Prodigy Applies the Notice-Prejudice Rule
The insured in Prodigy was apparently a sophisticated company that had merged with another company (FlashNet), the latter being insured under a D&O liability claims-made and reported policy issued by Agricultural Excess & Surplus Insurance Company (AESIC).[6] The D&O policy required that, “as a condition precedent,” written notice of any claim had to be provided the carrier “as soon as practicable . . . but in no event later than ninety (90) days after the expiration of the Policy Period, or Discovery Period.”[7]
Following the merger, FlashNet was named as a defendant in a class action securities lawsuit and served with the complaint on June 20, 2002. The claim was made within the D&O’s policy and discovery period, but the insured (Prodigy) did not report it to AESIC until almost a year later.[8] AESIC denied coverage, claiming the insured failed to comply with its policy’s notice requirements. The insured then sued AESIC, seeking a declaration that it was entitled to coverage, and the parties thereafter cross-moved for summary judgment. The trial court ultimately granted AESIC’s motion and denied Prodigy’s application.[9] Prodigy appealed, and the Texas court of appeals affirmed, concluding that Prodigy’s one-year delay in providing notice was not “as soon as practicable” as a matter of law and that AESIC was not required to show it had been prejudiced by Prodigy’s late notice.[10]
On appeal, the Texas Supreme Court reversed. The court framed the issue before it as follows:
[W]hether, under a claims-made policy, an insurer can deny coverage based on its insured’s alleged failure to comply with the policy provision requiring that notice of a claim be given “as soon as practicable,” when (1) notice of the claim was provided before the reporting deadline specified in the policy; and (2) the insurer was not prejudiced by the delay.[11]
The court ultimately concluded that coverage could not be defeated in these circumstances even if the insured failed to provide notice “as soon as practicable,” unless the insurer could also demonstrate it had been prejudiced by the delay. The court thus observed: “In a claims-made policy, when an insured notifies its insurer of a claim within the policy term or other reporting period that the policy specifies, the insured’s failure to provide notice ‘as soon as practicable’ will not defeat coverage in the absence of prejudice to the insurer.”[12]
In support of its conclusion, the court explained the “basic distinctions between occurrence and claims-made policies and the different types of notice requirements associated with each.”[13] For example, the court observed that the principal difference between these coverages is that the claims-made policy “provides unlimited retroactive coverage and no prospective coverage,” whereas the occurrence-based policy “provides unlimited prospective coverage and no retroactive coverage.”[14] The main advantage of a claims-made policy is the “limitation of liability to claims asserted during the policy period.”[15] The court noted that eliminating exposure to claims filed after the policy expiration date allows carriers “to calculate risks and premiums with greater precision,” which in turn enables insurers to sell claims-made policies “at reduced premiums.”[16]
Regarding the notice requirement, the court pointed out that occurrence and claims-made policies “tend to have a requirement that notice of a claim be given to the insurer promptly, or ‘as soon as practicable.’”[17] But unlike occurrence-based policies, claims-made and reported policies typically have an additional requirement that the claim be reported to the carrier within the term of the policy or within a specified time thereafter.[18] As the court noted, these notice requirements serve very different purposes.
