As anyone involved in D&O insurance knows, policyholders’ late provision of notice of claim is a recurring problem. All too often, delays in providing notice result in a preclusion of coverage, an outcome that I find in many cases to be troubling. Because of concerns about policyholders’ loss of coverage, some courts have held that an insurer must show that the late provision of notice prejudiced its interests in order to disclaim coverage. However, a number of other courts have also held that the “notice prejudice rule” does not apply to claims made policies.
Along these lines, on February 11, 2016, the New Jersey Supreme Court held that, at least where a “sophisticated” insured is involved, an insurer that contends that it was not provided with timely notice of claim under a claims made insurance policy does not have to show that it was prejudiced by the delayed provision of notice in order to disclaim coverage. The New Jersey Supreme Court’s opinion can be found here.
As I commented at the time when the intermediate appellate court reached the same conclusion in this case, I have some issues with this case and the way it all played out.
The plaintiffs in the coverage action (Templo Fuente De Vida Corp. and Fuente Properties) are assignees of the insured (First Independent Financial Group, formerly known as Merl Financial Group). 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. The insured provided notice of the complaint to its insurer on August 28, 2006 (that is, six months after the claim was made and during the policy period). 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.
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. 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. As discussed here, in June 2014, an intermediate appellate court affirmed the trial court. The plaintiffs appealed to the New Jersey Supreme Court.
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.
The February 11, 2016 Opinion
In February 11, 2016 opinion written by Justice Lee A. Solomon for a unanimous court, the New Jersey Supreme Court affirmed the intermediate appellate court, ruling that the insurer under a claims made policy does not have to show that it was prejudiced in order to disclaim coverage for notice that was not timely under the terms of the policy, at least where the policyholder is a “sophisticated” party.
Following its 1985 opinion in Zuckerman v. National Union Fire Insurance Co. (here), the New Jersey Court said that the question of whether or not an insurer must show prejudice in order to assert late notice as a defense to coverage is very different for occurrence policies and for claims made policies, because of fundamental differences in the ways the two kinds of policies operate. The requirement of notice in an occurrence policy “is subsidiary to the event that invokes coverage,” and therefore the notice conditions should be “liberally and practically construed.” By contrast, the event that invokes coverage under a claims made policy is the “transmittal of notice of claim.” Because of these differences, the “notice prejudice rule” that has been developed with regard to occurrence policy has “no application whatsoever to a claims made policy.”
Turning to this case, the Supreme Court first concluded that the policyholder had not provided timely notice of claim, at least according to the provisions of this policy. Specifically, the Court concluded that the insured’s provision of notice of claim did not satisfy the policy’s “as soon as practicable” requirement. While the plaintiffs urged the court to consider the circumstances surrounding the delayed provision of notice, the Supreme Court noted that during oral argument that the plaintiffs (who were, after all, assignees of the actual insured) conceded that the insured had not notified the insurer as soon as practicable. The Supreme Court noted further that the plaintiffs did not provide the trial court with any evidence to justify the insured’s “reporting delay.”
The plaintiffs, the Supreme Court noted, “fail to assert why the delay occurred, let alone why we should consider [the insured’s] reporting of the claim to be ‘as soon as practicable’ under the ‘circumstances,’” and therefore “there is no factual dispute that the notice given was not timely.” However, the Supreme Court said that “we need not and do not draw any ‘bright line’ on these facts for timely compliance with ‘as soon as practicable’ notice requirements.”
Finally, the Supreme Court rejected the plaintiffs argument that the “notice prejudice” rule should be applied to claims made policies where notice is provided during the policy period. In rejecting this argument, the Court emphasized the “importance of the characteristics” of the insured. The insured, the Court said, is a “sophisticated” insured; it is “an incorporated business entity that engaged in complex financial transactions. It had “at least fourteen full-time employees.” The policy at issue is also “complex,” and the policy was placed with the aid of a broker. The Court said “our jurisprudence” has “never afforded a sophisticated insured the right to deviate from the clear terms of a ‘claims made’ policy.”
