Sparks v. St. Paul Ins. Co.

• Citation: 495 A.2d 406,100 N.J. 325
• Parties: John R. SPARKS, III, and Carolyn Sparks, his wife, Plaintiffs-Respondents, v. ST. PAUL INSURANCE CO., a corporation doing business in New Jersey, Defendant- Appellant.
• Decision Date: 25 July 1985
• Court: United States State Supreme Court (New Jersey)

Page 325

100 N.J. 325

495 A.2d 406

John R. SPARKS, III, and Carolyn Sparks, his wife, Plaintiffs-Respondents, v. ST. PAUL INSURANCE CO., a corporation doing business in New

Jersey, Defendant- Appellant.

Supreme Court of New Jersey.

Argued March 5, 1985.

Decided July 25, 1985.

Leonard Rosenstein, West Orange, for defendant-appellant (Feuerstein, Sachs, Maitlin, Rosenstein & Fleming, West Orange, attorneys)

Herbert C. Kaplan, Carteret, for plaintiffs-respondents (Kaplan, Feingold & Kaplan, Carteret, attorneys).

Henry G. Morgan, Livingston, submitted a brief on behalf of amici curiae, American Ins. Assn. and the Alliance of American Insurers (Morgan, Melhuish, Monaghan, Arvidson, Abrutyn & Lisowski, Livingston, attorneys).

The opinion of the Court was delivered by

STEIN, J.

In this case, as in Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304, 495 A.2d 395 (1985), which the Court also decides today, we consider the enforceability of certain coverage limitations contained in a "claims made" professional liability insurance policy issued by appellant St. Paul Insurance Company (St. Paul). The trial court and the Appellate Division refused to enforce the policy provision limiting coverage to claims and potential claims reported to St. Paul during the policy period. We granted the insurance company's petition for certification, 99 N.J. 211, 491 A.2d 706 (1984), in order to resolve the apparent conflict between the unreported Appellate Division decision in this case and the Appellate Division decision in Zuckerman, supra, 194 N.J.Super. 206, 476 A.2d 820 (1984), enforcing a similar provision in the "claims made" policy at issue in that case.

I

The material facts are not in dispute. In November, 1978, respondents, John and Carolyn Sparks, retained A. Raymond Guarriello, a New Jersey attorney, to represent them in connection with the sale of their residence. That transaction resulted in litigation between respondents and the prospective purchasers. In the course of that litigation, apparently due to Guarriello's negligence, Mr. and Mrs. Sparks failed to answer interrogatories. This resulted in an order entered in mid-October, 1979, suppressing the Sparks' answer and counterclaim. A default judgment for specific performance was entered against Mr. and Mrs. Sparks in February, 1980, and a money judgment for $18,899.08 was entered against them in May, 1981. It is not disputed that Guarriello's negligence was the proximate cause of the judgments against Mr. and Mrs. Sparks.

On November 6, 1976, appellant, St. Paul, issued Guarriello a one-year professional malpractice policy that was renewed for successive one-year periods, terminating on November 6, 1979. On September 27, 1979, St. Paul issued a substitute policy for The policy issued to Guarriello in 1976 was denominated a "claims made" policy. A "Schedule" attached to the declaration page of the policy bore the following notice:

one additional year that was to take effect on November 6, 1979. Guarriello failed to pay the premium and appellant sent Guarriello a notice cancelling the substitute policy, effective January 21, 1980. Between June and August of 1980, substituted counsel for respondents notified St. Paul of the underlying facts and demanded that the insurance company provide malpractice coverage with respect to Guarriello's negligence.

TO OUR POLICYHOLDERS

This is a "claims made" Coverage Form. It only covers claims arising from the performance of professional services subsequent to the retroactive date indicated and then only to claims first made within the provisions of the Policy while this Coverage Form is in force. No coverage is afforded for claims first made after the termination of this insurance unless and to the extent that Reporting Endorsements are purchased in accordance with Condition 3 of this Coverage Form. Please review the Policy carefully. [Emphasis added.]

The retroactive date set forth in the policy was November 6, 1976, the same date as the effective date of coverage. Therefore, unlike the standard "claims made" policy that was involved in our decision in Zuckerman, supra, 100 N.J. at 307 - 309, 495 A.2d 395, St. Paul's policy provided no retroactive coverage whatsoever during its first year. In that year, the coverage provided by the policy applied only to errors and omissions that occurred during the policy year and were reported to the company within the policy year. During the two renewal years beginning November 6, 1977 and November 6, 1978, the policy afforded "retroactive" coverage for negligence that occurred subsequent to November 6, 1976.