The requirement that notice be given promptly (i.e.,“as soon as practicable”) serves to “maximize the insurer’s opportunity to investigate, set reserves, and control or participate in negotiations with the third party asserting the claim against the insured.”[19] In contrast, the requirement in claims-made policies that notice be provided within the policy period or a specified time thereafter serves an entirely different purpose. This latter requirement “is directed to the temporal boundaries of the policy’s basic coverage terms. . . . [Notice under this provision] is not simply part of the insured’s duty to cooperate, but defines the limits of the insurer’s obligation, and if there is no timely notice, there is no coverage.”[20]
Based on this latter notice requirement found only in claims-made policies, courts have uniformly and consistently held that an insurer “need not demonstrate prejudice to deny coverage when an insured does not give notice of a claim within the policy’s specified time frame.”[21] This is because this strict reporting requirement is “essential to coverage under a claims-made-and-reported policy.”[22]
But this rationale does not hold true with the notice requirement that a claim be reported promptly or “as soon as practicable.” In that circumstance, the notice requirement is not “essential” to coverage. Rather, because the prompt or “as soon as practicable” notice requirement found in both occurrence and claims-made policies is primarily concerned with enabling the insurer to investigate, set reserves, defend, and negotiate settlements, courts have required that the insurer demonstrate material prejudice before the policyholder’s coverage is forfeited.[23]
The Prodigy court concurred with this analysis, holding that “when an insured gives notice of a claim within the policy period or other specified reporting period, the insurer must show that the insured’s noncompliance with the policy’s ‘as soon as practicable’ notice provision prejudiced the insurer before it may deny coverage.”[24] Ultimately, the court concluded that Prodigy’s obligation to provide AESIC notice of the claim “as soon as practicable” was not “a material part of the bargained-for exchange under this claims-made policy.”[25] Moreover, because AESIC “admitted that it was not prejudiced by the delay in receiving notice,” the insurer could not deny coverage based on Prodigy’s purported failure to provide notice “as soon as practicable.”[26]
While this analysis and approach to the notice-prejudice rule with respect to claims-made policies has been followed or acknowledged by other courts,[27] several courts have rejected it, as exemplified recently by the New Jersey Supreme Court in Templo Fuente.
Templo Fuente Rejects the Notice-Prejudice Rule
In the underlying case, the plaintiffs were owners and operators of a church and day care centers who engaged the defendants to find funding sources for the purchase of property so the plaintiffs’ church might be relocated. Unfortunately, when closing on the property was to take place, no funding was available to purchase the property, and the sellers terminated the purchase agreement. As a result of financial losses sustained, the plaintiffs filed suit and served the defendants with the complaint on February 21, 2006.[28]
One of the named defendants had purchased a $1 million D&O policy from National Union Fire Insurance Company of Pittsburgh that covered the period from January 1, 2006 through January 1, 2007. The New Jersey Supreme Court characterized this policy throughout its opinion as a “claims-made” policy, as opposed to an “occurrence-based” policy, overlooking that the D&O policy at issue was actually a claims-made and reported policy.[29] The D&O policy required as a “condition precedent to coverage” that the insured provide notice of a claim “as soon as practicable” and, further, “during the Policy Period” or “Discovery Period.”[30]
The insured did not provide notice of the claim to National Union until August 28, 2006, about six-months after being served with the plaintiffs’ complaint. Although the notice was made well within the D&O’s policy term, National Union nonetheless denied coverage, asserting the notice was not provided “as soon as practicable.”[31] Following a settlement in the underlying case, the plaintiffs were assigned the insured’s rights under the policy and thereafter filed a declaratory judgment action against National Union. The parties cross-moved for summary judgment, and the trial court granted National Union’s application, dismissing the plaintiffs’ complaint with prejudice. The trial court reasoned that the insured had failed to satisfy the prompt notice requirement and, further, the insurer did not have to show “appreciable prejudice” in order to avoid coverage. On appeal, the trial court’s opinion was affirmed by the Appellate Division.[32] Thereafter, the New Jersey Supreme Court granted certification to address the issue of “whether an insurance company must establish prejudice before denying coverage based on the insured’s failure to comply with a notice condition in a ‘claims made’ policy.”[33]
