By William Brennan, Sedgwick New York
In a decision released yesterday, the New Jersey Supreme Court held that an insurer could deny coverage under a claims-made directors and officers policy based on the insured’s late notice, without any evidence of prejudice to the insurer.
In Templo Fuente De Vida Corp., et al. v. National Union Fire Insurance Co., ___ A.3d ___, 2016 WL 529602 (N.J. Feb. 11, 2016), the underlying plaintiffs brought a number of claims against First Independent Financial Group. (“First Independent”) in the wake of a failed real estate deal for which First Independent had promised to provide funding, only to come up empty when the closing date rolled around. First Financial’s D&O policy with National Union required it to provide notice of claims “as soon as practicable” and within the policy period. Yet First Financial did not notify National Union of this claim until six months after it had been served, and after it had retained counsel and filed an answer. National Union promptly disclaimed on grounds of late notice. In the ensuing coverage litigation brought by the underlying plaintiffs, to whom First Financial assigned its insurance claim, the trial court granted National Union summary judgment on the basis of the late notice defense, brushing aside the plaintiffs’ arguments that National Union should be required to demonstrate prejudice arising from the late notice. After an affirmance by the New Jersey Appellate Division, the issue arrived at the Supreme Court.
The New Jersey Supreme Court acknowledged that New Jersey does require insurers to show prejudice in order to make out a late notice defense, but noted that this principle applied only to occurrence policies. The Court emphasized that it approached occurrence and claims-made policies differently due to its belief that the “vast majority” of policyholders with occurrence policies were unsophisticated consumers buying adhesion contracts, while claims-made policyholders, especially for D&O policyholders like First Independent, were sophisticated insureds advised by sophisticated brokers. Given this background, the Court found that the National Union policy at issue, including its notice requirement, “sufficiently conformed to the objectively reasonable expectations of the insured, and, hence, did not violate the public policy of New Jersey.” It therefore enforced the prompt notice requirement as written, without imposing a further “prejudice” requirement.