied coverage on a number of grounds including the ground that the insured had not provided notice of claim to the insurer “as soon as practicable” as required under the policy.
The notice provisions of the policy state that:
(a) The Company or the Insureds shall, as a condition precedent to the obligations of the Insured under this policy, give written notice to the Insurer of any Claim made against an Insured as soon as practicable and either:
(1) anytime during the Policy Period or during the Discovery Period (if applicable); or
(2) within [thirty] days after the end of the Policy Period or the Discovery Period (if applicable), as long as such Claim is reported no later than [thirty] days after the date such Claim was first made against an Insured.
After the assignment to the plaintiffs of the insured’s right under the policy, the plaintiffs filed an action against the insurer seeking a judicial declaration that the policy covered the underlying claim. The parties filed cross-motions for summary judgment. On February 3, 2013, the trial court granted the insurer’s motion for summary judgment, based in its finding that the insured did not provide the insurer with notice of the underlying claim as soon as practicable and therefore that coverage was barred. The plaintiffs appealed.
The June 6 Opinion
On June 6, 2014, in an unpublished per curiam opinion, the Superior Court of New Jersey, Appellate Division, affirmed the trial court’s ruling.
The appellate court observed that the insured had provided the insurer with notice of claim “over six months after plaintiffs served them with the complaint.” The court added that “No explanation for this lengthy delay was provided.” The appellate court cited with approval its own prior decision in a 1963 case in which the earlier court had held that a delay of five and one-half months in providing notice was not “as soon as practicable” under the terms of a similar policy.
The appellate court also noted that the notice provision required notice to be provided to the insurer both within the policy period and as soon as practicable. Because “the insured did not meet both of the notice requirements that were unambiguously expressed in the policy, we conclude that coverage was properly denied to the insureds and by extension, to plaintiffs as their assignees.”
In reliance on the New Jersey Supreme Court’s 1985 holding in Zuckerman v. National Union Fire Insurance Co., the appellate court also rejected the plaintiffs’ argument that the insurer had to show that it was prejudiced by the late notice in order to assert the late notice as a defense to coverage. In Zuckerman, the New Jersey Supreme Court had held that with respect to claims made policies (like the one involved here) an insurer need not show that it was prejudiced by an insured’s failure to provide notice as soon as practicable in order to deny coverage. The New Jersey Supreme Court had said in Zuckerman that to require an insurer to make such a showing would constitute an “unbargained-for expansion of coverage, gratis, resulting in the insurance company’s exposure to a risk substantially broader than that expressly insured against in the policy.” The appellate court said that as an intermediate appellate court, “we are bound to follow and enforce the decisions of the Supreme Court.”
As anyone involved in the insurance business knows, late notice happens. Delayed notice is provided to insurers all the time. The delays in providing notice happen for all sorts of reasons or for no reason at all. Usually, the delay arises because the person within the organization who knows about the lawsuit is not the same person within the organization who knows about the organization’s insurance. (This problem about the location of insurance knowledge within an organization is the reason why it is a good idea to seek to have the notice provision amended by endorsement to provide that the clock does not start to run on notice issues until certain specified persons find out about a claim.)
In the context of an industry in which belated notice is a regular occurrence, a delay of six months is nothing. For that reason, I simply don’t understand the comment by the court with respect to the timing of the notice here that “no explanation for this lengthy delay was provided.” In my humble opinion based on over thirty years in the D&O insurance business, it is not even remotely accurate for the appellate court to suggest that a six-month delay in providing notice is “lengthy.” I would describe it as “normal” or “par for the course” or “basically, the kind of thing that happens when any process requires the involvement of people.”
Not only was the delay in providing notice here not “lengthy,” but the insurer was provided notice during the policy period. This is not a case where the notice finally came sailing in months after the insurer was off of the risk. The insurer was still on this risk when it received notice.
And not only that, the insurer here did not even claim that it was prejudiced in any way by the six month delay in providing notice. What is the point of harshly enforcing a mere procedural requirement in a punitive way given that the condition was fulfilled during the contract period and nothing about the fulfillment of the condition was detrimental to the insurer?
And here’s the final issue – the appellate court did not even ask what the word “practicable” means and whether or not in this case the insured did provide notice as soon as was practicable for this insured. One definition of the word “practicable” in an online dictionary is that the word means “capable of being done” or “capable of putting into effect.” Seems to me that the insured here provided notice as soon as it was capable of providing notice.
The term “as soon as practicable” is meant to be both a liberalizing term and to provide flexibility, by contrast to the use in some policies of terms requiring provision of notice within a specified time period (say, 60 or 90 days). The more flexible standard is meant to be less rigid than the precise time requirement – and frankly it is meant to be a looser standard. Basically, the term means that the insured should provide notice of claim as soon as it can. There is nothing in standard industry practices to suggest that the provision of notice during the policy period and six months from service of the claim is not “as soon as practicable” – unless the six month delay prejudiced the insurer in some way, which is a factor that is not present here.
I will say that I don’t know where courts get off with this idea that when a policyholder seeks coverage for a claim that it is trying to get “unbargained-for expansion of coverage.” In this case in particular, the suggestion that the insured’s assignee was looking for unbargained-for coverage is a completely unwarranted statement. To the contrary, the courts’ harsh and unwarranted construction of the notice provisions represents a completely unjustified diminution of coverage.
It is hard to question the position that the insurer took in this case with respect to late notice, given that two courts have concluded that under New Jersey law the notice here was not “as soon as practicable.” Just the same, I have to say that the fact that an insurer would take the position that the insurer took on the notice issue here is a relevant topic in a discussion with a client about the insurer’s claims handing practices.