The court first determined that, based on the undisputed factual record, the insured’s “unexplained six-month delay” in providing notice of the claim failed to satisfy the D&O policy’s prompt notice requirement.[34] Given that determination, the court next turned to the issue of whether that breach of the prompt notice requirement could nonetheless be overcome by requiring the insurer to show it was prejudiced by that delay. To evaluate that question, the court specifically framed the issue in the context of whether prejudice was necessary when the insured demonstrates notice of the claim was provided within the claims-made policy term.[35]
Unfortunately, in holding the insurer need not show prejudice in such circumstances, the court believed the issue it framed required an expansion of its prior holding in Zuckerman v. National Union Fire Insurance Co.[36] In Zuckerman, the insured attorney gave notice of a legal malpractice lawsuit to its insurer 10 months after the claims-made professional liability policy had expired. After providing an historical backdrop—explaining the distinctions and purposes underlying occurrence-based and claims-made policies and why the latter replaced the former, in part to address the vagaries of “long-tail exposures”—the Zuckerman court concluded an insurer need not show “appreciable prejudice” in denying coverage based on late notice when such dilatory reporting occurs outside the policy period. In such circumstances, the court observed, extending the notice period of a claims-made policy would constitute “an unbargained-for expansion of coverage,” which exposed the insurer to a much greater risk than it bargained for.[37]
That rationale, however, is entirely consonant with the insurer’s ability in a claims-made policy to “calculate risks and premiums with greater exactitude since the exposure ends at a fixed point, usually the policy termination date.”[38] The actuarial principle of determining when the insurer’s “books may be closed,” however, should not be conflated with the prompt notice requirement, which allows the carrier to investigate, defend, and settle the claim—the same rationale that undergirds the similar prompt notice requirement found in occurrence-based policies. Viewed more correctly, therefore, the Templo Fuente court was not expanding but, rather, contracting its previous holding in Zuckerman.
Curiously, the Templo Fuente court also veered off course by embracing the notion that because it considered the insured to be a sophisticated policyholder, that policyholder characterization automatically negates the rationale of the prompt notice requirement. The court acknowledged that the prompt notice requirement maximizes the insurer’s ability to investigate, defend, set reserves, and negotiate with the third-party claimant.[39] Those goals do not undergo a substantive transformation simply based on the sophisticated nature of the policyholder. But the court believed that to be the case and, thus, chose to take a more stringent approach in evaluating this late notice issue, primarily because it considered the policyholder to be more knowledgeable and because the insured used a broker in procuring the D&O policy.[40] Whether the insured is considered “sophisticated” or not, however, does not undermine, nor defeat, the carrier’s opportunity to investigate, defend, set reserves, or negotiate settlements, provided it has not been materially prejudiced by the tardy notice.[41]
As a consequence of the holding in Templo Fuente, policyholders in New Jersey must now be more vigilant in reporting claims. The insured must not only be sensitive to notifying the carrier within the policy period, but must also take measures to report the claim immediately or risk the forfeiture of its policy’s benefits.
The Notice-Prejudice Rule Should Apply to Claims-Made Policies
In comparing these two approaches for accepting or rejecting application of the notice-prejudice rule for claims-made and reported policies, it becomes readily apparent that the Prodigy decision is better reasoned because its holding is on more solid footing. Prodigy, more than Templo Fuente, captures the purpose behind the need for prompt (“as soon as practicable”) notice in both occurrence-based and claims-made policies, explaining the distinctions between these policies and why an insurer should first demonstrate it has been materially prejudiced before an insured is told it must forfeit the benefits of its policy.
As the courts and commentators have emphasized, the critical difference between a claims-made policy and an occurrence policy is that coverage in a claims-made policy ends once the policy’s term has expired. This allows the carrier to both calculate its risks and set its premiums with greater precision. So long as the insured has reported notice of the claim to the insurer within that policy term—which is the “essence” of a claims-made policy—coverage should remain available and forfeiture of policy benefits should be avoided. That is, unless, of course, the reported notice is not “as soon as practicable” and, further, the carrier can demonstrate material prejudice.
