Although New Jersey is often regarded as a state whose courts will strive mightily to afford a remedy to policyholders seeking coverage from their insurers, a recent decision of the New Jersey Supreme Court has confirmed that it has lines that even it will not cross. The Court’s opinion in Templo Fuente De Vida Corp. v. National Union Fire Ins. Co., (A-18-14, February 11, 2016) highlights the differences between “occurrence” and “claims-made” insurance policies, and the mandatory significance of timely notice under the latter.
In Templo, an assignee of the insured sought coverage in the form of a monetary recovery under a Directors & Officers (D&O) liability policy as a result of the alleged negligent failure of the assignor/lender to make a loan in connection with the acquisition of a piece of property. When the underlying business transaction concluded unsuccessfully – even after the proposed lender had received substantial payments for its commitment to make the loan – the Plaintiff borrower settled with multiple defendants, including the lender who was insured by the D&O carrier under a claims-made policy, in an effort to recover both its commitment payments as well as damages allegedly caused as a result of the failure of the proposed loan to close. The insured was joined in the lawsuit by means of an amended complaint which was filed and served during the one-year period (2006) that the claims-made policy was in effect.
Under the claims-made policy, the insured was obligated to give the insurance carrier notice of the assertion of the claim both during the policy period and “as soon as practicable,” in order to afford the insurer an opportunity to decide whether to assume or participate in the defense of the claim. In this case, both the Trial Court and the Appellate Division, siding with the carrier, concluded that a six-month delay between assertion of the claim and notification to the insurer, even if still within the policy period, released the latter from any obligation to defend its insured and, correspondingly, to indemnify the claimant against its insured.
The Supreme Court affirmed the decision of the lower courts, principally on the basis of the delayed and untimely notification, distinguishing the treatment of the two types of insurance policies. “Occurrence” policies, usually offering coverage for damages arising out of automobile accidents, fire losses and other traditional tort claims, are usually triggered by an easily identifiable event, enabling the insurer to conduct a prompt investigation of the incident and make an early assessment of injury and damages, in order to calculate loss ratios, establish reserves and, more globally, fix premium rates. In such situations, although beneficial for an insurer to receive actual notice of the incident (in order to perform an early and thorough investigation), the insureds are often less sophisticated individuals and smaller business entities, and the law has evolved to permit tardy insureds under occurrence policies to enforce coverage unless the insurer can demonstrate actual prejudice from the delay in its notification.
“Claims made” policies, a more recent development, have arisen in the professional liability context due to the fact that claims are often asserted many years after the triggering event, which made it difficult for insurance companies to set premiums on policies that had an unlimited “tail” of potential exposure. Under these policies, where coverage is premised upon the claim’s assertion during the policy period (irrespective of when the triggering act occurred), strict adherence to the stated notice provisions is necessary, held the Court, to permit insurers to avoid a lengthy and unpredictable exposure to liability, and to thereby issue such policies at a reduced and reasonable rate to their insureds.
The Templo Court, adhering to precedent, concluded that the six-month delay in affording the carrier notice, even while still within the policy period, nullified coverage. Essentially, the Court felt that there was no reason for it to write a better contract than the one that these parties had agreed to with respect to the issue of the importance of prompt and timely notice given both within the policy period and “as soon as practicable.” A determination as to whether the late notice was actually prejudicial was simply not important in this context, concluded the Court, where the insured under the D&O policy was a sophisticated business entity engaged in complex financial transactions; the policy covered a broad variety of complex civil and criminal risks and exposures; a broker had been involved in the procurement of the policy on the insured’s behalf; and, most significantly, the insurance industry’s ability to assess risks and establish reasonable premiums under claims made policies carried a more significant public policy interest than whether coverage due to an absence of actual prejudice would be found in any (and perhaps every) particular case.
The significance of this decision to claims made policy insureds is apparent. No matter how sympathetic the facts, policyholders are obligated to and should give their carriers immediate notice under these policies as soon as claims against them are brought (indeed, perhaps even as early as when they know or have reason to know that claims are forthcoming). Equitable considerations notwithstanding, the courts of this state have been directed, in no uncertain terms, to deny coverage under this type of insurance contract unless the insured adheres strictly to the policy language in terms of its notice obligations.
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