Most third-party liability policies are occurrence based. In order for a loss to be covered under such a policy, the damage at issue must “occur” during the policy period. In most instances, it does not matter when a claim is actually asserted as long as the damage took place during the policy period. A claims-made policy, on the other hand, provides coverage only for claims first made against the insured and reported to the insurance company during the policy period or shortly after expiration thereof. A key feature of a claims-made policy is that it provides coverage for acts or omissions that took place prior to the effective date of the policy as long as any claims arising therefrom are first asserted against the insured and reported to the insurance company during the policy period.
Under a claims-made policy, it is not necessary to determine when the particular event that gave rise to the claim occurred because it is the making of the claim that triggers coverage and not the occurrence of the damage that gave rise to the claim. Thus, insurers can limit the time during which they will be subject to claims being made under a particular policy to a certain finite period. Under an “occurrence” based policy, in contrast, insurers can be subject to claims many years — and even decades — after a policy has expired.
As noted above, claims-made policies typically require that in order for coverage to exist, a claim must be first asserted against the insured and reported to the insurance company during the policy period, or within a specified “discovery” period following expiration of the policy. Moreover, most policies provide that notice of a claim be provided to the insurer “as soon as practicable.” Thus, an insured actually has two notice requirements under a claims-made policy: (1) the claim must be reported within the policy period; and (2) the claim must be reported “as soon as practicable.” Unless an insured meets both of the notice requirements there will be no coverage under the policy.
The first notice requirement was addressed by the New Jersey Supreme Court in Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304 (1985). There, the insured failed to provide notice of a claim to its insurer prior to expiration of the policy. The Court held that coverage was barred as a result of the late notice. The Court ruled that, unlike an occurrence policy, it is not necessary for an insurance company to establish that it was prejudiced as a result of the late notice to avoid coverage. Id. at 323. The reason for this, as explained by the Court, is:
In exchange for limiting coverage only to claims made during the policy period, the carrier provides the insured with retroactive coverage for errors and omissions that took place prior to the policy period. Thus, an extension of the notice period in a “claims made” policy constitutes an unbargained-for expansion of coverage, gratis, resulting in the insurance company’s exposure to a risk substantially broader than that expressly insured against in the policy.
Id. at 324.
The second notice requirement recently was addressed by the New Jersey Supreme Court in Templo Fuente De Vida Corp. v. National Union Fire Ins. Co., No. 074572, 2015 WL 529602 (Feb. 11, 2016). There, the Court dealt with the issue of whether an insurer was required to show prejudice when notice of a claim was received during the policy period, but the insured failed to provide the notice “as soon as practicable.” That case involved a claim under a directors and officers liability policy, which is a common type of a claims-made policy. Although the claim at issue was reported to the insurer within the policy period, the insured waited until six months after it had been sued to provide notice to its insurer. The policy specifically required the insured to provide notice of a claim “as soon as practicable.”
Whether an insured has provided notice of a claim “as soon as practicable” generally presents a question of fact. However, the Court held that based on the facts before it, the insured failed to provide notice of a claim “as soon as practicable” as a matter of law. According to the Court:
Because plaintiffs fail to assert why the delay occurred, let alone why we should consider [the insured’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.
2016 WL 529602 at *9. The court was unwilling, however, to adopt a “bright line” test for determining “timely compliance with an ‘as soon as practicable’ notice provision.” Id. Thus, whether notice was timely will have to be decided on a case-by-case basis.
Significantly, the Court further held that an insurer is not required to show that it was prejudiced as a result of the untimely notice in order to avoid coverage, finding that the notice provision was a condition precedent to obtaining coverage. Id. at *10-11. Once again, however, the court was unwilling to adopt a bright-line rule applicable to all claims-made policies. Rather, the court simply observed:
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,” . . . thereby preserving the insurer’s rights . . . to associate and influence how the litigation proceeds from its inception.
Id. at *11.
The court’s decision was based, in part, on “the conceptual differences between ‘claims made’ and ‘occurrence’ policies.” Id. at *5. As noted by the court:
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. at * 7 (quoting 13 Couch on Insurance 3d §186:13 (2009)). As discussed above, coverage under an “occurrence” policy is triggered based on the happening of an event during the policy period that gives rise to a claim. Consequently, it can be very difficult for an insurer to predict its future liability because claims may be made decades after a policy has expired. Under a “claims made” policy, on the other hand, it does not matter when the particular event that gave rise to the claim occurred. Rather, what matters is when a claim is first asserted against the insured. Thus, there is a finite period of time during which the insurer may be held liable.
In ruling in favor of the insurer, the Court placed great weight on the fact that the insured was a “sophisticated” insured represented by an insurance broker in connection with the procurement of the policy. Many of the special rules governing the interpretation of insurance policies are based on the premise that insurance policies are contract of adhesion. Most non-commercial insurance policies are based on standard forms used by insurers and insureds have little or no bargaining power to negotiate the terms of the policies. In other words, policies are presented on a take-it-or-leave-it basis. That often is not the case, however, with sophisticated commercial insureds. Such insureds generally are represented by insurance brokers who have the ability to negotiate the terms of the insurance policies. Indeed, brokers often draft insurance policies that are presented to insurers for review and acceptance. Those policies are referred to as broker drafted manuscript forms.
There is no question that the insured in Templo was a sophisticated commercial insured and it was represented by an insurance broker in connection with the procurement of the insurance policy at issue. Specifically, the Court observed:
[W]e note first the importance of the characteristics of [the insured. The insured] is not an individual and this policy is not a simple personal liability insurance policy. To the contrary, the insured was an incorporated business entity that engaged in complex financial transactions. During the initial application process for the Directors and Officers policy, [the insured] 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, [the insured] 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.
Id. at *10. Consequently, the court refused to treat the insurance policy at issue as a contract of adhesion and strictly enforced the notice requirement.
As argued by the plaintiff in Templo, some courts in other jurisdictions have treated the two notice requirements under a claims-made policy differently. Specifically, a no-prejudice standard has been applied to the requirement that notice be provided within the policy period, whereas a prejudice standard has been applied to the requirement that notice be provided “as soon as practicable.” In Templo, the New Jersey Supreme Court essentially rejected any distinction between the two notice requirements and held that a no-prejudice standard applies to both.
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