The rationale behind requiring the insurer to show prejudice when the insured has breached the prompt notice requirement is premised on the carrier’s need to investigate the claim, set reserves, and control or participate in negotiations with the third-party claimant. The overwhelming majority of courts that have analyzed this underlying rationale in occurrence-based policies have concluded that the notice-prejudice rule should apply in these circumstances. Why then should a similar rule not apply to claims-made and reported policies when the insurer denies coverage based on the insured’s failure to comply with the policy’s prompt notice requirement? As the Prodigy court appropriately recognized, there is no principled basis to reject the notice-prejudice rule in this circumstance.
Nor should an exception be created to apply the notice-prejudice rule based on the “sophisticated” nature of the insured, as suggested in Templo Fuente. The insured in Prodigy, as well as the insureds in other cases that have followed Prodigy’s reasoning, were sophisticated, but that element had no bearing on the outcome of whether the notice-prejudice rule should be applied. Indeed, why should that element matter to any degree if the insurer cannot establish it has been prejudiced? If the insured, whether sophisticated or not, has provided the claims-made insurer notice within the policy term, then the “essence” of that policy has been satisfied.
In conclusion, there should be no distinction in how the prompt notice requirement is viewed, simply based on whether that provision appears in a claims-made or occurrence policy. In both situations, the reason for its inclusion in the policy remains the same. Accordingly, the notice-prejudice rule should be applied equally in either setting. And that is why the Prodigy decision appears to be better reasoned.
Keywords: insurance, coverage, notice-prejudice rule, claims-made policy, claims-made and reported policy, occurrence-based policy
Ellis I. Medoway is a partner with the law firm of Archer & Greiner, P.C ., Haddonfield, New Jersey. He chairs the firm’s insurance practice group.
[1] See, e.g., Cooper v. Gov’t Emps. Ins. Co., 51 N.J. 86, 94, 237 A.2d 870 (N.J. 1968) (although occurrence auto policy required insured to notify insurer “as soon as practicable” of an accident, and notice was not provided until almost two years after the accident at issue, the New Jersey Supreme Court nevertheless concluded the policy’s notice provision had not been breached. Rather, the court concluded the insurer could “not forfeit the bargained-for protection unless there are both a breach of the notice provision and a likelihood of appreciable prejudice.”).
[2] Cooper, 51 N.J. at 94 (noting it would be “unfair to insureds” not to require insurers to demonstrate “appreciable prejudice” when claiming late notice; thus, placing burden of persuasion on the carrier). The majority of courts follow this notice-prejudice rule for occurrence-based policies. See 3-20 Franklin D. Cordell, New Appleman on Insurance Law, Library Edition § 20.01[6][a] (LexisNexis 2015). The minority rule, on the other hand, allows the insurer to deny coverage based on late notice as a matter of law, even if the carrier is not prejudiced. For years, New York followed this minority approach. However, in 2008, the New York legislature amended its insurance statute, N.Y. Ins. Law § 3420, to require the insurer to show prejudice for most occurrence-based liability policies.
[3] When the insured has not provided notice of the claim within the term of the policy, the notice-prejudice rule is uniformly rejected whether the policy is a claims-made policy or a claims-made and reported policy. See, e.g., Lexington Ins. Co. v. W. Pa. Hosp., 423 F.3d 318, 327 (3d Cir. 2005) (under Pennsylvania law, no prejudice requirement for late notice under a claims-made policy); Craft v. Phila. Indem. Ins. Co., 343 P.3d 951, 952–53 (Colo. 2015) (noticeprejudice rule not applicable to “date-certain” notice requirement in claims-made and reported policy where notice of claim was not provided until more than a year after policy term expired); Anderson v. Aul, 361 Wis. 2d 63, 862 N.W.2d 304, 317 (Wis. 2015) (Wisconsin notice-prejudice statute not applicable to claims-made and reported policy where notice of claim was not provided until almost a year after claim was first made); Countryside Co-op v. Harry A. Koch Co., 280 Neb. 795, 790 N.W.2d 873, 886 (Neb. 2010) (no prejudice requirement for late notice under a claims-made policy); Zuckerman v. Nat’l Union Fire Ins. Co., 100 N.J. 304, 495 A.2d 395 (N.J. 1985) (prejudice rule rejected in claims-made and reported policy where notice of claim was not provided until 10 months after policy term ended); Slater v. Lawyers’ Mut. Ins. Co., 227 Cal. App. 3d 1415, 1421–22 (Cal. Ct. App. 1991) (prejudice rule not applicable when claim reported to insurer six months after policy term ended).
