(Article from Insurance Law Alert, February 2016)
For more information, please visit the Insurance Law Alert Resource Center. New Jersey Supreme Court Says Prejudice is Not Required
The New Jersey Supreme Court ruled that an insurer need not establish prejudice in order to deny coverage under a claims-made policy based on late notice. Templo Fuente De Vida Corp. v. Nat. Union Fire Ins. Co. of Pittsburgh, Pa., 2016 WL 529602 (N.J. Feb. 11, 2016).
National Union insured First Independent Financial Group under a claims-made policy. The policy required as a “condition precedent” to coverage “written notice to the Insurer of any Claim made against an Insured as soon as practicable.” First Independent sought coverage under the policy for claims arising out of a failed purchase agreement. National Union denied coverage based on late notice because First Independent did not provide notice until six months after receiving the first-amended complaint. In ensuing coverage litigation, a New Jersey trial court granted National Union’s summary judgment motion. Although the trial court found insufficient evidence that the claims had been made outside the policy period, it found that coverage was nonetheless barred because notice was not provided “as soon as practicable.” An appellate court affirmed, explaining that the policy required the insured to provide notice both within the policy period and as soon as practicable. The New Jersey Supreme Court affirmed.
The New Jersey Supreme Court ruled that First Independent’s unexplained six-month delay in providing notice violated the policy’s notice provision as a matter of law. The court further ruled that National Union was not required to establish prejudice from First Independent's failure to provide notice “as soon as practicable.” In so holding, the court expressly referenced the unambiguous condition precedent policy language and emphasized the equal bargaining power of First Independent and National Union as two sophisticated business entities. The court explained that equitable concerns presented in late notice cases involving policyholders who are “unsophisticated consumers” were not at issue given First Independent’s business acumen. For this reason, it is likely that policyholders will argue that Templo Fuente’s no-prejudice rule should be limited to cases involving sophisticated corporate insureds.
Maryland Appellate Court Requires “Actual Prejudice”
Maryland statutory law requires an insurer to establish actual prejudice in order to deny coverage based on late notice under a claims-made policy. See Sherwood Brands, Inc. v. Great Am. Ins. Co., 13 A.3d 1268 (Md. 2011) (under Ins. § 19-110, an insurer may disclaim coverage based on untimely notice only if it “establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice”). Applying section 19-110, a Maryland appellate court recently held that an insurer was not entitled to disclaim coverage as a matter of law under a claims-made-and-reported policy, notwithstanding a nearly three-year delay in notice. Fund for Animals, Inc. v. Nat. Union Fire Ins. Co. of Pittsburgh, Pa., 2016 WL 385222 (Md. Ct. Spec. App. Feb. 1, 2016).
In 2000, the Fund for Animals sued Feld Entertainment, Inc., a circus operator, alleging violations of the Endangered Species Act (the “ESA Case”). In 2007, Feld filed a separate action against the Fund and alleged RICO violations in connection with the Fund’s prosecution of the ESA Case. Feld asserted that the Fund bribed individual plaintiffs to testify falsely and committed other criminal acts for the purposes of establishing standing in the ESA Case. The RICO suit was stayed pending resolution of the ESA Case, and was ultimately settled.
Nearly three years after the countersuit was brought, the Fund sought coverage for the RICO suit from National Union under a 2007 claims-made-and-reported policy. By that time, a court had already ruled against the Fund in the ESA Case and made numerous factual findings detrimental to the Fund. National Union denied coverage based on late notice. The coverage dispute went to trial, and at the close of evidence, the court granted National Union’s motion for judgment, finding that it had met its prejudice burden under section 19-110. The appellate court reversed.
The appellate court acknowledged the untimeliness of the Fund’s notice of the RICO suit and that the adverse ruling in the ESA Case prejudiced National Union. However, the court held that National Union failed to establish a causal link between the delay and the prejudice. In particular, the court explained that National Union did not prove that, “had it been given timely notice of the RICO Case, in 2007 or early 2008, instead of untimely notice in 2010, it would have taken some action in that period of delay that would have averted that judgment.” In so ruling, the court emphasized that National Union did not insure any defendant in the ESA Case and had no contractual right to control any aspect of that litigation. In this respect, the case is distinguishable from cases in which an insurer is not provided notice until after a judgment has been issued against the policyholder in an underlying suit in which the insurer could have controlled the defense. Under such circumstances, the court noted that the insurer would be prejudiced by the delay due to its inability to investigate claims and to control the defense.