Zuckerman v. National Union Fire Ins. Co.

• Decision Date: 25 July 1985
• Citation: 100 N.J. 304,495 A.2d 395
• Parties: Edward K. ZUCKERMAN, Esq., Plaintiff-Appellant, v. NATIONAL UNION FIRE INSURANCE COMPANY, Defendant-Respondent.
• Court: New Jersey Supreme Court

Page 304

100 N.J. 304

495 A.2d 395

Edward K. ZUCKERMAN, Esq., Plaintiff-Appellant, v. NATIONAL UNION FIRE INSURANCE COMPANY, Defendant-Respondent.

Supreme Court of New Jersey.

Argued March 5, 1985.

Decided July 25, 1985.

Anthony B. Vignuolo, North Brunswick, for plaintiff-appellant (Borrus, Goldin & Foley, North Brunswick, attorneys).

Walter E. Monaghan, Union, for defendant-respondent (Haggerty & Donohue, Union, attorneys; J. David Woods, Union, on brief).

The opinion of the Court was delivered by

STEIN, J.

In this case, as in Sparks v. St. Paul Insurance Co., 100 N.J. 325, 495 A.2d 406 (1985), which we also decide today, we are called upon to consider the enforceability of professional liability insurance written in the form of the "claims made" or "discovery" policy. Specifically, the issue is whether the policy provision limiting coverage to claims filed with the insurance company during the policy period is to be strictly enforced so as to bar coverage for those claims reported to the company subsequent to the expiration date of the policy.

I

The material facts in this case are not disputed. Appellant, Zuckerman, an attorney at law, was sued for malpractice in November, 1981, by former client Barbara Katz. Katz alleged that she retained appellant in April, 1978, after her hearing had been impaired by a loud, piercing noise emanating from the newly-installed telephone system at her employer's office. Although appellant's law firm filed a workers' compensation claim for Katz that was reduced to judgment, appellant failed to file a negligence complaint against the company that had installed the telephone. In September, 1980, appellant informed his client that the applicable statute of limitations had expired and suggested that Katz consult other counsel. Katz subsequently filed suit against appellant for malpractice.

An unbroken series of insurance policies issued by respondent, National Union Fire Insurance Company (National Union), provided appellant with professional liability coverage from January 15, 1974 through February 25, 1982. Each policy was a "claims made" policy, providing retroactive coverage for errors and omissions that occurred at any time prior to the effective date of the policy but limiting such coverage to claims made against the insured and actually communicated to the company during the policy period.

When appellant was served with the Katz complaint in 1981, he did not notify respondent because he believed that the claim was "minimal" and could be settled within the deductible limits of his insurance policy. After a default judgment was entered against appellant in the Katz suit, he retained independent counsel to defend him. In June, 1982, the trial court granted a motion to set aside the default judgment and appellant was permitted to file an answer as well as a third-party complaint against the telephone installation company.

On December 28, 1982, appellant through his counsel notified respondent insurance company of the pendency of the Katz suit and requested that respondent defend the action and indemnify him in the event of liability. By letter of January 14, 1983, respondent denied coverage since appellant had been served with the summons and complaint three months before his policy expired but did not give notice of the claim until ten months after the policy expiration date. Respondent's disclaimer of coverage was based upon several policy provisions that limited the insurer's liability to only those claims that were reported to the company during the policy period. The pertinent provisions follow:

Insuring Agreement

I. Coverage

To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as money damages because of any claim or claims first made against the insured and reported to the company during the policy period, arising out of an act or omission of the insured in rendering or failing to render professional services for others in the insured's capacity as a lawyer * * * and caused by the insured or any other person for whose acts or omissions the insured is legally responsible, except as excluded or limited by the terms, conditions and exclusions of this policy.

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V. Policy Period and Territory

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A claim is first made during the policy period or extended reporting period if:

(a) during the policy or extended reporting period the insured shall have knowledge or become aware of any act or omission which could reasonably be expected to give rise to a claim under this policy and shall during the policy period or extended reporting period give written notice thereof to the Company in accordance with Condition VII.