[4] Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Co., 288 S.W.3d 374 (Tex. 2009).
[5] Templo Fuente v. National Union Fire Insurance Co., 224 N.J. 189, 129 A.3d 1069 (N.J. 2016).
[6] As the Prodigy court appropriately noted, many judicial decisions have failed to distinguish between claims-made and claims-made and reported policies, instead speaking in “broad terms” of “claims-made policies.” Prodigy, 288 S.W.3d at 379–80 n.7. Because the Prodigy policy required that notice of a claim be given no later than 90 days after the expiration of “the Policy Period or Discovery Period,” this requirement was characteristic of a claims-made and reported policy. Prodigy, 288 S.W.3d at 379–80 n.7. See also Pension Tr. Fund for Operating Eng’rs v. Fed. Ins. Co., 307 F.3d 944, 955–56 (9th Cir. 2002) (noting claims-made policy that did not require claims be reported within policy period or by a specified time thereafter is not a claims-made and reported policy).
[7] Prodigy, 288 S.W.3d at 375–376. FlashNet, in anticipation of its merger with Prodigy, purchased a three-year “Discovery Period” for a $93,750 premium that extended coverage under the D&O policy for any “claims first made” against it until May 31, 2003. Prodigy, 288 S.W.3d at 376.
[8] Prodigy, 288 S.W.3d at 376.
[9] Prodigy, 288 S.W.3d at 376–77.
[10] Prodigy, 288 S.W.3d at 377. The insurer (AESIC) admitted that it was not prejudiced by the delayed notice. Prodigy, 288 S.W.3d at 375, 378, 382.
[11] Prodigy, 288 S.W.3d at 377.
[12] Prodigy, 288 S.W.3d at 382–83.
[13] Prodigy, 288 S.W.3d at 378. The court noted that D&O policies are written on a claims-made basis, which means the policy covers only claims that are first asserted against the insured during the policy period. Prodigy, 288 S.W.3d at 378.
[14] Prodigy, 288 S.W.3d at 379 (citing 20 Eric Mills Holmes, Holmes’ Appleman on Insurance § 130.1(A)(1) (2d ed. 2002), and 1 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 1.5 (3d ed. 2008)).
[15] Prodigy, 288 S.W.3d at 379 (quoting 20 Holmes’ Appleman on Insurance § 130.1(A)(1)).
[16] Prodigy, 288 S.W.3d at 379 (quoting 20 Holmes’ Appleman on Insurance § 130.1(A)(1)).
[17] Prodigy, 288 S.W.3d at 379 (quoting 13 Couch on Insurance § 186:13).
[18] Prodigy, 288 S.W.3d at 379–80.
[19] Prodigy, 288 S.W.3d at 380 (quoting 13 Couch on Insurance § 186:13); see also Chas. T. Main, Inc. v. Fireman’s Fund Ins. Co., 406 Mass. 862, 551 N.E. 2d 28, 29–30 (Mass. 1990) (noting premiums are determined based on the requirement that notice of a claim be given within the policy period and, accordingly, this claims-made notice requirement “is of the essence in determining whether coverage exists”).
[20] Prodigy, 288 S.W.3d at 380 (quoting 13 Couch on Insurance §186:13).
[21] Prodigy, 288 S.W.3d at 381. Some courts have found that it is “per se prejudicial” to the insurer when notice is not given within the policy period “because it expands the grant of coverage provided by the insurance policy.” Anderson v. Aul, 361 Wis. 2d 63, 862 N.W.2d 304, 325 (Wis. 2015).
