Introduction:
The Supreme Court of New Jersey will hear an appeal of the Appellate Division’s decision in Templo Fuente De Vida Corp. and Fuente Properties, Inc. v. National Union Fire Insurance Company of Pittsburgh, Pa., 2014 WL 2533810 (N.J. App. Div. June 6, 2014), which interpreted the notice provision of a claims-made and reported directors and officers liability insurance policy. There, the intermediate court held that when a claims-made and reported policyholder reports a claim late, but nonetheless during the policy period, the insurance company properly may deny the claim based on late notice without a showing of prejudice.

We recently published an article in the New Jersey Law Journal reporting the inconsistency in the opinion: “[Under this ruling,] an insurance company can avoid coverage for a claim made and reported, albeit late, within the term of a claims made and reported policy, but cannot avoid coverage for the same claim reported late under an occurrence policy absent a showing of ‘appreciable prejudice.’” Frederic J. Giordano et al., Late Filing Under a Claims-Made vs. An Occurrence-Based Policy: Appellate Division Rejects Precedent, New Jersey Law Journal (July 24, 2014). Now, New Jersey’s high court is poised to reconcile that inconsistency. Specifically, the question before the Court is: “Did the plaintiff-insured provide notice to the defendant-insurer of the claim for coverage ‘as soon as practicable’ under the circumstances; and, if not, was the defendant-insurer required to show that it was prejudiced by the late notice to avoid coverage?” Track Supreme Court Appeals, http://www.judiciary.state.nj.us/calendars/scappeal.htm (posted Oct. 24, 2014). This is an important decision for policyholders because, if upheld, policyholders risk forfeiture of coverage based on a ruling that a claim was not reported “as soon as practicable,” regardless of prejudice.

Background:
Templo Fuente De Vida Corp. and Fuente Properties, Inc. (“Templo”) breached a contract to purchase property and forfeited over $1 million in down payments. Templo sued its lenders in contract and tort for failing to fund the purchase pursuant to a loan agreement. Templo settled its claims against the lenders, who assigned to Templo their coverage rights under a directors and officers liability insurance policy (the “Policy”) sold by National Union Insurance Company of Pittsburgh, Pa. (“National Union”).

The coverage dispute arose in connection with Templo’s efforts to secure coverage under the Policy, which National Union wrote on a claims-made and reported basis. The Policy covered loss caused by the wrongful acts of directors, officers, and employees and required notice of a claim “as soon as practicable” and either during the policy period or within 30 days after the policy period (referred to herein as “dual reporting requirements”). Although the policyholders reported the claim within the policy period, they did not provide such notice until six months after they received the complaint.

National Union disclaimed coverage, stating that the policyholders did not provide notice as soon as practicable, and the trial court sustained its coverage denial. On appeal, the Appellate Division rejected the Supreme Court precedent that a carrier must demonstrate “appreciable prejudice” to sustain a late notice defense, stating that these prior decisions were inapplicable to claims-made policies.

Petition for Certification:
Templo’s Petition for Certification highlights an issue of first impression in New Jersey: whether an insurance company must show appreciable prejudice in disclaiming coverage when a claim is made against its policyholder during the policy period and the policyholder reports the claim during the policy period—just not “as soon as practicable.” Templo argues that all other jurisdictions analyzing notice under a claims-made and reported policy have required a showing of appreciable prejudice to sustain a coverage denial. According to Templo, “[t]hese cases hold that where there are dual reporting requirements and the claim meets the objective criteria in that it was reported within the policy period, to defeat the objective criteria and the claim on the grounds that the claim was not made ‘as soon as practicable,’ the insurer must show prejudice.” Thus, Templo argues that the Appellate Division erred in relying instead on inapposite and factually distinguishable cases where the policyholder either did not have dual reporting requirements or failed to provide notice during the reporting period.  

Conclusion:
The Supreme Court of New Jersey’s decision on Templo’s appeal could have far-reaching implications to policyholders and their notice responsibilities under claims-made and reported policies. Accordingly, policyholders should pay close attention to this case.