The New Jersey Supreme Court ruled in favor of National Union Fire Insurance Company of Pittsburgh, Pa. in a Directors and Office's policy coverage dispute on February 11, in the matter of Templo Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co., 2016 N.J. LEXIS 144. Therein, the Court held that because the Directors and Officers "claims made" policy was not a contract of adhesion, but was negotiated by sophisticated parties, National Union was not required to demonstrate it suffered "appreciable prejudice" before disclaiming coverage due to the insured's failure to give notice of the claim "as soon as practicable." The Court also found that the term "as soon as practicable" as articulated within the National Union policy was clear, unambiguous and should be interpreted as written. National Union was represented by Andrew L. Indeck from the Warren, New Jersey office of Weber Gallagher. Mr. Indeck is Chair of the firm's Insurance Practice Group.
Under a "claims made" policy, coverage is triggered when a claim is "first made" and the insured reports the claim to its carrier. Prior decisions in New Jersey enforced the "as soon as practicable" reporting requirement without compelling an insurer to demonstrate it sustained appreciable prejudice as a consequence of the untimely reporting. In the earlier decisions however, the claims had been reported outside of the policy period. Accordingly, the requirement of reporting a claim "as soon as practicable" was overshadowed by the concept that the claims were reported outside of the policy period, which, if permitted, would constitute an impermissible gratis expansion of coverage. Templo addressed the novel issue of enforcement of the "as soon as practicable" policy condition when the claim is nonetheless reported to the insurance carrier within the policy period.
The underlying litigation was brought by Templo Fuente De Vida Corp. and Fuente Properties, Inc. (collectively, plaintiffs) to recover losses sustained in an attempt to secure financing from National Union's insured, First Independent Financial Group. First Independent purchased a Directors, Officers and Private Company Liability Insurance Policy from National Union covering the time period from January 1, 2006 through January 1, 2007. First Independent was served with the plaintiffs' first-amended complaint on February 21, 2006. At least six months after service of the first-amended complaint, First Independent first placed National Union on notice of plaintiffs' claim. National Union disclaimed coverage on multiple grounds. Ultimately, the plaintiffs and First Independent settled the underlying litigation under an agreement that included an assignment of First Independent's rights under the National Union Policy. Subsequently, the plaintiffs initiated a declaratory judgmen t action against National Union to collect under the policy.
In considering cross-motions for summary judgment, the Trial Court held that National Union need not "show appreciable prejudice in order to avoid coverage based on a failure to meet the notice requirement of a claims made" policy, and that "to hold that such unambiguous [notice] language is unenforceable absent appreciable prejudice would be an unjust and inequitable expansion of the coverage provided." Id. at 16-7. Accordingly, the Trial Court dismissed the complaint against National Union. The Appellate Division affirmed, noting that the policy "clearly required that notice be provided both within the policy period and as soon as practicable" and, as such, that "coverage was properly denied to the insureds and, by extension, to plaintiffs as their assignees." Id. at 17
Interpretation of the term "as soon as practicable" was not before the Supreme Court inasmuch as the plaintiffs' conceded that the six month delay by First Independent in reporting the claim was not "as soon as practicable." Similarly, the plaintiffs did not assert that the condition's language was ambiguous or capable of multiple interpretations. Accordingly, the Supreme Court found plaintiffs' unexplained six-month delay in reporting the claim was not "as soon as practicable". Noting the fact specific nature of an "as soon as practicable" analysis, the Court emphasized that "we need not and do not draw any "bright line" on these facts for timely compliance with an "as soon as practicable" notice provision." Id. at 32.
The Court next turned to whether National Union was required to demonstrate appreciable prejudice before being entitled to rely upon the "as soon as practicable" policy condition. The sophisticated nature of the parties to D&O and E&O parties generally, and in this case specifically, formed an important part of the Court's rationale. It was primarily for this reason that the Court refused to deviate from the literal and unambiguous requirements of the National Union policy. The court noted these types of claims made policies in general (and this policy in particular) represented a negotiated contract between two sophisticated business entities. The Court discussed the historically different approaches taken concerning interpretation of "claims made" versus "occurrence" policies, which are premised upon the respective bargaining powers of the parties to those insurance policies. The court noted that typically, "occurrence" policies are purchased by an "unsophisticated customer unaware of all the policy's requirements." Id. at 35. Those policies are viewed as "contracts of adhesion" because the insured has next to no bargaining power and is left with a choice to "take-it-or-leave-it." This inherent inequity mandates special judicial consideration, such as the Cooper doctrine that requires an insurer to show appreciable prejudice resulted from an untimely reported claim under an "occurrence" policy in order to withhold coverage.
Conversely, the Court noted that "claims made" policies, generally, are not formed in such a one-sided manner with various policy provisions actively negotiated. Because First Independent was a sophisticated entity, the "claims made" policy could not be considered a contract of adhesion, and the "equitable concerns" tempering the application of policy provisions (such as the Cooper doctrine) were inapplicable,. As such, the Court applied the policy language as written, finding "when First Independent began defending against plaintiffs' claims without first notifying National Union, an action explicitly barred by the terms of the policy, it violated a condition precedent of timely notice to National Union, and thus breached the policy's express condition of notice of a claim in order for coverage to attach." Id. at 37.
Templo represents an expanded application of the "as soon as practicable" reporting requirement to circumstances where claims are reported during the policy period of a "claims made" policy. In light of the Templo decision, sophisticated insureds, who are the typical purchasers of "claims made" policies, are now more likely to be held to the literal terms of the "as soon as practicable" reporting requirements, even if a claim is ultimately reported within the applicable policy period.