It’s Too Late: Notice of a Loss Under a Claims-Made Policy

An insured generally is required to provide its insurer with timely notice of a loss that may be covered under its insurance policy.  Failure to provide timely notice may preclude coverage for the loss.  Under New Jersey law, an insured’s failure to provide timely notice will preclude coverage only if the insurer shows that it sustained appreciable prejudice as a result thereof.  There is one exception, however:  Failure to provide timely notice of a loss under a claims-made policy will bar coverage even in the absence of prejudice.  The notice requirements of a claims-made policy are strictly enforced.

A claims-made policy provides coverage for claims first made against the insured and reported to the insurance company during the policy period or shortly after the expiration thereof.  It does not matter when the conduct giving rise to the claim occurred as long as any claim arising therefrom is first asserted against the insured during the policy period and reported to the insurer within the time period set forth in the policy.  This is 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.

This is in contrast to the more typical occurrence-based policies.  In order for a loss to be covered under an occurrence-based 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.

The most common type of claims-made policy is a professional liability and/or malpractice policy issued to a doctor, lawyer, architect, engineer, or other professional.  Such a policy provides coverage for claims arising out of “professional services” rendered by the insured.  In addition to a claims-made policy, a professional typically also will purchase an occurrence-based policy to provide coverage for claims that do to arise out of the rendering of professional services.

There typically are two different 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” or “immediately.”  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).  The second notice requirement was addressed by the Court in Templo Fuente De Vida Corp. v. National Union Fire Ins. Co., 224 N.J. 189 (2016), which was the subject of a February 15, 2016 blog post.  Unless an insured meets both of the notice requirements, there will be no coverage under the policy.

In S.M. Electric Co. v. Torcon, Inc., 2016 WL 6091256 (App. Div. Oct. 19, 2016), the Appellate Division dealt with the issue of what constitutes a claim sufficient to trigger the notice requirements.  In that case, Torcon, Inc. (“Torcon”) was insured under two separate Professional and Pollution Liability-General Contractors policies issued by Greenwich Insurance Company (“Greenwich”).  The policies were claims-made policies, which provided coverage for liability arising out of the insured’s rendering of professional services.  Each policy provided coverage for any claims first made against the insured and reported to the insurer, in writing, during the policy period.  The first policy was in effect from November 11, 2007 through February 1, 2009 and the second policy was in effect from February 1, 2009 through February 1, 2010.

Claim was broadly defined as a “demand received by the INSURED for money or services that arises from PROFESSIONAL SERVICES or CONTRACTING SERVICES.”  Id. at *1  The policies further provided that a claim was “not necessarily … limited to lawsuits, petitions, arbitrations or other alternative dispute resolution requests filed against the INSURED.”  Id.  The word “demand” was not defined in the policy, however.

Torcon was the construction manager for a project being built by the New Jersey Economic Development Authority (“NJEDA”).  Torcon subcontracted with S.M. Electric Company (“SME”) to provide electrical work.  Due to problems with SME’s work, on May 7, 2008, NJEDA issued a notice of violation to Torcon.  On May 14, 2008, Torcon, in turn, declared SME in default of its obligations under the subcontract.  In response, SME claimed that Torcon was at fault and informed Torcon that it intended to submit a claim seeking compensatory damages.

By letter dated August 19, 2008, SME informed Torcon that it was seeking in excess of $15 million “as compensation for the additional costs of performing work at the . . . project.”  Id. at *2.  The letter was entitled “A Request for Equitable Adjustment” and requested the issuance of various change orders.

After receipt of the letter, Torcon’s representatives met with SME’s principals.  Torcon claimed that it was advised by SME at the meeting that SME no longer intended to pursue the claim, which was not supported by any backup.  However, on September 17, 2009, approximately a year later, SME sent Torcon an “amended claim” for “cost adjustment.”  Id.  In January 2010, SME sued Torcon.  Torcon subsequently informed Greenwich of the filing of the complaint.

Greenwich denied coverage on the basis that the claim was first set forth in the August 19, 2008 letter, which fell under the first policy period.  In other words, the claim was not first asserted under the then current (i.e., second) policy.  It did not matter that Greenwich also was the insurer at the time the claim was made because it was not reported to Greenwich at that time.       

Both parties moved for summary judgment and the trial judge ruled in favor of Greenwich.  That decision was affirmed on appeal.  The primary issue was whether the August 19, 2008 letter constituted a claim under the policy.  The Appellate Division summarized the trial judge’s conclusion as follows:

Judge Grispin found that the “practical and logical” interpretation of the letter, “in the context of the overall dispute” among the parties, “can lead to no other conclusion but that it was a demand for money arising out of professional services.” Since the letter was a claim for which notice should have been provided under the 2007 policy, Torcon was prevented from seeking coverage in the 2009 term.

Id. at *3.

Finding the policy’s definition of “claim” to be unambiguous, the Appellate Division concluded that “it is abundantly clear that the 2008 Letter was a claim.”  Id. at *5.  The court also rejected the argument that use of the phrase “change order” in the letter took away from the fact that it was a demand letter:

The letter clearly conveyed a demand. This was not a request for change orders regarding future conduct, but a claim for equitable compensation by one party seeking, as a matter of right, the payment of money in connection with the other party’s alleged wrongdoing.

Id. at *5.

The court noted that because the letter constituted a claim, Torcon was required to provide notice to Greenwich.  With respect to Torcon’s argument that its “subjective assessment” as to whether the letter was a claim should control, the court held:

Notice requirements of a claims made policy are strictly enforced without regard to an insured’s subjective assessment of the merits.  Even if Torcon’s subjective perception was relevant to the analysis, it does not outweigh the evidence supporting the construction of the letter as a claim.

Id. at *6.  Moreover, the court concluded that the alleged withdrawal of the claim by SME during its meeting with Torcon “did not affect Torcon’s responsibility to give notice to the insurer.”  Id. at * 7.  The court observed:

The letter was withdrawn in the context of an ongoing dispute regarding millions of dollars.  It is not credible that anyone would have considered SME’s demand for nearly two-thirds of the contract amount in additional payment to have been actually “withdrawn” as a result of the failure to adequately document their claims.  Judge Grispin was unconvinced about this argument; so are we.  Once the letter was presented, at that snapshot of a moment, it was Torcon’s responsibility under the terms of the policy to provide notice to Greenwich.

Id.  Thus, the court concluded:

The claim was made during the 2007 policy term, and Torcon did not provide notice.  It was not until the 2009 lawsuit that Torcon conveyed the claim to Greenwich. Greenwich’s denial is therefore proper.

Id. at *6.

The lesson to be learned from S.M. Electric is that an insured needs to put its insurer on notice even if it doubts whether a demand may ripen into an actual claim, questions the merits of the potential claim, or believes the claim will be resolved without litigation.  The rule here is better safe than sorry.


© William D. Wilson and, 2016.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or with appropriate and specific direction to the original content.

By William D Wilson

I am a partner in Mound, Cotton, Wollan & Greengrass, which is headquartered in New York City. I am in charge of running the firm's New Jersey office, which is in Florham Park. I have been practicing law for approximately 23 years and focus primarily on insurance related matters