In a majority of states, an insurer cannot deny coverage based on a policyholder’s late notice of a claim without showing that the delay prejudiced the insurer. This “notice-prejudice rule” is an advance over the traditional “no-prejudice” rule that allows insurers to deny claims based on late notice regardless of the circumstances leading to the delay. The Wyoming Supreme Court, the most recent court to adopt the notice-prejudice rule, described the rationale for the rule in Century Surety Company v. Jim Hipner, LLC: most policyholders lack the leverage to negotiate for better policy terms; forfeiture of coverage on a mere technicality gives an unwarranted windfall to the insurer; and states have an interest in ensuring that accident victims are compensated. The court also held that a policy provision attempting to “contract around” the notice-prejudice rule violated public policy.
Nevertheless, more states are limiting the notice-prejudice rule to occurrence policies and applying the no-prejudice rule to claims-made policies. The New Jersey Supreme Court applied the no-prejudice rule to a claims-made policy that required written notice of a claim “as soon as practicable” in Templo Fuente De Vida Corp. v. National Union Fire Insurance Co. The court agreed with National Union’s contention that the policyholder’s notice of a D&O claim more than six months after service of the lawsuit violated the notice provision. Despite longstanding precedent in New Jersey following the notice-prejudice rule, the New Jersey Supreme Court refused to apply the notice-prejudice rule to claims-made policies with clear and unambiguous terms. The court discounted the equitable concerns behind the notice-prejudice rule because purchasers of claims-made policies are “knowledgeable insureds, purchasing their insurance requirements through sophisticated brokers.”
Despite this court’s application of the no-prejudice rule to a claims-made policy, policyholders should not presume this is a blanket rule, even in New Jersey. In Templo Fuente, the policyholder gave no reason for its delay in providing notice. An explanation could have dissuaded the court from denying coverage. In addition, not all purchasers of claims-made policies are “sophisticated.” Finally, the goal of avoiding an unwarranted windfall to the insurer appears to equally apply to a claims-made policy. Unlike an occurrence policy, which can be triggered years after the policy period expires, coverage under a claims-made policy is limited. In order for coverage to apply, the policyholder must give notice of the claim within the policy period or any applicable extended period, as did the policyholder in Templo Fuente.
To avoid a forfeiture of coverage, policyholders should establish a protocol for giving notice of claims and potential claims under all potentially applicable insurance policies, including umbrella and excess policies. In Century Surety, the policyholder had notified the primary insurer but not the umbrella insurer, perhaps believing that the claim would not exceed the primary policy’s limits. The policyholder’s failure to notify the umbrella insurer did not forfeit coverage in that case, but would have under the no-prejudice rule.