A few years back, a major financial institution retained us to review its insurance coverage program. After checking the main items I usually look for, I asked the Risk Manager whether the heads of the organization’s various business units knew the basics of the notice provisions in the company’s major coverages. I could see her eyes glazing over. Why would anyone care about that, and why in the world was I adding make-work to the already-overburdened Risk Manager’s to do list?
The answer is pretty simple: You can have the best coverage in the world, and you can still be in trouble when a major claim rolls in, because you blew the notice provisions under the policy. This danger is even more acute in large and diffuse (“sophisticated”) organizations, because your people in the field may have no idea what types of things are and aren’t covered under your program, and when and how to send information to the Risk Management Department. They may think insurance is only for slip and fall incidents and fender benders; and of course, a complex business coverage program goes way beyond that.
We once represented a defense contractor, for example. The contractor had designed and manufactured certain machinery to be installed in a military application, and the work was done at a facility in another state, far distant from corporate headquarters (and the risk management department). When the contractor performed a final inspection on the equipment before sending it to the military, the equipment inexplicably started to discharge lead (prohibited in this type of application). Frenetic activity resulted, including numerous interviews of employees, and destructive testing of the equipment. No one, however, focused on filing an insurance claim with the contractor’s property carrier, until an insurance broker raised the issue while conducting an annual review, a year and a half later. We became involved very late in the process, and, after filing suit, we were able to achieve a decent settlement – but the settlement would’ve been a lot better if we weren’t facing a serious late notice issue. Such are the perils of unclear lines of communication.
With that background, consider the New Jersey Supreme Court’s recent decision in Templo Fuente de Vida Corp. v. National Union, which you can read here. The case involved the notice provisions under a claims-made D&O policy.
Templo hired Morris Mortgage Inc. (MMI) to help obtain funding for the purchase of certain property, for the relocation of a church and daycare center. MMI identified a possible funding source (Merl), but the anticipated lender failed to come through on the final closing date (ouch). Templo sued Merl (the recalcitrant lender), which later became known as First Independent.
National Union had sold First Independent a D&O and Private Company Liability Policy with a $1 million limit. The Policy potentially covered the Templo claim. More than six months after being served with the first amended complaint in the underlying suit, and only after retaining counsel and filing an answer, First Independent provided notice of the claim to National Union. National Union denied coverage, arguing in part that notice of the claim had not been given to National Union “as soon as practicable,” as the policy specifically required. There was no dispute, however, that First Independent gave notice within the policy period.
First Independent settled the underlying litigation. The settling defendants’ liability exceeded $3 million, and they committed to pay plaintiffs a portion of that liability by a fixed date. To cover part of the settlement amount, First Independent assigned to Templo (the underlying plaintiff) its rights and interests under the National Union policy.
In its declaratory judgment suit against National Union, Templo argued in part that notice had been given during the policy period, and that National Union had suffered no prejudice as a result of the timing of notice. The New Jersey Supreme Court rejected this argument, holding that the existence of prejudice was only relevant to late notice issues arising under “occurrence”-based policies, and not under claims-made coverage.
The Court wrote: “Plaintiffs do not assert that the notice provision in question was ambiguous. During oral argument plaintiffs conceded that First Independent did not notify National Union of the claims ‘as soon as practicable,’ and plaintiffs did not provide the trial court with any evidence to justify First Independent’s reporting delay…We hold only that on this record the unexplained six-month delay did not satisfy the policy’s notice requirement.…We need not and do not draw any ‘bright line’ on these facts for timely compliance with an ‘as soon as practicable’ notice provision.”
Then, picking up on the old saw often relied upon by insurance companies, the Court noted that First Independent – which had 14 full-time employees, two part-time employees, and a Human Resources Department – had been represented by an insurance broker in its negotiations with National Union, and was a “sophisticated insured” and therefore not entitled to the benefit of the doubt on notice. This confirms that there are two different worlds: “Judge World” and the “Real World.” In “Judge World,” “sophisticated policyholders” get less insurance then ordinary consumers, based upon the same policy language. Also in “Judge World,” insurance brokers apparently routinely negotiate the terms of standard form notice provisions contained in commercial insurance policies.
Although most of us operate in the “Real World,” we sometimes can’t avoid being dragged into “Judge World.” I therefore go back to the beginning of this post. Make sure your business unit managers (or your clients’ business unit managers) know the basics of the notice procedures under your major coverages. And be careful about taking assignments of insurance claims to satisfy debt. You may think that the claim is worth substantially more than it actually is.
By the way, here’s a pretty good article on proper risk management controls.