Because the insured’s failure to comply with policy’s notice provision “constituted a breach of the policy,” the insurer “may decline coverage without demonstrating appreciable prejudice.”
There are a couple of aspects of the Supreme Court’s decision that are important and that I hope are not overlooked. The first is that the Supreme Court didn’t say that a six-month delay in and of itself did not satisfy the “as soon as practicable” requirement. In fact, the Court expressly declined to adopt any bright line test. The Court just said that where there was no evidence to assess the circumstance surrounding the delay, there was no factual basis on which the plaintiffs could argue that the notice satisfied the “as soon as practicable” requirement – particularly given that the plaintiffs apparently conceded at oral argument that notice had not been provided as soon as practical. So everybody needs to recognize that this decision did not affirmatively hold that provision of notice six months after a claim is made and during the policy period is per se not as “soon as practicable.”
The other important aspect is that its conclusion that the notice prejudice rule does not apply to this claims made policy turned in part on its assessment of the insured as “sophisticated.” Personally, based on my experience with many different kinds of companies and their varied operations, I question whether a company that, for example, has only 14 full-time employees necessarily qualifies as sophisticated. But regardless of that, the Court’s decision seems to leave the door open to an argument for a different insured that is not as “sophisticated” that late notice should not preclude coverage in the absence of notice.
With respect to the decision itself, it may be argued that the New Jersey Supreme Court’s holding is no surprise. As discussed in a recent guest post on this blog by my good friend and D&O insurance maven Joe Monteleone (here), a number of courts have held that the notice prejudice rule does not apply to claims made policies. What is surprising to me is not the outcome of the case or the Court’s analysis. The surprise to me is that this case played out the way it did.
I will put it this way. The most important thing about this case is not necessarily what the courts said or did. It is what the insurer did here, or more particularly, the position it took. I am not saying its position was technically incorrect; indeed, the insurer has now succeeded in persuading three different courts that the notice it was provided here was untimely, and that it did not have to show prejudice in order to assert the late notice as a defense to coverage. I am saying that the fact that an insurer would take the position that the insurer took here – that is, that provision of notice of claim during the policy period and after only a six month delay is coverage preclusive despite the absence of any prejudice — is a very pertinent topic in a discussion with a client about this insurer’s claims handling practices.
In any event, I am hoping that, as D&O insurance policies evolve, this decision of the New Jersey Supreme Court quickly becomes irrelevant. The circumstances of this case strongly militate in favor of the inclusion in D&O policy’s notice provisions of the following language (which I have previously discussed in prior posts):
If the Insured fails to provide notice of such Claim to the Insurer as required under this Section, the Insurer shall not be entitled to deny coverage for the Claim based solely upon late notice unless the Insurer can demonstrate that its interests were materially prejudiced by reason of such late notice.
The inclusion of this language will ameliorate the hardships that can arise when the late provision of notice results in coverage preclusion. The inclusion of this language would certainly eliminate the dispute about whether or not the notice prejudice rule applies in the context of claims-made policies.
There is an important lesson from this case. That is, as this case underscores, insureds must be diligent in protecting their interests. The fact is that the provision of notice of claim is a “condition precedent” to coverage. As I have noted elsewhere, policyholders as well as insurers have duties under the insurance policy. Policyholders should be diligent both in protecting their interests and in fulfilling their duties under their policies. But in simple recognition that the delayed provision of notice is a regular occurrence, the inclusion in the policy of the kind of “prejudice required” language that I discussed above would ensure that the policy’s notice provisions are not enforced in a way that works a hardship on the policyholders and could help to ensure that the notice provisions are enforced consistently with the balance of the equities.
Happy Monday: So half the people in the U.S. think Monday is a holiday, but you still had to come to work. So, just for you, here’s the guitar solo from The Eagles’ song, “Hotel California.” Just because.