In a unanimous opinion, the New Jersey Supreme Court, applying New Jersey law, has held that an insurer is not required to show that it suffered prejudice before denying coverage on the basis of the insured’s failure to give notice of the claim “as soon as practicable” even when notice was provided during the policy period of a claims-made-and-reported policy, relying in part on the fact that the insurance contract was entered into by sophisticated parties and was not a contract of adhesion. Templo Fuente De Vida Corp. v. Nat’l Union Fire Ins. Co., 2016 WL 529602 (N.J. Feb. 11, 2016).
The insurer issued a D&O policy to the insured, a finance company. The policy was a claims-made-and-reported policy that required the insured, as a condition precedent to coverage, to give written notice of any claim “as soon as practicable” and within the policy period. The insured failed to procure sources of funding for an underlying claimant, allegedly causing the claimant to suffer losses on the sale of a property. The claimant sued the insured, but the insured waited more than six months before it provided notice of the claim to the insurer. The insurer denied coverage because, while notice was given within the policy period, the insured failed to provide notice “as soon as practicable.” As part of a settlement, the insured assigned its rights and interests under the policy to the claimant, who then brought suit against the insurer. The trial court granted summary judgment in favor of the insurer because it found that notice was not given as soon as practicable and that the insurer did not need to show prejudice as a result of the delay in order to deny coverage. The appellate court affirmed.
The New Jersey Supreme Court affirmed, holding that the insurer could decline coverage without demonstrating prejudice because the insured’s failure to comply with the notice provisions of the policy constituted a breach of the policy. The court explained that the prompt notice requirement and the requirement that the claim be made within the policy period allows insurers of claims-made policies to maximize their opportunity to investigate, set reserves, and control or participate in negotiations with the third party asserting the claim against the insured. The court also noted that an insurer must show prejudice as a result of untimely notice in an occurrence policy because such policies are usually issued to unsophisticated consumers. However, it stated that proof of prejudice is not necessary to deny coverage for a claims-made policy that fulfills the reasonable expectations of the more knowledgeable and sophisticated policyholder.
The court determined that there was no factual dispute that the notice given by the insured was untimely, as no reason was given to assert why the delay occurred. The court also found that the insured was an incorporated business entity that engaged in complex financial transactions. Therefore, the court held that the insured breached the policy by failing to give notice of the claim as soon as practicable and that New Jersey public policy did not require the insurer to prove prejudice in order to deny coverage when sophisticated parties were involved.