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NJ Supreme Court -- Late Notice (Without Prejudice) Remains a NJ Policy Defense in Claims Made Policies.

February 12, 2016

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Late notice, in the absence of a showing of “appreciable prejudice” by the insurer, has gone the way of the <a href="">dodo bird</a> in respect of its viability as the basis for a disclaimer on an occurrence based policy. However, in NJ (and in many other jurisdictions) late notice (even without appreciable or material prejudice) remained a defense in claims made policies (on the theory that timely notice was a material condition of the policy). Whether such a late notice defense was still viable was the question that the NJ Supreme Court decided yesterday in the case of <em>Templo Fuente De Vida Corp., et al. v. National Union Fire Insurance Co.</em> In an unanimous decision, the Court ruled that the answer is “yes.”
In <em>Templo Fuente</em>, a real estate closing went bad when the financing to fund the loan fell through. A directors and officers lawsuit was filed against Templo Fuente. Templo Fuente thereafter presented the claim to National Union for coverage under a claims made policy – some six months after being served with the complaint. National Union disclaimed coverage on the grounds that a condition precedent to coverage – timely notice – had not been met. The trial court and the appellate court agreed with National Union, but Templo Fuente appealed to the New Jersey Supreme Court, Templo Fuente argued (among other things) that allowing a late notice disclaimer (in the absence of “appreciable prejudice”) was contrary to the growing national trend.
The New Jersey Supreme Court <a href=""rel="">disagreed and ruled</a> for National Union. In reaching its decision, the Court noted that:
<em>the requirement of notice in an occurrence policy is subsidiary to the event that invokes coverage, and the conditions related to giving notice should be liberally and practically construed.
By contrast, the event that invokes coverage under a “claims made” policy is transmittal of notice of the claim to the insurance carrier. In exchange for limiting coverage only to claims made during the policy period, the carrier provides the insured with retroactive coverage for errors and omissions that took place prior to the policy period. </em>
This decision is obviously good news for insurers since the pricing for claims made policies is largely predicated on timely notice. But, what may be even better news is that in reaching its decision (in <a href="">dicta</a>) the Court noted that one of the reasons that claims made policies should be treated differently than occurrence based policies is that the insureds in claims made policies are “knowledgeable insureds, purchasing their insurance requirements through sophisticated brokers” who effectively know (or should know) what they are buying. One wonders whether this argument could be successfully used as a defense in respect of disclaimers on other types of policies or on other types of legal issues where there are “knowledgeable insureds” with “sophisticated brokers.”
For more information about this post please e-mail <a href=""target="_blank">Bob Cosgrove </a>.

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