A-18-14 Templo Fuente De Vida Corp v. National Union Fire Insurance Company of Pittsburgh , 224 N.J. 189 ( 2016 )

SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the
convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the
interest of brevity, portions of any opinion may not have been summarized.)
Templo Fuente De Vida Corp., et al. v. National Union Fire Insurance Co. (A-18-14) (074572)
Argued October 14, 2015 -- Decided February 11, 2016
SOLOMON, J., writing for a unanimous Court.
The issue in this appeal is whether, in order to disclaim coverage, an insurance company must show it was
prejudiced by an insured’s failure to comply with the notice provision in a Directors and Officers “claims made”
policy.
Plaintiffs, Templo Fuente De Vida Corp. (Templo) and Fuente Properties, Inc. (Fuente) (collectively,
plaintiffs), engaged Morris Mortgage Inc. (MMI) to find funding sources for the purchase of property. Plaintiffs
entered into a purchase agreement and MMI identified Merl Financial Group, Inc. (Merl) as a possible funding
source. When the final closing date for the property arrived, neither Merl nor any of the sources of financing listed
in the commitment documents were able to fund the loan to purchase the property, and the sellers terminated the
purchase agreement. Plaintiffs filed a complaint against Merl, among others. The defendants named in the
complaint were served with the first-amended complaint on or about February 21, 2006.
Prior to the filing of the complaint, Merl was restructured and renamed First Independent Financial Group
(First Independent). First Independent purchased a $1 million Directors, Officers and Private Company Liability
Insurance Policy (the Policy) from National Union Fire Insurance Company of Pittsburgh (National Union) covering
the time period from January 1, 2006 through January 1, 2007. The policy is a “claims made” policy, as opposed to
an “occurrence” policy, and required in pertinent part that, as a condition precedent to coverage under the policy,
“written notice to the Insurer of any Claim made against an Insured as soon as practicable.”
On August 28, 2006, more than six months after being served with the first amended complaint, First
Independent provided notice of the claims to National Union. National Union denied coverage, asserting, among
other defenses, that the claims against First Independent were made outside of the policy period, and that notice of
the claims was not given to National Union “as soon as practicable.” Plaintiffs and several defendants, including
First Independent, reached a settlement agreement in excess of $3 million and defendants committed to pay
plaintiffs a portion of that liability. To cover the remainder of the settlement amount, First Independent assigned to
plaintiffs its rights and interests under the Policy.
Plaintiffs initiated this litigation against National Union seeking a declaratory judgment that First
Independent was an insured under the Policy, and that plaintiffs were entitled to coverage. Plaintiffs moved for
partial summary judgment and National Union filed a cross-motion for summary judgment on all counts. The trial
court granted National Union’s cross-motion for summary judgment and dismissed plaintiffs’ complaint with
prejudice. The trial court found that although there was insufficient proof to establish that the claims had been made
outside the policy period, the claim for coverage was nevertheless barred because First Independent failed to provide
National Union with notice of plaintiffs’ claims “as soon as practicable,” as required by the specific terms of the
policy.
The trial court relied on Associated Metals & Minerals Corp. v. Dixon Chemical & Research, Inc., 82 N.J.
Super. 281 (App. Div. 1963), in which the Appellate Division held that a five and one-half month delay in notice to
the insurance company was not “as soon as practicable.” In addition, the court concluded that under Zuckerman v.
National Union Fire Insurance Co., 100 N.J. 304 (1985), the insurer did not need to “show appreciable prejudice in
order to avoid coverage based on a failure to meet the notice requirement of a claims made policy.”
The Appellate Division affirmed, noting the policy “clearly required that notice be provided both within the
policy period and as soon as practicable.” The panel, like the trial court, relied on Zuckerman in rejecting plaintiffs’
argument that National Union had to demonstrate prejudice as a result of the delayed notice before it could deny
coverage. The Appellate Division held that, unlike “claims made” policies, “occurrence” policies require the
insurance company to establish prejudice to avoid coverage.
The Supreme Court granted plaintiffs’ petition for 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. 220 N.J. 42 (2014).
HELD: First Independent’s failure to comply with the notice provisions of the bargained for Directors and Officers
“claims made” policy constituted a breach of the policy, and National Union may decline coverage without
demonstrating appreciable prejudice.
1. The Court reviews de novo the trial 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.” The Court’s interpretation of insurance policies, such as the National Union policy
in this case, is governed by commonly recognized rules of construction. If the plain language of the policy is
unambiguous, the Court will “not ‘engage in a strained construction to support the imposition of liability’ or write a
better policy for the insured than the one purchased.” Chubb Custom Ins. Co. v. Prudential Ins. Co. of Am., 195
N.J. 231, 238 (2008). When the provision at issue is subject to more than one reasonable interpretation, it is
ambiguous, and the “court may look to extrinsic evidence as an aid to interpretation.” Ibid. (pp. 12-13)
2. In Zuckerman, supra, the Court explained that under a traditional “occurrence” policy, it is the “occurrence” of
the peril that is insured, and so long as that peril occurred during the life of the policy, coverage attaches. 100 N.J.
at 310-11. The Court also explained that “in the ‘claims made’ policy, it is the making of the claim which is the
event and peril being insured and, subject to policy language, regardless of when the occurrence took place.” Id. at
311 (emphasis added) (quoting S. Kroll, “The Professional Liability Policy ‘Claims Made,’” 13 Forum 842, 843
(1978)). “Claims made” policies commonly require that the claim be made and reported within the policy period,
thereby providing a fixed date after which the insurance company will not be subject to liability under the policy.
