New Jersey Supreme Court Rules that Prejudice is not Required in Disclaiming Coverage under a “Claims Made” Policy

On February 11, 2016, the New Jersey Supreme Court handed down its decision in Templo Fuente De Vida Corp., et al. v. National Union Fire Ins. Co., enforcing the insurer’s coverage denial under a “claims made” policy for the insured’s breach of the notice provision.  In this case, plaintiff Templo Fuente De Vida Corp. (Templo) relied on Merl Financial Group, Inc. (Merl) as a source of funding for its purchase of property.  However, upon the closing date, Merl was unable to fund the loan, and the seller terminated the purchase agreement.  As a result, Templo filed a complaint against Merl, which was subsequently restructured and renamed First Independent Financial Group (First Independent).  The matter was eventually settled, wherein First Independent assigned its rights and interests under an insurance policy to Templo.
First Independent purchased the policy from National Union Fire Ins. Co. (National Union), which was a $1 million “claims made” policy containing a notice provision section.  That section, as a condition precedent, required First Independent to provide notice to National Union of any claim “as soon as practicable.”  Although First Independent was served with Templo’s Complaint on February 21, 2006, it did not provide notice of the claim to National Union until August 28, 2006.  As a result, National Union disclaimed coverage, asserting that notice of the claim was not provided “as soon as practicable” under the terms of the policy.
Templo then initiated a declaratory judgment action against National Union, seeking a coverage determination.  The Court, in affirming summary judgment to National Union, upheld National Union’s disclaimer as First Independent did not provide notice as soon as practicable, and also held that National Union did not have to show prejudice.  In reaching that conclusion, the Court reasoned that, if the policy language is unambiguous, the Court will not engage in a strained construction to support coverage, nor write a better policy than the one purchased.  The Court then found that the policy’s notice provision unambiguously required the insured to provide notice as soon as practicable, and that First Independent's delay in providing notice of Templo’s claim was unjustified under the circumstances.
In determining that National Union was not required to prove prejudice prior to disclaiming coverage, it reasoned that the policy at issue covered “claims made,” and that First Independent was a knowledgeable entity which purchased its insurance through sophisticated brokers.  As a result, the Court reasoned that National Union did not need to show prejudice prior to disclaiming coverage, and instead, the Court need only enforce the plain and unambiguous terms of the negotiated policy.  The Court found that the nature of the “claims made” policy contained mutual rights and obligations, and by failing to adhere to the notice requirement, the insured foreclosed the insurer’s ability to protect its own rights and to influence how litigation proceeded.  When First Independent defended Templo’s claims without notifying National Union, First Independent breached the timely notice provision contained in the policy, and National Union was within its rights to decline coverage without demonstrating appreciable prejudice.