By:
John A. Carleton
A recent case reveals how New Jersey courts strictly
enforce notice provisions in claims made policies and also provides an important
lesson for insurance brokers to refrain from making coverage determinations.
Apro Management, Inc. v. Royal Surplus Lines
Insurance Co., 2007 WL 1238574 (App. Div. April 30, 2007) was a declaratory
judgment action Apro brought seeking a determination Royal had a duty to defend
and indemnify it for certain claims brought by Wang in prior litigation. Wang
entered into a contract in June 1999 with Apro, a mortgage service provider, for
the purchase of land and construction of a duplex. Wang was later informed the
duplex could not be built unless she agreed to certain changes, which she was
unwilling to do. The contract was terminated and deposit monies were returned.
Ultimately the duplex was constructed consistent with the original plans and
sold at a significant premium.
On March 15, 2001 Wang sued Apro, among other parties,
alleging fraudulent misrepresentation and violation of the New Jersey Consumer
Fraud Act. When Apro received the complaint, it was forwarded to Apro’s
insurance agent, Professional Insurance Associates, Inc. (“PIA”). PIA advised
Apro the professional liability policy which Royal had issued did not cover the
claims asserted by Wang. On May 24, 2001, one of the co-defendants filed a
cross-claim against Apro seeking, among other things, indemnification.
In May 2002, Wang filed an amended complaint
(adding counts for breach of contract and breach of duty to use reasonable care
in constructing) and on October 11, 2002, Apro gave notice of it to Royal. On
November 20, 2002, Royal denied coverage because Apro failed to provide notice
of the claims within the time required by the policy and because the claims were
not covered. Royal issued two professional liability policies to Apro, one for
the period of October 3, 2000 to October 3, 2001 and the other for October 3,
2001 to October 3, 2002.
The trial court found Royal had a duty to defend and
indemnify the insured and held a plenary hearing to determine the fees/costs
incurred by the insured in defending the Wang action. The trial court found it
significant the amended complaint was the first to contain covered claims and
there was no need to provide earlier notice.
The appellate court reversed and held the
insured was obliged under the notice provision of the policy to inform the
insurer of the initial complaint and cross-claim during the coverage period of
the first policy even though they did not include any covered claims. The court
held the filing of plaintiffs’ lawsuit was a reportable event because it was a
“claim” as defined in the policy. The court further reasoned the lawsuit should
have been reported since the insured should have anticipated it would reasonably
be expected to result in claims covered by the policy, i.e. negligence
amendment. The court also stated the insured needed to notify Royal of the
cross-claim filed against it. Further, the insured may not circumvent the
reporting requirements under a claims-made policy by picking and choosing the
claims for which they seek coverage when those claims all arise out of the same
occurrence or incident. Such a result would be inconsistent with the
limitations on coverage inherent in a claims-made policy. The Court noted
“notice” provisions are strictly construed and thus there was no need to reach
the coverage issues.
This case also illustrates the importance of
providing “notice” and how insurance brokers may expose themselves to E&O claims
when they act as claims handlers. Certainly the safer course is for the broker
to facilitate the claim submission. The role of “gate keeper” by the broker,
perhaps in an effort to avoid an increased premium, can prove detrimental to the
insured and broker, alike.