“Claims made” policies also tend to have an additional “notice of claim” provision “phrased in terms of the insured
notifying the insurer of a claim or potential claim ‘promptly’ or the like[.]” 13 Couch on Insurance 3d § 186:13
(2009). (pp. 13-18)
3. In Cooper v. Government Employees Insurance Co., the Court first enunciated the principle that notwithstanding
the unambiguous notice provisions within a particular “occurrence” policy, the “public interest” required the
insurance company to show prejudice to “forfeit coverage” for an insured’s breach of the policy’s notice provisions.
51 N.J. 86, 94 (1968). The Court concluded that because the insurance contract was a contract of adhesion, it was
against the public interest to forfeit the insured’s bargained-for coverage by reason of its failure to provide timely
notice. Id. at 94. In Zuckerman, supra, the Court determined that while the Cooper doctrine of “appreciable
prejudice” is applicable to “occurrence policies,” “[i]t has . . . no application whatsoever to a ‘claims made’ policy
that fulfills the reasonable expectations of the insured with respect to the scope of coverage.” 100 N.J. at 324(emphasis added). (pp. 18-21)
4. Relying on Associated Metals, supra, both the trial court and the Appellate Division found that First
Independent’s unexplained six-month delay in reporting plaintiffs’ claims did not comply with the policy’s “as soon
as practicable” requirement, which was a condition precedent to coverage. Because plaintiffs fail to assert why the
delay occurred, let alone why this Court should consider First Independent’s reporting of the claims to be “as soon
as practicable” under the “circumstances,” there is no factual dispute that the notice given was not timely. On this
record, the unexplained six-month delay did not satisfy the policy’s notice requirement. (pp. 21-23)
5. In the vast majority of “occurrence” policies, the policy holders are “unsophisticated” and, as a result, “courts
have taken special consideration of the fact that the policy holders were consumers unlikely to be conversant with all
the fine print of their policies” and “found that strict adherence to the terms of the notice provisions would result too
harshly against [such insureds.]” MGIC Indem. Corp. v. Cent. Bank of Monroe, 838 F.2d 1382, 1387 (5th Cir.
1998). Those equitable concerns do not control the Court’s analysis of the “as soon as practicable” notice
requirement of the Directors and Officers “claims made” policy here. The notice requirement within the contract of
insurance sold by National Union to First Independent sufficiently conformed to the objectively reasonable
expectations of the insured and, hence, did not violate the public policy of New Jersey. First Independent’s failure
to comply with the notice provisions of the bargained for Directors and Officers policy constituted a breach of the
policy, and National Union may decline coverage without demonstrating appreciable prejudice. (pp. 23-28)
The judgment of the Appellate Division is AFFIRMED.
2
CHIEF JUSTICE RABNER; JUSTICES LaVECCHIA, ALBIN, and PATTERSON; and JUDGE
CUFF (temporarily assigned) join in JUSTICE SOLOMON’s opinion. JUSTICE FERNANDEZ-VINA did
not participate.
3
SUPREME COURT OF NEW JERSEY
A-18 September Term 2014
074572
TEMPLO FUENTE DE VIDA CORP.
and FUENTE PROPERTIES, INC.,
Plaintiffs-Appellants,
v.
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, P.A.,
Defendant-Respondent.
Argued October 14, 2015 – Decided February 11, 2016
On certification to the Superior Court,
Appellate Division.
Mitchell B. Seidman argued the cause for
appellants (Seidman & Pincus, attorneys).
Andrew L. Indeck argued the cause for
respondent (Weber Gallagher Simpson
Stapleton Fires & Newby, attorneys; Mr.
Indeck and Brad A. Baldwin, on the brief).
JUSTICE SOLOMON delivered the opinion of the Court.
In this appeal, we are called upon to determine whether, in
order to disclaim coverage, an insurance company must show it
was prejudiced by an insured’s failure to comply with the notice
provision in a Directors and Officers “claims made” policy.
In the instant case, the insured, who had been sued for
damages by plaintiffs, entered into a settlement whereby it
agreed to assign its rights and interests under the insurance
1
policy to plaintiffs. However, when plaintiffs sought to
recover under the policy, the insurer denied coverage because
the insured breached the policy’s notice conditions. The trial
court granted summary judgment to the insurance company, finding
that notice was not given “as soon as practicable,” and that the
insurance company need not show appreciable prejudice as a
result of the delay in notice in order to refuse coverage.
Plaintiffs appealed, and the Appellate Division affirmed
substantially for the reasons given by the trial court.
We hold that because this Directors and Officers “claims
made” policy was not a contract of adhesion but was agreed to by
sophisticated parties, the insurance company was not required to
show that it suffered prejudice before disclaiming coverage on
the basis of the insured’s failure to give timely notice of the
claim.
I.
A.
