Late Reporting of a Claim or Lawsuit
Late Reporting of a Claim or Lawsuit08.01.2016
As a practicing insurance coverage attorney practicing in New York for over 25 years, the late reporting of a claim or a lawsuit was often a strong and successful policy defense to vitiate coverage as New York was a rare “no prejudice” state (which was somewhat weakened over the years), meaning an insurer did not have to demonstrate that it was prejudiced by untimely notice to deny coverage. Many of my then insurer clients took a different approach in the majority of jurisdictions where a showing of prejudice was required, sometimes not even raising the coverage defense on the belief that prejudice was too difficult of an obstacle to overcome. A decision from the New Supreme Court last month provides a useful discussion where the late notice coverage defense remains viable especially under a professional liability policy.
In Templo Fuente v. National Union Fire Ins. Co., 129 A.3d 1069 (N.J. 2016) whether, in order to disclaim coverage, an insurance company must show it was prejudiced by an insured s failure to comply with the notice provision in a Directors and Officers claims made policy. The plaintiff hired a mortgage broker to arrange financing to purchase a property to relocate its church/daycare center which, in turn, identified Merl Financing (later reformed as First Independent) as the source of funding. However, when closing arrived, funding was absent so the sellers terminated the purchase agreement. Merl Financing and others were sued, and Merl Financing sought coverage six months after the complaint was filed under its National Union claims made D&O policy that required claim notice “as soon as practical”. National Union refused the tender, claiming that notice was untimely.
The trial court found notice was untimely, and the insurer had no obligation to show prejudice from untimely notice. The Appellate Division affirmed, holding that, unlike claims made policies, occurrence policies require the insurance company to establish prejudice to avoid coverage. The New Jersey Supreme Court held that Merl Financing’s failure to comply with the notice provisions of the bargained for Directors and Officers claims made policy constituted a breach of the policy, and National Union may decline coverage without demonstrating appreciable prejudice.
Of particular interest, the Court noted that, notwithstanding the unambiguous notice provisions within a particular occurrence policy, the public interest required the insurance company to show prejudice to forfeit coverage for an insured s breach of the policy s notice provisions because the insurance contract was a contract of adhesion, and it was against the public interest to forfeit the insured s bargained-for coverage by reason of its failure to provide timely notice. In doing so, the Supreme Court took opined that occurrence policyholders were consumers unlikely to be conversant with all the fine print of their policies and that, as a result, strict adherence to the terms of the notice provisions would be too harsh a result.
In contrast, it was held that those equitable concerns did not control the Court’s analysis of the instant “as soon as practicable” notice requirement of the Directors and Officers claims made policy. The notice requirement within the contract of insurance sold by National Union to Merl Financing met the objectively reasonable expectations of the insured and, therefore, did not violate the public policy of New Jersey. The Supreme Court of New Jersey concluded that the notice provisions were breached, and National Union properly declined coverage without having to demonstrate prejudice.
All information provided in this blog is for informational purposes only. The sources used are presumed accurate. Lancer Claims Services, Brown & Brown Program Insurance Services, Inc. and Brown & Brown, Inc. will not be liable for any errors, omissions, losses, injuries or damages arising from its display or use and will not assume responsibility for any misguided information. No guarantees are implied.