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Conditions

I. Definitions

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(c) "Policy period" means the period of time between the inception date shown in the Declarations and the effective date of termination, expiration or cancellation of coverage and specifically excludes any extended reporting period hereunder. ¹

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VII. Notice of Claim or Suit

Upon the insured becoming aware of any act or omission which could reasonably be expected to be the basis of a claim or suit covered hereby, written notice shall be given by or on behalf of the insured to the Company or any of its authorized agents as soon as practicable, together with the fullest information obtainable. If claim is made or suit is brought against the insured, the insured shall immediately forward to the Company every demand, notice, summons or other process received by him or his representative.

If during the policy period or the extended reporting period, the Company shall be given written notice of any act or omission which could reasonably be expected to give rise to a claim or suit against the insured under this policy, any claim which subsequently arises out of such act or omission shall be considered to be a claim reported during the policy year or extended reporting period in which the written notice was received.

According to its terms, appellant's policy afforded him coverage for acts or omissions occurring at any time, provided that the claim be asserted and reported to the carrier during the policy period. Exclusion (h) of the policy barred from retroactive coverage instances of malpractice involving claims "arising out of any acts or omissions occurring prior to the effective date of this policy if the insured at the effective date knew or could have reasonably foreseen that such acts or omissions might be expected to be the basis of a claim or a suit." The policy also entitled the insured to purchase an "extended reporting endorsement" for an additional premium equal to 225% of the insured's last annual policy premium. Exercise of this option would have provided expanded insurance coverage by extending indefinitely the period within which claims may be reported to the company for acts or omissions that occurred prior to the termination date of the policy. In February, 1982, appellant's insurance agent allegedly sent final notice of the expiration of the policy and at the same time offered appellant an extended reporting endorsement, which he chose not to purchase.

In January, 1983, Zuckerman instituted suit against National Union, seeking a judgment that would compel the company to defend him in the Katz litigation and to indemnify him against any resultant liability. Both parties filed cross motions for summary judgment. The trial court granted summary judgment for appellant on the ground that respondent had not demonstrated any prejudice resulting from appellant's failure to file his claim before the policy expired. The Appellate Division, 194 N.J.Super. 206, (1984), 476 A.2d 820, reversed in a split decision, holding that the terms of the policy should be enforced literally. The Appellate Division concluded that no considerations of public policy justified the requirement that the insurance company show prejudice in order to be relieved from liability when notification of a claim was not given until after a "claims made" policy expired. Appellant appealed to this Court as of right on the basis of the dissent below. R. 2:2-1(a).

II

The type of professional liability insurance policy National Union issued to appellant is commonly known as a "claims made" or "discovery" policy. "Claims made" professional liability coverage has become increasingly prevalent during the past two decades, supplanting the "occurrence" policy, which until recently had been the typical form of professional liability insurance. See J. Parker, "The Untimely Demise of the 'Claims Made' Insurance Form? A Critique of Stine v. Continental Casualty Company," 1983 Det.C.L.Rev. 25, 28-29, 71-72 & nn. 167-68; S. Kroll, "The Professional Liability Policy 'Claims Made,' " 13 Forum 842, 850 (1978); see also D. Shand, " 'Claims Made' vs 'Occurrence,' " 28 Int'l Ins. Monitor 269 (Sept.,1974) (acknowledging trend toward greater use of "claims made" policies).

The standard definitions for "discovery" and "occurrence" policies appear in Samuel N. Zarpas, Inc. v. Morrow, 215 F.Supp. 887 (D.N.J.1963):

[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. [Id. at 888.]

Variations on this definitional theme pervade the case law. The fundamental distinction between the two types of policies has been expressed in different terms and with differences in emphasis. For example, the court in Brander v. Nabors, 443 F.Supp. 764 (N.D.Miss.), aff'd, 579 F.2d 888 (5th Cir.1978), distinguished these policy types based on the period for which...