[22] Prodigy, 288 S.W.3d at 381. See 20 Holmes’ Appleman on Insurance §130.1(A)(1) (“The essence . . . of a claims-made policy is notice to the insurance carrier within the insurance policy period.”).
[23] Prodigy, 288 S.W.3d at 381–82 (citing Chas. T. Main, 551 N.E.2d at 30 (noting requirement in claims-made policy that claim be reported within the policy term “is of the essence in determining whether coverage exists” and, thus, prejudice is not required when untimely notice is provided; but further emphasizing prejudice is required under Massachusetts’s statutory notice-prejudice rule for “as soon as practicable” notice requirement)), and T.H.E. Ins. Co. v. P.T.P., Inc., 331 Md. 406, 628 A.2d 223, 228 (Md. 1993) (similarly concluding under Maryland’s statutory notice-prejudice requirement)).
[24] Prodigy, 288 S.W.3d at 382. The court noted that even assuming the insured had not given notice “as soon as practicable,” the carrier was not denied the benefit of the claims-made nature of its policy because it could not “close its books” on the policy until 90 days after the extended policy period concluded. Prodigy, 288 S.W.3d at 382.
[25] Prodigy, 288 S.W.3d at 382.
[26] Prodigy, 288 S.W.3d at 382. On the same day Prodigy was decided, the Texas Supreme Court issued a companion decision in a similar case arising from a certified question from the U.S. Court of Appeals for the Fifth Circuit, Financial Industries Corp. v. XL Specialty Insurance Co., 285 S.W.3d 877 (Tex. 2009). In this case, a sophisticated insured, Financial Industries (FI), was issued a claims-made, management liability policy that covered securities claims. FI’s policy differed slightly from the Prodigy policy in that it only required notice of a claim be given “as soon as practicable” but did not contain a clear-cut reporting deadline. FI notified its insurer seven months after a lawsuit claiming fraud and breach of contract was filed against it; however, the notice was provided within the policy’s coverage period. Given that notice was provided before the carrier could “close its books” on the policy and, thus, the carrier was not denied the benefit of the claims-made nature of its policy, the Texas Supreme Court answered the certified question in the affirmative. Relying on its decision in Prodigy, the Texas high court held that the insurer “must show prejudice to deny payment on a claims-made policy, when the denial is based upon the insured’s breach of the policy’s prompt-notice provision, but the notice is given within the policy’s coverage period.” Financial Industries Corp., 285 S.W.3d at 879.
[27] Like the Prodigy court, several courts have recognized that so long as notice is provided within the policy’s coverage period, the insurer cannot deny coverage based on the insured’s failure to promptly give notice (“as soon as practicable”), unless the insurer can demonstrate it was prejudiced. See, e.g., Anderson v. Aul, 361 Wis. 2d 63, 862 N.W.2d 304, 325–26 (Wis. 2015) (construing state’s notice-prejudice statute, Wis. Stat. §§631.81(1) and 632.26(2), and holding that prejudice need not be shown when notice of claim is not provided under a lawyer’s professional liability claims-made and reported policy within the policy’s coverage period; further concluding Wisconsin’s notice-prejudice statute did not supersede the reporting requirement specific to claims-made and reported policies, but implicitly recognizing that had notice been provided prior to policy’s expiration, insurer would need to show prejudice under state's notice-prejudice statute); Craft v. Phila. Indem. Ins. Co., 343 P.3d 951, 953 (Colo. 2015) (similar to Anderson, holding, in connection with certified question from the Tenth Circuit, that notice-prejudice rule does not apply to breach of a “date-certain notice requirement in a [D&O] claims-made insurance policy,” because the “date-certain notice requirement defines the scope of coverage”; further recognizing that notice-prejudice rule would apply if notice was provided prior to the policy’s expiration: “[A]pplying a prejudice requirement make[s] sense in the context of a