We begin with a review of plaintiffs’ claims against the
insured that underlie the instant litigation and were ultimately
settled. With respect to those claims, the following facts are
not in dispute.
2
Plaintiffs, Templo Fuente De Vida Corp. (Templo) and Fuente
Properties, Inc. (Fuente) (collectively, plaintiffs),1 engaged
Morris Mortgage Inc. (MMI) to find funding sources for the
purchase of property to relocate plaintiffs’ church and daycare
centers. Approximately two and one-half months later,
plaintiffs made a down payment and entered into a purchase
agreement to buy a property in North Bergen (the property),
conditioned upon plaintiffs securing mortgage financing by a
certain date. After several extensions of the financing date,
MMI identified Merl Financial Group, Inc. (Merl) as a possible
funding source.
Over the course of approximately nine months, Merl gave
plaintiffs a series of funding commitments in exchange for ten
percent of the total amount of each commitment. However, when
the final closing date for the property arrived, neither Merl
nor any of the sources of financing listed in the commitment
documents were able to fund the loan to purchase the property,
and the sellers terminated the purchase agreement. As a result
of the losses sustained in their attempt to purchase the
1 Plaintiffs, Templo and Fuente, are separate New Jersey
corporations. Templo was formed in 1993 and operated a church
for religious services and child and adult daycare centers.
Templo formed Fuente in 2002 to acquire a property for
relocation.
3
property, plaintiffs filed a complaint2 against Merl, among
others. The defendants named in the complaint were served with
the first-amended complaint on or about February 21, 2006.
Sometime prior to the filing of the complaint, Merl was
restructured and renamed First Independent Financial Group
(First Independent). First Independent purchased a $1 million
Directors, Officers and Private Company Liability Insurance
Policy (the Policy) from National Union Fire Insurance Company
of Pittsburgh (National Union) covering the time period from
January 1, 2006 through January 1, 2007.
The policy is a “claims made” policy, as opposed to an
“occurrence” policy, and contained “NOTICE/CLAIM REPORTING
PROVISIONS,” section 7, requiring that, as a condition precedent
to coverage under the policy, “The Company or the Insureds”
give written notice to the Insurer of any
Claim made against an Insured as soon as
practicable and either: (1) anytime during the
Policy Period or during the Discovery Period
(if applicable); or (2) 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.
2 In the complaint, which was amended several times between 2005
and 2009 to add claims and parties, plaintiffs alleged breach of
contract, breach of the implied covenant of good faith and fair
dealing, unjust enrichment, negligence, negligent
misrepresentation, conversion, breach of fiduciary duty,
violation of the Consumer Fraud Act, professional malpractice,
professional negligence, violation of New Jersey’s racketeering
statute, and fraud.
4
The mutual interests of the insured and the insurer served
by the notice provisions of the policy are reflected in section
8, “DEFENSE COSTS, SETTLEMENTS, JUDGMENTS (INCLUDING THE
ADVANCEMENT OF DEFENSE COSTS),” which grants the insured the
right to defend itself against the claim, while simultaneously
guaranteeing the insurer the ability to “associate” with the
insured in that defense. Section 8 further allows the insured
to “tender defense of the Claim to the Insurer,” but prohibits
any action by the insured from the time it receives the claim
until a defense is tendered by the insurance company, if so
requested. This prohibition checks action that could prejudice
the insurance company, the insured, or both, such as interposing
an ill-conceived defense strategy, or engaging in settlement
discussions. Compliance by the insured commands its defense by
the insurance company and permits the insured to “associate”
with the insurance company in the defense of the claim, and
settlement negotiations.3
3 Section 8 of the policy states, in pertinent part:
The insurer does not assume any duty to
defend. The Insureds shall defend and contest
any claim made against them.
Notwithstanding the foregoing, the Insureds
shall have the right to tender the defense of
the Claim to the Insurer, which right shall be
exercised in writing by the Named Entity on
behalf of all Insureds to the Insurer pursuant
5
On August 28, 2006, more than six months after being served
with the first amended complaint, and after retaining counsel
and filing an answer, First Independent provided notice of the
claims to National Union. National Union denied coverage,
asserting, among other defenses, that the claims against First
Independent were made outside of the policy period, and that
notice of the claims was not given to National Union “as soon as
practicable.”
Plaintiffs and several defendants, including First
Independent, reached a settlement agreement in the underlying
to the notice provisions of Clause 7 of this
policy. This right shall terminate if not
exercised within 30 days of the date the Claim
is first made against an Insured, pursuant to
Clause 7 of the policy. Further, from the
date the Claim is first made against the
Insureds to the date when the Insurer accepts
the tender of the defense of such Claim, the
Insureds shall take no action, or fail to
take any required action, that prejudices the
rights of the Insureds or the Insurer with
respect to such Claim. Provided that the
Insureds have complied with the foregoing, the
Insurer shall be obligated to assume the
defense of the Claim, even if such Claim is
groundless, false or fraudulent. The
assumption of the defense of the Claim shall
be effective upon written confirmation sent
thereof by the Insurer to the Named Entity.
Once the defense has been so tendered, the
Insured shall have the right to effectively
associate with the Insurer in the defense and
the negotiation of any settlement of any
Claim, subject to the provisions of this
Clause 8.
