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Disclaimer of Coverage Upheld Due to Insured’s Failure to Comply with Notice Provision in Policy

By on February 26, 2016 in Liability with 0 Comments

Notice provisions are common clauses in insurance policies, whereby the insured is required to provide timely notice of the claim as a condition to obtaining coverage under the policy. The courts in New Jersey, however, interpret this notice clause differently, depending upon whether the policy is an occurrence or a claims made policy. In Templo Fuente De Vida Corp. v. National Union Fire Insurance Co., 2016 N.J. LEXIS 144 (2016), the New Jersey Supreme Court dealt with the interpretation of this clause in the context of a claims made policy.

The issue in this case was whether, to disclaim coverage for a claims made policy, an insurance company must show that it was prejudiced by the insured’s failure to provide timely notice. The policy in question was a Directors and Officers policy.

The underlying claim involved a failure of the defendant insured to provide funding to the plaintiff to purchase property. The plaintiff Templo Fuente De Vida Corp. (“Templo”) had engaged the Morris Mortgage Inc. (“MMI”) to find funding sources for the purchase of the property. MMI identified Merl Financial Group, Inc. (“Merl) as a possible funding source. Despite several commitments from Merl, when the final closing date arrived, Merl was unable to fund the purchase and the sellers of the property terminated the sales agreement with the plaintiff. Templo then sued Merl for its losses due to the terminated agreement. Claims were made for breach of contract, unjust enrichment, negligence, professional malpractice, as well as other claims.

Sometime prior to the filing of the complaint, Merl was restructured and renamed First Independent Financial Group (“First Independent”). First Independent Group purchased a $1 million Directors, Officers, and Private Company Liability Insurance policy from National Union Fire Insurance Company (“National Union).  This policy was a claims made policy which required that, as a condition precedent to coverage, the insured must give written notice to the insurer of any claim against an insured “as soon as practicable” during the policy period.

However, the insured did not notify National Union for 6 months after suit was filed. Instead, it retained counsel, filed an answer and later provided notice. The carrier disclaimed due to the failure to comply with the notice provision in the policy.

Thereafter, the insured settled the claim for $3 million, agreed to pay a portion of the settlement, and assigned its rights under its policy to the plaintiff to pursue the carrier for the balance of the settlement. The plaintiff then commenced this declaratory judgment action against National Union.

It was undisputed that the insured failed to give notice of the claim until 6 months after it was sued, which violated the notice provision. The insured was unable to provide any explanation as to the cause of the delay.  Case law is clear that a 6 month delay violated the “as soon as practicable” notice requirement. Thus, the issue was whether the carrier also had to show it was prejudiced by the delay.

In making its determination, the Court distinguished between occurrence versus claims made policies. For an “occurrence” policy, it is the “occurrence” of the peril that is insured. As long as that peril occurred during the life of the policy, coverage attaches. However, for a “claims made” policy, it is the making of the claim which is the event and peril being insured, regardless of when the occurrence took place.

Automobile and homeowners policies are examples of typical occurrence policies. Claims made policies are typically issued for professional negligence claims. While both types of policies have notice provisions, the rationale for these provisions differ between these types of policies. For an occurrence policy, notice is required to permit the carrier to be able to promptly investigate, settle, and defend the claims. However, for a claims made policy, notice during the policy period is required to provide a fixed date after which the insurance company no longer has any liability. Thus, the purpose of the notice provision in the claims made policy is to fix the risk for the carrier.

In addition to the difference in the reason for the notice provisions in these types of policies, the Supreme Court also pointed out that occurrence policies are usually a contract of adhesion entered into by parties with unequal bargaining powers. In the vast majority of occurrence policies, the insureds are unsophisticated consumers who are unaware of the policy’s requirements. As a result, they are strictly construed against the carrier. Hence, the courts have held that for a carrier to disclaim based upon a violation of the notice provision in an occurrence policy, they must show “appreciable prejudice” due to the delay in providing notice.

On the other hand, claims made policies are usually with knowledgeable insureds, purchasing insurance through sophisticated brokers. They deal with insurers on a more equal footing. Prior case law has not imposed an obligation upon insurers to show prejudice when the notice provision has been violated.

The Court found that the notice provision in the National Union policy was clear and unambiguous, requiring that the insured report a claim to the insurer “as soon as practicable.” By failing to provide prompt notice, First Independent violated a condition precedent of timely notice to National Union. The Court found no public policy reason to expand this provision to include a requirement that the carrier had to show that it was prejudiced by this delay as well. Hence, National Union’s disclaimer of coverage was upheld by the Court.

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About the Author

About the Author:

Ms. Ramos is an Executive Committee Member and Co-Chair of the Litigation Department at Capehart Scatchard, P.A. located in Mount Laurel, New Jersey. She is an experienced litigator with over 25 years experience handling diverse matters. Practice areas include tort defense, business litigation, estate litigation, tort claims and civil rights defense, construction litigation, insurance coverage, employment litigation, shareholder disputes, and general litigation.

For the years 2020 and 2021, Ms. Ramos was selected for inclusion in The Best Lawyers in America© in the practice area of Litigation - Insurance. The attorneys on this list are selected based upon the consensus opinion of leading lawyers about the professional abilities of their colleagues within the same geographical area and legal practice area. A complete description of The Best Lawyers in America© methodology can be viewed via their website at: https://www.bestlawyers.com/methodology.

In 2021, Capehart Scatchard and Ms. Ramos received the “Best Law Firm” ranking in the area of Litigation – Insurance (Metro, Tier 3) published by U.S. News & World Report and Best Lawyers®. Law firms included on the list are recognized for professional excellence with consistently impressive ratings from clients and peers. To be eligible for a ranking, a firm must have at least one attorney who has been included in the current edition of Best Lawyers in America, which recognizes the top five percent of practicing lawyers in the United States. Betsy Ramos (Litigation – Insurance) was recognized for this prestigious award in the 2021 edition. For a description of the “Best Law Firm” selection methodology please visit: https://bestlawfirms.usnews.com/methodology.aspx.

“Best Law Firms” is published by Best Lawyers in partnership with U.S. News & World Report. For a description of the selection methodology please visit: https://bestlawfirms.usnews.com/methodology.aspx.

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