Templo Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, P.A.

• Decision Date: 11 February 2016
• Citation: Templo Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, P.A., 224 N.J. 189, 129 A.3d 1069 (N.J. 2016)
• Parties: TEMPLO FUENTE DE VIDA CORP. and Fuente Properties, Inc., Plaintiffs–Appellants, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, P.A., Defendant–Respondent.
• Court: New Jersey Supreme Court

224 N.J. 189

129 A.3d 1069

TEMPLO FUENTE DE VIDA CORP. and Fuente Properties, Inc., Plaintiffs–Appellants,

v.NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, P.A., Defendant–Respondent.

Supreme Court of New Jersey.

Argued Oct. 14, 2015.

Decided Feb. 11, 2016.

Mitchell B. Seidman, argued the cause for appellants (Seidman & Pincus, attorneys).

Andrew L. Indeck, Warren, argued the cause for respondent (Weber Gallagher Simpson Stapleton Fires & Newby, attorneys; Mr. Indeck and Brad A. Baldwin, on the brief).

Justice SOLOMON delivered the opinion of the Court.

In this appeal, we are called upon to determine whether, in order to disclaim coverage, an insurance company must show it was prejudiced by an insured's failure to comply with the notice provision in a Directors and Officers "claims made" policy.

In the instant case, the insured, who had been sued for damages by plaintiffs, entered into a settlement whereby it agreed to assign its rights and interests under the insurance policy to plaintiffs. However, when plaintiffs sought to recover under the policy, the insurer denied coverage because the insured breached the policy's notice conditions. The trial court granted summary judgment to the insurance company, finding that notice was not given "as soon as practicable," and that the insurance company need not show appreciable prejudice as a result of the delay in notice in order to refuse coverage. Plaintiffs appealed, and the Appellate Division affirmed substantially for the reasons given by the trial court.

We hold that because this Directors and Officers "claims made" policy was not a contract of adhesion but was agreed to by sophisticated parties, the insurance company was not required to show that it suffered prejudice before disclaiming coverage on the basis of the insured's failure to give timely notice of the claim.

I.

A.

We begin with a review of plaintiffs' claims against the insured that underlie the instant litigation and were ultimately settled. With respect to those claims, the following facts are not in dispute.

Plaintiffs, Templo Fuente De Vida Corp. (Templo) and Fuente Properties, Inc. (Fuente) (collectively, plaintiffs),¹ engaged Morris Mortgage Inc. (MMI) to find funding sources for the purchase of property to relocate plaintiffs' church and daycare centers. Approximately two and one-half months later, plaintiffs made a down payment and entered into a purchase agreement to buy a property in North Bergen (the property), conditioned upon plaintiffs securing mortgage financing by a certain date. After several extensions of the financing date, MMI identified Merl Financial Group, Inc. (Merl) as a possible funding source.

Over the course of approximately nine months, Merl gave plaintiffs a series of funding commitments in exchange for ten percent of the total amount of each commitment. However, when the final closing date for the property arrived, neither Merl nor any of the sources of financing listed in the commitment documents were able to fund the loan to purchase the property, and the sellers terminated the purchase agreement. As a result of the losses sustained in their attempt to purchase the property, plaintiffs filed a complaint² against Merl, among others. The defendants named in the complaint were served with the first-amended complaint on or about February 21, 2006.

Sometime prior to the filing of the complaint, Merl was restructured and renamed First Independent Financial Group (First Independent). First Independent purchased a $1 million Directors, Officers and Private Company Liability Insurance Policy (the Policy) from National Union Fire Insurance Company of Pittsburgh (National Union) covering the time period from January 1, 2006 through January 1, 2007.

The policy is a "claims made" policy, as opposed to an "occurrence" policy, and contained "NOTICE/CLAIM REPORTING PROVISIONS," section 7, requiring that, as a condition precedent to coverage under the policy, "The Company or the Insureds"

give written notice to the Insurer of any Claim made against an Insured as soon as practicable and either: (1) anytime during the Policy Period or during the Discovery Period (if applicable); or (2) within 30 days after the end of the Policy Period or the Discovery Period (if applicable), as long as such Claim is reported no later than 30 days after the date such Claim was first made against an Insured.