6
litigation. Under that agreement, the settling defendants’
liability exceeded $3 million, and they committed to pay
plaintiffs a portion of that liability by a fixed date. To
cover the remainder of the settlement amount, First Independent
assigned to plaintiffs its rights and interests under the
Policy.4 Thereafter, the trial court dismissed plaintiffs’
complaint as settled.
B.
Plaintiffs initiated this litigation against National Union
seeking a declaratory judgment that First Independent was an
insured under the Policy, and that plaintiffs were entitled to
coverage. Upon the completion of discovery, plaintiffs moved
for partial summary judgment, and National Union filed a cross-
motion for summary judgment on all counts.
Following oral argument, the trial court granted National
Union’s cross-motion for summary judgment and dismissed
plaintiffs’ complaint with prejudice. The trial court found
that although there was insufficient proof to establish that the
claims had been made outside the policy period, the claim for
coverage was nevertheless barred because First Independent
failed to provide National Union with notice of plaintiffs’
4Some of the settling defendants made their payments under the
settlement agreement, but other settling defendants did not.
Plaintiffs obtained a judgment for the unpaid settlement amounts
against the defaulting defendants.
7
claims “as soon as practicable,” as required by the specific
terms of the policy. In reaching this conclusion, the trial
court relied on Associated Metals & Minerals Corp. v. Dixon
Chemical & Research, Inc., 82 N.J. Super. 281, 316-17 (App. Div.
1963), certif. denied, 42 N.J. 501 (1964), in which the
Appellate Division held that a five and one-half month delay in
notice to the insurance company was not “as soon as
practicable.”
In addition, the trial court concluded that under Zuckerman
v. National Union Fire Insurance Co., 100 N.J. 304 (1985),
National Union did not need to “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.”
The Appellate Division affirmed the trial court, noting the
policy “clearly required that notice be provided both within the
policy period and as soon as practicable.” Accordingly, the
panel held that “coverage was properly denied to the insureds
and, by extension, to plaintiffs as their assignees.”
The panel, like the trial court, relied on Zuckerman in
rejecting plaintiffs’ argument that National Union had to
demonstrate prejudice as a result of the delayed notice before
8
it could deny coverage. The Appellate Division held that only
“occurrence” policies require the insurance company to establish
prejudice to avoid coverage because “claims made” policies
differ from “occurrence” policies. Under the former, coverage
is triggered when the insured notifies the insurance company of
the claim, while under the latter, coverage is triggered if the
act or omission giving rise to the claim occurred during the
policy period.
We granted plaintiffs’ petition for 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.
220 N.J. 42 (2014).
II.
Plaintiffs assert three main arguments in support of their
claim that National Union should have been required to show
prejudice in order to deny coverage. First, plaintiffs
challenge the Appellate Division’s and trial court’s reliance on
Associated Metals to conclude that notice was untimely because,
unlike the case at bar, the claim at issue in Associated Metals
involved an injury resulting from an accident, which entails a
more time-sensitive inquiry requiring the insurance company to
conduct an investigation while the facts remain fresh in the
minds of the parties involved. Further, plaintiffs assert that
9
because the policy at issue in Associated Metals did not have
dual reporting requirements -- that the claim be reported within
the policy period and “as soon as practicable” -- the insurance
company did not have the “safety net” of both an objective and a
subjective notice requirement that was available to National
Union in the instant case.
Second, plaintiffs argue that the Appellate Division
improperly expanded this Court’s ruling in Zuckerman by
permitting insurance companies to deny coverage without showing
prejudice, not only where the insured gives notice of the claim
outside of the policy period, as in Zuckerman, but also when the
insured fails to give prompt notice of the claim within the
policy period. Plaintiffs urge this Court to restrict our
holding in Zuckerman to instances where the insured reports a
claim outside of the policy period.
Finally, plaintiffs rely on authority from other
jurisdictions, which they assert is consistent with a “growing
trend in insurance law,” requiring insurance companies to
demonstrate prejudice before disclaiming coverage for failure to
give timely notice within the period of a “claims made” policy.
See Prodigy Commc’ns. Corp. v. Agric. Excess & Surplus Ins. Co.,
288 S.W.3d 374, 382-83 (Tex. 2009) (holding inherent benefit of
“claims made” policy is insurer’s ability “to ‘close its books’
on a policy at its expiration and thus to attain a level of
10
predictability unattainable under standard occurrence policies”
(quoting F.D.I.C. v. Mijalis, 15 F.3d 1314, 1330 (5th Cir.
1994))); see also Fulton Bellows, LLC v. Fed. Ins. Co., 662 F.
Supp. 2d 976, 993-94 (E.D. Tenn. 2009) (adopting rationale and
holding of Prodigy).
National Union argues that the terms of the policy are
clear and unambiguous, with coverage conditioned on the insured
providing notice of a claim within the policy period and “as
soon as practicable.” National Union further claims that the
trial court and Appellate Division properly relied on Associated
Metals and Zuckerman in concluding that New Jersey jurisprudence
does not require insurance companies to demonstrate prejudice
before disclaiming coverage on a “claims made” policy based on
an insured’s violation of the policy’s notice requirements.