In April, 1981, St. Paul rejected respondent's demand that it provide coverage for Guarriello's malpractice since the company received notice of the claim after the termination of the second renewal policy in November, 1979 and after the January, 1980 cancellation of the replacement policy for nonpayment of the premium. ¹ In June, 1981, Mr. and Mrs. Sparks obtained a $42,968.08 judgment against Guarriello based upon his malpractice.

The present action commenced in October, 1981. Mr. and Mrs. Sparks sought a declaratory judgment that the liability insurance policy issued by St. Paul was valid and enforceable to pay the judgment obtained against Guarriello. In August, 1983, St. Paul's motion for summary judgment was denied and in September, 1983, summary judgment was granted in favor of Mr. and Mrs. Sparks. That judgment was affirmed by the Appellate Division, which held "claims made" policies to be unenforceable as violative of public policy.

II

In our decision in Zuckerman, supra, 100 N.J. at 309-313, 495 A.2d at 398-400, we summarized the origins of "claims made" or "discovery" liability policies and emphasized the distinction between such policies and the more traditional "occurrence" policies. That distinction warrants reiteration in view of the unusual provisions of the policy issued to Guarriello by St. Paul:

[T]here are two types of Errors and Omissions Policies: the "discovery" policy and the "occurrence" policy. In a discovery policy the coverage is effective if the negligent or omitted act is discovered and brought to the attention of the insurance company during the period of the policy, no matter when the act occurred. In an occurrence policy the coverage is effective if the negligent or omitted act occurred during the period of the policy, whatever the date of discovery. [Samuel N. Zarpas, Inc. v. Morrow, 215 F.Supp. 887, 888 (D.N.J.1963).]

Another court characterized "claims made" policies as "provid[ing] unlimited retroactive coverage and no prospective coverage at all," as distinguished from "occurrence" policies which "provide unlimited prospective coverage and no retroactive coverage at all." Brander v. Nabors, 443 F.Supp. 764, 767 (N.D.Miss.), aff'd, 579 F.2d 888 (5th Cir.1978).

The distinction between the two types of policies has also been described in terms of the peril insured:

In the "occurrence" policy, the peril insured is the "occurrence" itself. Once the "occurrence" takes place, coverage attaches even though the claim may not be made for some time thereafter. While in the "claims made" policy, it is the making of the claim which is the event and peril being insured and, subject to policy language, regardless of when the occurrence took place. [S. Kroll, "The Professional Liability Policy 'Claims Made,' " 13 Forum 842, 843 (1978).]

In Zuckerman, supra, 100 N.J. at 311-313, 495 A.2d at 399, we discussed in detail the significant social utility of the "claims made" policy that has led to its supplanting the occurrence policy in the professional liability field. We noted that since the insurance company that issues an "occurrence" policy is exposed to a "tail"--that is, the lapse of time between the occurrence and the date on which the claim is made--there is considerable difficulty in accurately calculating underwriting risks and premiums with respect to perils that typically lead to long tail exposure. Moreover, claims asserted in the fields of professional malpractice, products liability, and environmental law often present the added difficulty of determining precisely when the actuating event "occurred" for the purpose of defining coverage. From the standpoint of the insured, there is the danger of inadequate coverage in cases in which claims are asserted long after the error or omission occurred, because inflationary factors lead to judgments that are higher than those originally contemplated when coverage was purchased years earlier. Id., 100 N.J. at 311-313, 495 A.2d at 399.

From the insurer's perspective, the clear advantage derived from a "claims made" policy is the limitation of liability to claims asserted during the policy period. This limitation enables insurers to calculate risks and premiums with greater precision. Although "claims made" policies provide coverage for errors and omissions occurring prior to the policy's inception, the elimination of exposure to claims filed after the policy expiration date enables companies to issue these policies at reduced premiums. Zuckerman, supra, 100 N.J. at 312-313, 495 A.2d at 399-400; J. Parker, "The Untimely Demise of the 'Claims Made' Insurance Form? A Critique of Stine v. Continental Casualty Co.," 1983 Det.C.L.Rev. 25, 73.

In Zuckerman, we observed that Courts throughout the country have upheld the validity of "claims made" policies. 100 N.J. at 313-314, 495 A.2d at 400. Although "claims made" policies have regularly been challenged on public policy grounds, the vast majority of courts that have considered these challenges have enforced the policies as written. See, e.g., Brander v. Nabors, supra, 443 F.Supp. 764; Gulf Ins. Co. v. Dolan, Fertig & Curtis, 433 So.2d 512 (Fla.1983); Livingston Parish School Bd. v. Fireman's Fund Am. Ins. Co., 282 So.2d 478 (La.1973); Stine v. Continental Cas. Co., 419 Mich. 89, 349 N.W.2d 127 (1984). ²

The courts that have declined to...