The New Jersey Supreme Court recently revisited its earlier decision in Zuckerman v. National Union Fire Insurance Fire Insurance Co., 100 N.J. 304, 495 A.2d 395 (1985) and upheld the strict enforcement of notice and reporting requirements contained in claims made policies, holding that an insurance company does not need to show that it was prejudiced by an insured’s failure to comply with the notice provision in a Directors and Officers “claims made” policy to disclaim coverage. Templo Fuente De Vida Corp. and Fuente Properties, Inc., Inc. v. National Union Fire Insurance Company of Pittsburgh, P.A., Supreme Court of New Jersey A-18 September Term 2014, 074572 (decided February 11, 2016).
The insured First Independent Financial Group was insured under a Directors, Officers and Private Company Insurance Policy issued by National Union Fire Insurance Company covering the period January 1, 2006 through January 1, 2007. The policy was a “claims made” policy, which contained a Notice/Claim Reporting Provision, requiring that, as a condition precedent to coverage under the policy, the insured
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 30 days after the end of the Policy Period or the Discovery period (if applicable), as long as such claim is reported no later than 30 days after the date such claim was first made against an Insured.
Plaintiffs, Templo Fuente De Vida Corp. and Fuente Properties, Inc. sued First Independent for breach of an agreement to provide financing for a property plaintiffs intended to purchase. On August 28, 2006, more than six months after being served with the first amended complaint, and after retaining counsel and filing an answer, First Independent provided notice of the claim to National Union. National Union denied coverage, asserting that the claims against First Independent were made outside of the policy period, and that notice of the claims was not given to National Union “as soon as practicable.” Plaintiffs and several defendants, including First Independent, reached a settlement agreement in the underlying litigation, pursuant to which, First Independent assigned to plaintiffs its right and interests under the National Union policy.
However, when plaintiffs sought to recover under the policy, the insurer denied coverage in part because the insured breached the policy’s notice conditions. Plaintiffs filed an action seeking declaratory judgment that First Independent was an insured under the policy, and that plaintiffs were entitled to coverage. The trial court granted summary judgment to National Union, finding that the claim was barred because First Independent failed to provide National Union with notice of plaintiffs’ claims “as soon as practicable,” as required by the specific terms of the policy. In addition, the trial court concluded that under Zuckerman, National Union did not need to “show appreciable prejudice in order to avoid coverage based on a failure to meet the notice requirements of a claims made policy.” The Appellate Division affirmed. The Supreme Court granted plaintiffs’ petition for certification, and affirmed the Appellate Division decision upholding the trial court’s award of summary judgment to National Union.
In reaching its decision, the Court rejected plaintiffs’ arguments that: (1) the notice should not be considered untimely because the underlying claim did not involve an injury resulting from an accident, which entails a more time-sensitive inquiry; (2) the Zuckerman ruling permitting insurers to deny coverage without showing prejudice should only apply when notice was given outside the policy period; and (3) there supposedly was a “growing trend in insurance law,” requiring insurance companies to demonstrate prejudice before disclaiming coverage for failure to give timely notice within the period of a “claims made” policy.
As it had in Zuckerman, the Court considered the “conceptual differences between ‘claims made and ‘occurrence’ policies” and “[t]he distinctive roles that reporting requirements play in claims made versus occurrence policies”. The Court observed that “[t]he prompt notice requirement and the requirement that the claim be made within the policy period in ‘claims made’ policies ‘maximiz[e] the insurer’s opportunity to investigate, set reserves, and control or participate in negotiations with the third party asserting the claims against the insured’ and ‘mark the point at which liability for the claim passes to an ensuing policy …’”.
The Court also reaffirmed its holding that the Cooper v. Government Employees Ins. Co. doctrine of “appreciable prejudice” had no application in the context of a “claims made” policy, holding “that because this Directors and Officers ‘claims made’ policy was not a contract of adhesion but was agreed to by sophisticated parties, the insurance company was not required to show that it suffered prejudice before disclaiming coverage on the basis of the insured’s failure to give timely notice of the claim.”
The Court concluded its opinion by “recogniz[ing] that a different conclusion may have been reached in other jurisdictions, but our jurisprudence has never afforded a sophisticated insured the right to deviate from the clear terms of a ‘claims made’ policy.”
In light of this decision, under New Jersey law an insurer may properly deny coverage under a claims made policy for failure to comply with the policy’s notice provision without showing that it was prejudiced by the late notice. While insureds can be expected to challenge such denials, they should not be able to credibly raise the lack of prejudice to support a claim that the denial was made in bad faith.