Finally, National Union contends that existing New Jersey
authority governs this case and, as such, there is no cause to
consider authority from other jurisdictions.
III.
A.
Turning to the law applicable to this case, we note that we
review the trial court’s grant of summary judgment de novo under
the same standard as the trial court. Mem’l Props., LLC v.
Zurich Am. Ins. Co., 210 N.J. 512, 524 (2012). That standard
mandates that summary judgment be granted “if the pleadings,
11
depositions, answers to interrogatories and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact challenged and that the
moving party is entitled to a judgment or order as a matter of
law.” R. 4:46-2(c). When no issue of fact exists, and only a
question of law remains, this Court affords no special deference
to the legal determinations of the trial court. Manalapan
Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378
(1995). Because there is no genuine issue of material fact on
this record, we review de novo the trial 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.”
B.
Our interpretation of insurance policies, such as the
National Union policy in this case, is governed by the following
commonly recognized rules of construction. “In attempting to
discern the meaning of a provision in an insurance contract, the
plain language is ordinarily the most direct route.” Chubb
Custom Ins. Co. v. Prudential Ins. Co. of Am., 195 N.J. 231, 238
(2008). If the plain language of the policy is unambiguous, we
will “not ‘engage in a strained construction to support the
imposition of liability’ or write a better policy for the
12
insured than the one purchased.” Ibid. (quoting Progressive
Cas. Ins. Co. v. Hurley, 166 N.J. 260, 273 (2001)).
When the provision at issue is subject to more than one
reasonable interpretation, it is ambiguous, and the “court may
look to extrinsic evidence as an aid to interpretation.” Ibid.Only where there is a genuine ambiguity, that is, “‘where the
phrasing of the policy is so confusing that the average
policyholder cannot make out the boundaries of coverage,’”
should the reviewing court read the policy in favor of the
insured. Progressive Cas. Ins. Co., supra, 166 N.J. at 274(quoting Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 247 (1979)).
“When construing an ambiguous clause in an insurance policy,
courts should consider whether clearer draftsmanship by the
insurer ‘would have put the matter beyond reasonable question.’”
Ibid. (quoting Doto v. Russo, 140 N.J. 544, 547 (1995)).
C.
Guided by the law governing interpretation of insurance
contracts, we turn to the conceptual differences between “claims
made” and “occurrence” policies. In doing so, we focus on the
notice provisions that each policy typically contains, as well
as the function that those provisions fulfill.
We discussed the variations between the two types of
policies in Zuckerman. There, we explained that “the difference
in the peril insured” distinguishes “claims made” from
13
“occurrence” policies. 100 N.J. at 310-14. Under a traditional
“occurrence” policy, it is the “occurrence” of the peril that is
insured, and so long as that peril occurred during the life of
the policy, coverage attaches. Id. at 310-11. The Court, in
Zuckerman, also explained that “in the ‘claims made’ policy, it
is the making of the claim which is the event and peril being
insured and, subject to policy language, regardless of when the
occurrence took place.” Id. at 311 (emphasis added) (quoting S.
Kroll, “The Professional Liability Policy ‘Claims Made,’” 13
Forum 842, 843 (1978)). “This conceptual difference has
important practical implications for the risks that insurers
undertake and the premiums that insureds pay.” Craft v. Phila.
Indem. Ins. Co., 343 P.3d 951, 957 (Colo. 2015).
“Occurrence” policies were created to offer coverage for the
harms caused by collision, fire, and other similar occurrences.
See Zuckerman, supra, 100 N.J. at 311. Because liability under
“occurrence” policies was traditionally triggered by an easily
identifiable event, “the insurer [was] ordinarily able to
conduct a prompt investigation of the incident and make an early
assessment of related injuries and damages with the result that
actuarial considerations permit relative certainty in estimating
loss ratios, establishing reserves, and fixing premium rates.”
Stine v. Cont’l Cas. Co., 349 N.W.2d 127, 131 (Mich. 1984); see
also Zuckerman, supra, 100 N.J. at 311-12.
14
“Occurrence” policies insuring against professional
negligence began to fall out of favor in the latter part of the
twentieth century because of the difficulty underwriters faced
in setting premiums on policies “with an unlimited ‘tail’5 that
extend[ed] beyond the policy period” and thus required insurance
companies to forecast far into the future “the costs of the
risks assumed.” Zuckerman, supra, 100 N.J. at 311. This time
lapse made it particularly difficult for insurance companies to
accurately calculate premiums for latent injuries, such as those
caused by professional malpractice, where “claims [are]
frequently . . . made years after the insured event[.]” Id. at
312 (citing S. Kroll, supra, 13 Forum at 850); see also Sparks
v. St. Paul Ins. Co., 100 N.J. 325, 330 (1985) (noting that
“[f]rom the standpoint of the insured, there is the danger of
inadequate coverage in cases in which claims are asserted long
after the error or omission occurred, because inflationary
factors lead to judgments that are higher than those originally
contemplated when coverage was purchased years earlier”).
In an attempt to reduce the risks associated with
professional liability “occurrence” policies, insurance
companies began to shift to “claims made” policies. Under the
“claims made” policy, insurance companies possess “the ability
5 A tail is “the lapse of time between the date of the error and
the time the claim is made.” Id. at 311 (citations omitted).
