“For want of a shoe, the horse was lost,” goes the old saying. If you handle claims from the policyholder side, nothing will aggravate you more than seeing a perfectly good claim go awry because of poor risk management controls in an organization, especially the failure to give notice under potentially applicable insurance policies.
The law varies from state to state with respect to the insurance company’s ability to void coverage based on late notice. In New Jersey, under occurrence-based policies, the carrier must demonstrate “appreciable prejudice” before a forfeiture of coverage can occur. If evidence is irretrievably lost due to late notice, for example, and the carrier cannot adequately reconstruct what happened through secondary evidence, many Courts will relieve the carrier of its coverage obligations.
It’s important to recognize that the same rule doesn’t apply to claims-made coverage. If you’re new to the insurance coverage arena, occurrence-based coverage is triggered when damage takes place during a policy period. Under a claims-made policy, however, coverage is triggered when a liability claim is made against the policyholder during the policy period, and is reported to the carrier within the time limits specified by the policy.
The bottom line is that if you have a claims-made policy, you need to pay extra-careful attention to the notice requirements, because the “prejudice” rule won’t apply. The New Jersey Appellate Division recently made this clear in Templo Fuente de Vida v. National Union, Docket No. A-4516-12T1 (June 6, 2014).
The case involves a mortgage company (Morris Mortgage, Inc.) that allegedly was negligent in failing to secure proper financing for a real estate project (a church and day care center). The mortgage company settled the negligence lawsuit brought by its client, Templo, in part by assigning its E&O coverage claim to Templo.
Problem: the policy contained the familiar language requiring that the policyholder give written notice to the carrier of any claim “as soon as practicable,” and either during the policy period (or during the discovery period specified in the policy), or within 30 days after the end of the policy period. For reasons that are unclear from the decision, while the policyholder was served with the suit on February 21, 2006, it did not provide notice of the complaint to the insurance company until August 28, 2006. This was within the policy period, but the question the Court addressed was whether notice was given “as soon as practicable.”
The court noted that no explanation had been given for the delay, and denied coverage, writing: “The policy defendants provided to the insureds clearly required that notice be provided both within the policy period and as soon as practicable… Because the insureds did not meet both of the notice provisions that were unambiguously expressed in the policy, we conclude that coverage was properly denied to the insureds and, by extension, to plaintiffs as their assignees.”
The Court specifically observed that a “prejudice” rule does not apply to claims-made policies, writing that “for claims made policies, an insurer need not show that it was prejudiced by an insured’s failure to provide notice ‘as soon as practicable.’”
This decision does not make a whole lot of sense to me, since the carrier received notice of the claim during the policy period. If the policy period had lapsed, and the policyholder was still attempting to justify late notice, that might be understandable. Here, though, we’re talking about a six-month delay and no apparent prejudice to the insurance company (since, as we all know, litigation moves at a snail’s pace). On the other hand, I don’t wear a robe. (To work, I mean.)
In any event, Templo Fuente shows the importance of paying attention to risk management procedures in your organization. No one should ever assume that a claim made against the company is not covered. I often hear clients worry that if they provide notice of claim, their premiums will go up. Would you rather take the risk of having a six or seven figure liability assessed against your company, or deal with an increase in premiums? Your choice. Also, taking an assignment of an insurance claim as part of a settlement is a fairly common technique. Before you do it, though, you’d better examine the claim thoroughly and make sure it’s viable.