The mutual interests of the insured and the insurer served by the notice provisions of the policy are reflected in section 8, "DEFENSE COSTS, SETTLEMENTS, JUDGMENTS (INCLUDING THE ADVANCEMENT OF DEFENSE COSTS)," which grants the insured the right to defend itself against the claim, while simultaneously guaranteeing the insurer the ability to "associate" with the insured in that defense. Section 8 further allows the insured to "tender defense of the Claim to the Insurer," but prohibits any action by the insured from the time it receives the claim until a defense is tendered by the insurance company, if so requested. This prohibition checks action that could prejudice the insurance company, the insured, or both, such as interposing an ill-conceived defense strategy, or engaging in settlement discussions. Compliance by the insured commands its defense by the insurance company and permits the insured to "associate" with the insurance company in the defense of the claim, and settlement negotiations.³

On August 28, 2006, more than six months after being served with the first amended complaint, and after retaining counsel and filing an answer, First Independent provided notice of the claims to National Union. National Union denied coverage, asserting, among other defenses, that the claims against First Independent were made outside of the policy period, and that notice of the claims was not given to National Union "as soon as practicable."

Plaintiffs and several defendants, including First Independent, reached a settlement agreement in the underlying litigation. Under that agreement, the settling defendants' liability exceeded $3 million, and they committed to pay plaintiffs a portion of that liability by a fixed date. To cover the remainder of the settlement amount, First Independent assigned to plaintiffs its rights and interests under the Policy.⁴ Thereafter, the trial court dismissed plaintiffs' complaint as settled.

B.

Plaintiffs initiated this litigation against National Union seeking a declaratory judgment that First Independent was an insured under the Policy, and that plaintiffs were entitled to coverage. Upon the completion of discovery, plaintiffs moved for partial summary judgment, and National Union filed a cross-motion for summary judgment on all counts.

Following oral argument, the trial court granted National Union's cross-motion for summary judgment and dismissed plaintiffs' complaint with prejudice. The trial court found that although there was insufficient proof to establish that the claims had been made outside the policy period, the claim for coverage was nevertheless barred because First Independent failed to provide National Union with notice of plaintiffs' claims "as soon as practicable," as required by the specific terms of the policy. In reaching this conclusion, the trial court relied on Associated Metals & Minerals Corp. v. Dixon Chemical & Research, Inc., 82 N.J.Super. 281, 316–17, 197 A. 2d 569 (App.Div.1963), certif. denied,42 N.J. 501, 201 A. 2d 580 (1964), in which the Appellate Division held that a five and one-half month delay in notice to the insurance company was not "as soon as practicable."

In addition, the trial court concluded that under Zuckerman v. National Union Fire Insurance Co., 100 N.J. 304, 495 A. 2d 395 (1985), National Union did not need to "show appreciable prejudice in order to avoid coverage based on a failure to meet the notice requirement of a claims made policy," and that "to hold that such unambiguous [notice] language is unenforceable absent appreciable prejudice would be an unjust and inequitable expansion of the coverage provided."

The Appellate Division affirmed the trial court, noting the policy "clearly required that notice be provided both within the policy period and as soon as practicable." Accordingly, the panel held that "coverage was properly denied to the insureds and, by extension, to plaintiffs as their assignees."

The panel, like the trial court, relied on Zuckerman in rejecting plaintiffs' argument that National Union had to demonstrate prejudice as a result of the delayed notice before it could deny coverage. The Appellate Division held that only "occurrence" policies require the insurance company to establish prejudice to avoid coverage because "claims made" policies differ from "occurrence" policies. Under the former, coverage is triggered when the insured notifies the insurance company of the claim, while under the latter, coverage is triggered if the act or omission giving rise to the claim occurred during the policy period.

We granted plaintiffs' petition for certification, to address the issue of whether an insurance company must establish prejudice before denying coverage based on the insured's failure to comply with a notice condition in a "claims made" policy. 220 N.J. 42, 101 A .3d 1082 (2014).

II.

Plaintiffs assert three main arguments in support of their claim that National Union should have been required to show prejudice in order to deny coverage. First, plaintiffs challenge the Appellate Division's and trial court's reliance on Associated Metals to conclude that notice was untimely because, unlike the case at bar, the claim at issue in Associated Metals involved an injury resulting from an accident, which entails a more time-sensitive inquiry requiring the insurance company to conduct an investigation while the facts remain fresh in the minds of the parties involved. Further, plaintiffs assert that because the policy at issue in Associated Metals did not have dual reporting requirements—that the claim be reported within the policy period...