prompt notice requirement.” Craft, 343 P.3d at 958); Fulton Bellows, LLC v. Fed. Ins. Co., 662 F. Supp. 2d 976, 995 (E.D. Tenn. 2009) (predicting that Tennessee Supreme Court would accept the holding in Prodigy and “require a showing of prejudice for denial of coverage in a [D&O] claims-made policy . . . when the notice of the claim is untimely but still provided during the policy period”); Pension Tr. Fund for Operating Eng’rs v. Fed. Ins. Co., 307 F.3d 944 (9th Cir. 2002) (holding, under California law, that a claims-made policy with apparently no reporting requirement is subject to the notice-prejudice rule); T.H.E. Ins. Co. v. P.T.P., Inc., 331 Md. 406, 628 A.2d 223, 227 n.7 (Md. 1993) (holding state’s statutory notice-prejudice requirement not applicable to insurer’s denial of coverage for claims-made policy because notice was not reported until after policy expired; but further observing insurer would be required to demonstrate prejudice to deny coverage based on policy’s provision requiring insured to give notice of a claim “as soon as practicable,” assuming claim had been made and reported within the extended reporting period). But see Sherwood Brands, Inc. v. Great Am. Ins. Co., 418 Md. 300, 13 A.3d 1268 (Md. 2011) (holding that Maryland’s notice-prejudice statute, which was enacted after T.H.E. was decided, does apply to claims-made and reported policies and thus requires insurer to establish prejudice even when insured tenders notice after the extended policy period has already expired).
[28] Templo Fuente, 224 N.J. at 193–94, 129 A.3d 1069 (N.J. 2016).
[29] Templo Fuente, 224 N.J. at 194 (“The policy is a ‘claims made’ policy, as opposed to an ‘occurrence’ policy”); see also Templo Fuente, 224 N.J. at 200–201, 203 (generally discussing difference between “claims-made” and occurrence policies: “We have historically approached ‘claims made’ and ‘occurrence’ policies differently.” Templo Fuente, 224 N.J. at 208).
[30] Templo Fuente, 224 N.J. at 194. The D&O policy provided that notice of a claim could also be provided “within 30 days after the end of the Policy Period or the Discovery Period (if applicable), as long as such Claim is reported no later than 30 days after the date such Claim was first made against an Insured.” Based on this 30-day reporting requirement, a New Jersey federal district court rejected the holding in Templo Fuente because that 30-day provision was not contained in the insured’s policy. See Navigators Speciality Ins. v. PharmaNet Dev. Grp., Inc., 2016 U.S. Dist. LEXIS 40999, at *12–13 (D.N.J. Mar. 29, 2016).
[31] Templo Fuente, 224 N.J. at 195–96. The court cited the policy’s notice provisions (sections 7 and 8) that the court believed served the “mutual interests of the insured and the insurer.” The reasons for the insurer to be provided prompt notice were to allow the carrier to defend against the claim and to negotiate settlements. Notably, both notice provisions expressly state that being provided prompt notice allowed the insurer to protect against being prejudiced: “This prohibition checks action that could prejudice the insurance company . . . such as interposing an ill-conceived defense strategy, or engaging in settlement discussions.” Templo Fuente, 224 N.J. at 195 (emphasis added). “Insured shall take no action, or fail to take any required action, that prejudices the rights of the . . . Insurer.” Templo Fuente, 224 N.J. at 195 n.3 (emphasis added). Despite National Union’s own policy language that recognized the issue of prejudice was directly related to the prompt notice requirement, the court completely overlooked that carrier concession.
[32] Templo Fuente, 224 N.J. at 195–97.
[33] Templo Fuente, 224 N.J. at 197. The court noted there were no genuine issues of fact in dispute based on the record below and, thus, the Supreme Court’s review was de novo of the lower court’s “legal determination that an insurance company under a ‘claims made’ policy need not show prejudice before it may disclaim coverage on the basis of an insured’s failure to provide notice ‘as soon as practicable.’” Templo Fuente, 224 N.J. at 199.
