Notice under claims-made insurance policies is a trap. As a recent New Jersey Supreme Court case illustrates, the word has not yet gotten out. See Templo Fuente De Vida Corporation v. National Union Fire Insurance Company, Case No. 0745722 (NJ 2016). Despite the best efforts of defense counsel, policyholders, and insurance brokers, things can and do go wrong. And, when they do, D&O coverage can be forfeited. See Fatal Traps in D&O Insurance Policies Underscored by $10 Million Late Notice Insurance Claim Dismissal.
Templo Fuente
Another corporate policyholder just fell into this late notice fatal trap. On February 11, 2016, a unanimous New Jersey Supreme Court in Templo Fuente ruled that National Union (AIG) could deny coverage under a D&O policy because the policyholder failed to provide timely notice of the underlying lawsuit, holding that AIG does not have to show it suffered prejudice from the late notice. In this case, the insured was required to provide notice of a claim within the policy period and “as soon as practicable.” The insured did provide notice to AIG within the policy period but waited 6 months to notify AIG of the lawsuit filed against it. The insured argued that, even if its notice was late, because the policy was a contract of adhesion, AIG should be required to demonstrate that it was prejudiced as a result of the late notice. The New Jersey Supreme Court flatly rejected the policyholders’ argument, concluding that (i) notice was late as a matter of law because the insured failed to provide any explanation of why it waited 6 months to provide notice and (ii) the insurer is not required to demonstrate it was prejudiced by the late notice because D&O policies are not contracts of adhesion on account that purchasers of D&O policies are “sophisticated” companies, with equal bargaining power with insurers.
The “Sophisticated Policyholder” Fallacy
This decision sends a cautionary note to all corporate policyholders. The so-called “sophisticated” policyholder in Templo Fuente was a local one-office New Jersey investment firm, with 16 employees that, according to the New Jersey Supreme Court, “did not simply obtain a professional liability policy on its own; it sought out a broker, who procured the policy on [its] behalf.”
This analysis is incorrect on so many levels that it is difficult to know where to start. First, corporate D&O policies can only be purchased via a broker. The fact that a business used an insurance broker is not unique; it is the only way that insurance can be purchased. Second, it is ludicrous to think that there is equal bargaining power between a small privately owned company and AIG, one of the world’s largest financial institutions, merely because a policyholder procured a D&O policy via a broker, who of course, was paid by AIG for its services. Accordingly, every corporate policyholder, no matter if it has 3 employees or 3000 employees, or 1 office or 20 offices around the world, should assume that it is a “sophisticated” and that it has equal bargaining power with the world’s largest insurance companies. Noting could be further from the truth. Not even the largest companies can bargain equally with the leading insurers. The “sophisticated insured” argument makes no sense either under the facts presented in Templo Fuente, or in any other context.
Not Having an Excuse for Late Notice Was Never The Test
As to the actual merits of the case, unfortunately, the insured’s inability in Templo Fuente to articulate a reason for its late notice is not uncommon. Late notice can result from a number of factors, all of them preventable. For example, policyholders and defense counsel are often not thinking about insurance the moment a demand is made, or a suit is filed. Insurance is tends to be thought of as less important than immediate defense issues, and that needs to change. Policyholders need to ask, “what insurance do we have that could possible apply to this claim, and when and how do we need to notify the insurers?” Although late notice may be the result of policyholders and their defense counsel simply not reading their insurance policies, locating and reading the insurance policies may not be enough. Claims made notice issues are some of the most complicated insurance issues out there, and it can be suicide to tackle these issues without the early assistance of coverage counsel.
In light of Templo Fuente, yet another state court has closed the door on policyholders’ ability to argue lack of prejudice as a defense to late notice. Apparently, it does not matter that an insurer would not have done anything differently during the late notice period, nor does it matter that the insurer was not exposed to any additional defense costs or indemnity risks during the late notice period because its insured acted reasonably at all times in the defense of the underlying claim. Even when notice is made during the policy period, late notice under a D&O or professional liability insurance policy can result in a total forfeiture of coverage.
Lessons Learned
The decision in Templo Fuente is a further wake-up call to all corporate policyholders. Policyholders need to pay attention to insurance the moment a demand is made or a lawsuit is filed. In addition, Policyholders must understand many things in order to correctly assess notice, including policy language, choice of law applicable to the policy, and the ever-increasing body of law addressing notice. Further, policyholders need to recognize that notice issues under claims made insurance policies are complex, and that insurance brokers and defense counsel may not understand applicable law well enough to correctly advise policyholders on notice-related issues. Templo Fuente is also a strong reminder of what is at stake. If policyholders have good insurance recovery advice, proper notice can be given. If not, funding for a company’s defense and settlement of a claim is unnecessarily put at risk.
Please email or call Brian Friel (FrielB@MillerFriel.com, 202-760-3162) for additional information about this post.