15
to calculate risks and premiums with greater exactitude since
the insurer’s exposure ends at a fixed point, usually the policy
termination date.” Zuckerman, supra, 100 N.J. at 313 (citations
omitted). In other words, although a “claims made” policy
insures events that have already occurred, it is limited by the
dates of the policy because the insured must provide notice
within the policy period. This allows for the “issu[ance] [of]
these policies at reduced premiums” by eliminating the potential
exposure of a lengthy and unpredictable “tail” of liability.
Sparks, supra, 100 N.J. at 329-31; Zuckerman, supra, 100 N.J. at
310. “[I]f there is no timely notice, there is no coverage”
under a “claims made” policy. 43 Am. Jur. 2d Insurance § 681
(2013).
Both “claims made” and “occurrence” policies contain
reporting requirements, but the importance and terms of those
requirements differ. The distinctive roles that reporting
requirements play in “claims made” versus “occurrence” policies
not only addresses the basic difference between the two
policies, but informs our judicial interpretation of those
requirements.
In the “occurrence” policy, notice provisions are written
“to aid the insurance carrier in investigating, settling, and
defending claims.” Zuckerman, supra, 100 N.J. at 323. “Claims
made” policies commonly require that the claim be made and
16
reported within the policy period, thereby providing a fixed
date after which the insurance company will not be subject to
liability under the policy. Sparks, supra, 100 N.J. at 330-31;
7 Couch on Insurance 3d § 102:22 (2013). “Claims made” policies
also tend to have an additional “notice of claim” provision
“phrased in terms of the insured notifying the insurer of a
claim or potential claim ‘promptly’ or the like[.]” 13 Couch on
Insurance 3d § 186:13 (2009).
The prompt notice requirement and the requirement that the
claim be made within the policy period in “claims made” policies
“maximiz[e] the insurer’s opportunity to investigate, set
reserves, and control or participate in negotiations with the
third party asserting the claim against the insured” and “mark
the point at which liability for the claim passes to an ensuing
policy, frequently issued by a different insurer, which may have
very different limits and terms of coverage.” Id. As we noted
in Zuckerman:
Accordingly, 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
17
coverage for errors and omissions that took
place prior to the policy period.
[Zuckerman, supra, 100 N.J. at 323-24.]
D.
In Cooper v. Government Employees Insurance Co., we first
enunciated the principle that notwithstanding the unambiguous
notice provisions within a particular “occurrence” policy, the
“public interest” required the insurance company to show
prejudice to “forfeit coverage” for an insured’s breach of the
notice provisions of the policy. 51 N.J. 86, 94 (1968). Our
holding in Cooper reflected that, for individual members of the
public, insurance policies constitute adhesion contracts to
which our courts must “give special scrutiny . . . because of
the stark imbalance between insurance companies and insureds in
their respective understanding of the terms and conditions of
insurance policies.” Zacarias v. Allstate Ins. Co., 168 N.J.
590, 594 (2001).
In Cooper, the insureds were involved in a car accident but
failed to report the incident until two years after it occurred.
Cooper, supra, 51 N.J. at 88-89. As a result, the insurance
company denied coverage on the basis that the insureds breached
the policy’s requirement of reporting to the insurance company
an “accident, occurrence, or loss” “as soon as practicable.”
Id. at 89-90, 93. The policy at issue in Cooper further
18
provided that the insurance company would not be liable unless
“as a condition precedent” the insureds complied with all terms
of the policy, including the notice provision. Id. at 91.
Nevertheless, we concluded that because the insurance contract
was not “truly a consensual arrangement and was available only
on a take-it-or-leave-it basis,” it was against the public
interest to forfeit the insured’s bargained-for coverage by
reason of its failure to provide timely notice. Id. at 94.
Hence, under Cooper, we required that the insurer of an
“occurrence” policy prove both “‘a breach of the notice
provision and a likelihood of appreciable prejudice.’” Gazis v.
Miller, 186 N.J. 224, 228 (2006) (quoting Cooper, supra, 51 N.J.
at 94).
We later reviewed whether the Cooper doctrine of
“appreciable prejudice” was applicable in the context of a
“claims made” policy. Zuckerman, supra, 100 N.J. at 322-24. In
Zuckerman, an attorney was sued for malpractice but failed to
notify the insurance company until after the professional
liability policy expired. 100 N.J. 306-07. The policy at issue
in Zuckerman expressly required that “the claim be asserted and
reported to the [insurer] during the policy period.” Id. at
308. Because the insured attorney failed to comply with this
provision, the insurance company denied coverage. Id. at 307.
The insured then sought a judgment to compel the insurance
19
company to defend him in the malpractice suit and to provide
coverage for any resultant liability. Id. at 309. After
conducting an exhaustive comparison of “claims made” and
“occurrence” policies, we affirmed the Appellate Division’s
decision to enter summary judgment in favor of the insurer. Id.
at 309-13, 324. In issuing our decision, we determined that
while “[t]he Cooper doctrine has a clear application to
[‘occurrence’] policies, . . . [i]t has . . . no application
whatsoever to a ‘claims made’ policy that fulfills the
reasonable expectations of the insured with respect to the scope
of coverage.” Id. at 324 (emphasis added).