[34] Templo Fuente, 224 N.J. at 207. The court noted that it was not drawing any “bright line” test based on the record before it—which showed an unexplained six-month delay in providing notice—with regard to complying with the “as soon as practicable” notice provision. The lower courts had concluded that because a five-and-one-half-month delay in notice breached the prompt notice requirement in Associated Metals & Minerals Corp. v. Dixon Chemical & Research, Inc., 82 N.J. Super. 281, 197 A.2d 569 (App. Div. 1963), certification denied, 42 N.J. 501, 201 A.2d 580 (1964), so did this six-month delay. Notably, the prompt notice provision at issue in Associated Metals was in an occurrence policy.
[35] Templo Fuente, 224 N.J. at 207.
[36] Templo Fuente, 224 N.J. at 207. Zuckerman, 100 N.J. 304, 495 A.2d 395 (N.J. 1985), held that prejudice was not required to be shown by the insurer when the claim was not reported until after the claims-made and reported policy had already expired.
[37] Zuckerman, 100 N.J. at 324, 495 A.2d at 406. The Zuckerman court noted such an expansion of coverage in claims-made policies would adversely affect “the actuarial basis upon which premiums have been calculated and, consequently, the cost of ‘claims made’ insurance.” Zuckerman, 100 N.J. at 324, 495 A.2d at 406. Requiring the insurer to establish prejudice when the policyholder failed to give notice within the claims-made policy period was a “material modification” to the very essence of the policy, according to the court, and thus was both “inequitable” and “unjustified.” Zuckerman, 100 N.J. at 324, 495 A.2d at 406.
[38] Zuckerman, 100 N.J. at 313, 495 A.2d at 399–400.
[39] Templo Fuente, 224 N.J. at 203.
[40] Templo Fuente, 224 N.J. at 208–9. Ultimately, the court emphasized that due to the insured’s sophisticated nature, the policy could not be considered a “contract of adhesion” and, thus, “appreciable prejudice” need not be shown. Templo Fuente, 224 N.J. at 193, 209–10. The court, however, did qualify its holding, stating its ruling did not represent “a sweeping statement about the strictness of enforcing the ‘as soon as practicable’ notice required in ‘claims made’ policies generally.” Templo Fuente, 224 N.J. at 209.
[41] Other courts have similarly held that the insurer need not demonstrate prejudice when the prompt notice requirement of the claims-made policy is breached by the insured. See, e.g., Fireman’s Fund Ins. Co. v. Care Mgmt., 210 Ark. 110, 361 S.W.3d 800 (Ark. 2010) (answering certified question from the Eastern District of Arkansas that a carrier need not show prejudice when the insured fails to provide notice of the claim “as soon as practicable”); C.A. Jones Mgmt. Corp., LLC v. Scottsdale Indem. Co., 2016 U.S. Dist. LEXIS 80811, at *15 (W.D. Ky. June 21, 2016) (predicting Kentucky Supreme Court would not extend the notice-prejudice rule to claims-made and reported policies that require timely notice as condition precedent to coverage); Williams v. Synergy Care, Inc., 2008 U.S. Dist. LEXIS 57242, at *8–11 (W.D. La. July 29, 2008) (concluding Louisiana law does not require insurer to show “actual prejudice” for claims-made D&O policy, where insured’s notice of race discrimination claim was made 18–20 months late and thus did not satisfy policy’s condition precedent that notice be provided “as soon as practicable”); Lemuel v. Admiral Ins. Co., 414 F. Supp. 2d 1037, 1055, 1063–65 (M.D. Ala. 2006) (concluding that, under either New York or Alabama law, five-month late notice is breach of claims-made prompt notice requirement and “prejudice is irrelevant” even when notice of claim is provided within the claims-made policy term; also noting carrier had in fact been prejudiced by late notice).