Subsequently, in Werner Industries, Inc. v. First State
Insurance Co., this Court considered a “claims made” excess
“umbrella” liability policy covering commercial risks entered
into between sophisticated parties. 112 N.J. 30, 32 (1988). In
Werner, we enforced the plain language of the policy, to the
detriment of the insured, because we found the reasonable
expectations of the parties were met where the insurance policy
was procured through a broker, and the bargaining parties were
knowledgeable with respect to insurance. Id.at 39. The Court
stated:
Because, in our view, the policy here provided
neither unrealistic nor inadequate coverage,
and because there has been no showing
whatsoever that this policy did not meet . .
. expectations, we reverse. Application of
20
canons of construction dictating
interpretation against a drafter “should be
sensible and in conformity with the expressed
intent of the parties.” Such canons “should
not to be used as excuse to read into a private
agreement that which is not there, and that
which people dealing fairly with one another
could not have intended.” Our goal always is
to “justly fulfill the reasonable expectations
of the assured in the purchase of his
insurance policy.”
[Id. at 38-39 (internal citations omitted).]
Therefore, to resolve the factual issue of the parties’
expectations, which was in dispute, we remanded the matter to
“inquir[e] into any background evidence” of whether the insurer
induced the insured to enter into the policy by “creat[ing] a
different understanding” of the policy provision at issue. Id.
at 39.
IV.
A.
In this case, First Independent was issued a Directors and
Officers “claims made” policy by National Union to cover the
period of January 1, 2006 through January 1, 2007. By the terms
of the policy, National Union agreed to provide First
Independent coverage for acts or omissions taking place at any
time so long as the claim was made and reported to National
Union both within the policy period and “as soon as
practicable.”
21
It is undisputed that First Independent learned of
plaintiffs’ claims on or about February 21, 2006, when it
received the first-amended complaint, and that First Independent
failed to notify National Union of these claims until six months
later, on August 28, 2006. Relying on Associated Metals, both
the trial court and the Appellate Division found First
Independent’s unexplained six-month delay in reporting
plaintiffs’ claims did not comply with the policy’s “as soon as
practicable” requirement, which was a condition precedent to
coverage.
Plaintiffs contend that the trial court and Appellate
Division erred in relying solely on Associated Metals because
the inquiry into whether a claim was reported “as soon as
practicable” is fact sensitive. See Bass v. Allstate Ins. Co.,
77 N.J. Super. 491, 495 (App. Div. 1962); Miller v. Zurich Gen.
Accident & Liab. Ins. Co., 36 N.J. Super. 288, 296 (App. Div.
1955). Hence, plaintiffs claim the trial court and Appellate
Division should have “at the very least . . . considered the
length of the delay in reporting under the unique set of
circumstances presented herein.” However, plaintiffs do not
assert that the notice provision in question was ambiguous.
During oral argument plaintiffs conceded that First Independent
did not notify National Union of the claims “as soon as
practicable,” and plaintiffs did not provide the trial court
22
with any evidence to justify First Independent’s reporting
delay. In their petition for certification to this Court,
plaintiffs merely assert that the trial and appellate courts
unfairly determined the issue “without regard to the
circumstances.”
Because plaintiffs fail to assert why the delay occurred,
let alone why we should consider First Independent’s reporting
of the claims to be “as soon as practicable” under the
“circumstances,” there is no factual dispute that the notice
given was not timely. Thus, we hold only that on this record
the unexplained six-month delay did not satisfy the policy’s
notice requirement. However, we need not and do not draw any
“bright line” on these facts for timely compliance with an “as
soon as practicable” notice provision.
B.
Having concluded that First Independent failed to give
notice of the claims against it “as soon as practicable,” we
turn to plaintiffs’ argument that National Union should not be
permitted to disclaim coverage without showing that it was
prejudiced by the delay. Essentially, plaintiffs ask us to
expand our prior holding in Zuckerman by applying the Cooper
doctrine to “claims made” policies where the insured provides
notice of a claim within the policy period.
23
National Union, on the other hand, asserts that it need not
show prejudice to disclaim coverage where, as here, the terms of
the policy clearly and unambiguously require the insured to
report a claim “as soon as practicable” as a condition precedent
to recovery. National Union further argues that given the
sophisticated nature of the parties, the insured’s reasonable
expectations were not frustrated simply because National Union
required strict compliance with the notification conditions of
the policy. Finally, National Union contends that the “as soon
as practicable” requirement relates to the insurer’s risk in
this Directors and Officers policy. Specifically, the insurer’s
duty to cover costs, as part of the policy limits, is affected
by the insured’s failure to give notice “as soon as
practicable.” National Union asserts this failure deprives the
insurer of its negotiated right to associate with the defense,
and play a role in settlement if that occurs, thereby limiting
the potential exposure of the insurer under the policy’s terms.
In sum, the insurer argues that it is not a surety for the
insured under their sophisticated policy covering certain errors
and omissions within a business operation.
Turning to the nature of these parties, we note first the
importance of the characteristics of First Independent. First
Independent is not an individual and this policy is not a simple
personal liability insurance policy. To the contrary, the
24
insured was an incorporated business entity that engaged in
complex financial transactions. During the initial application
process for the Directors and Officers policy, First Independent
listed itself as having at least fourteen full-time employees,
two part-time employees, and a human resources department. The
policy covered a broad variety of complex civil and criminal
matters, including employment practices claims and security
claims. In the procurement of a complex policy like this one,
First Independent did not simply obtain a professional liability
policy on its own; it sought out a broker, who procured the
policy on First Independent’s behalf.
We have historically approached “claims made” and
“occurrence” policies differently due in large part to the
differences between the policyholders themselves. For example,
in Cooper, where the “occurrence” policy at issue was a contract
of adhesion entered into by parties with unequal bargaining
powers, we required the insurer to show prejudice before denying
coverage to prevent an unfair result. 51 N.J. at 93-94 (noting
terms of “occurrence” policy are “not talked out or bargained
for as in the case of contracts generally, [and] that the
insured is chargeable with its terms because of a business
utility rather than because he read or understood them”).
Indeed, in the vast majority of “occurrence” policies, the
policy holders are “unsophisticated consumer[s] unaware of all
25
of the policy’s requirements.” 10 Jeffrey E. Thomas, New
Appleman on Insurance Law, Library Edition § 129.05[2]
(LexisNexis 2015). As a result, “courts have taken special
consideration of the fact that the policy holders were consumers
unlikely to be conversant with all the fine print of their
policies” and “found that strict adherence to the terms of the
notice provisions would result too harshly against [such
insureds.]” MGIC Indem. Corp. v. Cent. Bank of Monroe, 838 F.2d
1382, 1387 (5th Cir. 1998); see also Gazis, supra, 186 N.J. at
228-29 (noting when construing notice provisions of “occurrence”
policies, New Jersey courts have rejected “a classical contract
approach that would have enforced strictly the terms of the
policy as written, and instead stated that the contract should
be read in accordance with the reasonable expectations of the
insured”).
Those equitable concerns based on the nature of the parties
do not control in our analysis of the “as soon as practicable”
notice requirement of the Directors and Officers “claims made”
policy here, where the policyholders “are particularly
knowledgeable insureds, purchasing their insurance requirements
through sophisticated brokers[.]” S. Kroll, supra, 13 Forum at
853. In this arena, insurers are “dealing with a more
sophisticated clientele, [who] are much better able to deal with
the insurers on an equal footing[.]” Ibid.
26
In this instance we need not make a sweeping statement
about the strictness of enforcing the “as soon as practicable”
notice requirement in “claims made” policies generally. We need
only enforce the plain and unambiguous terms of a negotiated
Directors and Officers insurance contract entered into between
sophisticated business entities. Its notice conditions contain
mutual rights and obligations and a clear and unambiguous
requirement that the insured report a claim to the insurer “as
soon as practicable,” pursuant to section 7, thereby preserving
the insurer’s rights, under section 8, to associate and
influence how the litigation proceeds from its inception.
Therefore, 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. We decline plaintiffs’
invitation to read the insurance policy at issue as a contract
of adhesion, or “‘engage in a strained construction to support
the imposition of liability’ or write a better policy for the
insured than the one purchased.” Chubb Custom Ins. Co., supra,
195 N.J. at 238 (citations omitted).
Consequently, we conclude that the notice requirement
within the contract of insurance sold by National Union to First
27
Independent sufficiently conformed to the objectively reasonable
expectations of the insured and, hence, did not violate the
public policy of New Jersey. Accordingly, we hold that First
Independent’s failure to comply with the notice provisions of
the bargained for Directors and Officers policy constituted a
breach of the policy, and National Union may decline coverage
without demonstrating appreciable prejudice. We recognize that
a different conclusion may have been reached in other
jurisdictions, but our jurisprudence has never afforded a
sophisticated insured the right to deviate from the clear terms
of a “claims made” policy. See Sparks, 100 N.J. at 342 (noting
“total inapplicability of the Cooper doctrine to a true ‘claims
made’ policy” in New Jersey).
V.
For the foregoing reasons, we affirm the judgment of the
Appellate Division.
CHIEF JUSTICE RABNER; JUSTICES LaVECCHIA, ALBIN, and
PATTERSON; and JUDGE CUFF (temporarily assigned) join in JUSTICE
SOLOMON’s opinion. JUSTICE FERNANDEZ-VINA did not participate.
28
SUPREME COURT OF NEW JERSEY
NO. A-18 SEPTEMBER TERM 2014
ON CERTIFICATION TO Appellate Division, Superior Court
TEMPLO FUENTE DE VIDA CORP.
and FUENTE PROPERTIES, INC.,
Plaintiffs-Appellants,
v.
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, P.A.,
Defendant-Respondent.
DECIDED February 11, 2016
Chief Justice Rabner PRESIDING
OPINION BY Justice Solomon
CONCURRING/DISSENTING OPINIONS BY
DISSENTING OPINION BY
CHECKLIST AFFIRM
CHIEF JUSTICE RABNER X
JUSTICE LaVECCHIA X
JUSTICE ALBIN X
JUSTICE PATTERSON X
JUSTICE FERNANDEZ-VINA --------------------
JUSTICE SOLOMON X
JUDGE CUFF (t/a) X
TOTALS 6