Wrong Address Sinks Insured

Generally, when a dispute arises between an insured and its insurer as to whether proper notice was provided under a policy, the dispute turns on whether such notice was timely provided to the insurer.

Seldom is the case where an insured and insurer dispute the proper address to which notice of a claim should be sent. Yet, this was precisely the issue in the Third Circuit Court of Appeal’s recent decision in Atlantic Health System, Inc. et al., v. National Union Fire Ins. Co., 2012 WL 640033 (3d. Cir., February 29, 2012), wherein the Third Circuit held that notice of an underlying lawsuit submitted by Atlantic Health System (“American Health”) to National Union Fire Insurance Company (“National Union”) was improper because it was sent to the wrong National Union address, thereby precluding coverage to American Health.

The Third Circuit’s decision is significant for insureds and insurers alike as it demonstrates New Jersey’s strict adherence to the precise terms of notice provisions contained in claims-made policies.

The policy at issue in National Union was a claims-made policy. Critical to a claims-made policy is that notice of a claim be provided during the policy period or during an applicable extended reporting period. In this regard, claims-made policies differ from “occurrence” based policies where notice may be provided beyond expiration of the policy period.

On April 5, 2004, American Health was sued by Med Alert Ambulance, Inc. (“Med Alert”) for alleged antitrust violations. American Health was insured under a National Union claims-made policy with a policy period of May 1, 2003 to May 1, 2004. Subsequent to being sued by Med Alert, American Health made several attempts to provide notice of the lawsuit to National Union. In its first attempt at notice, American Health requested coverage from National Union in a letter dated July 23, 2004, under a National Union policy that did not become effective until May 1, 2004, almost a month after commencement of the Med Alert lawsuit. Thus, National Union denied the claim.

American Health’s second attempt at notice came on August 17, 2004, when American Health sent a letter to National Union requesting coverage for the Med Alert lawsuit under a National Union policy with a policy period of May 1, 2003 to May 1, 2004. The claim was again denied because American Health failed to provide notice during the May 1, 2003 to May 1, 2004 policy period, nor did it provide notice during a 30 day notice period which extended beyond the May 1, 2004 policy expiration.

However, these were not the only instances where American Health made National Union aware of the Med Alert lawsuit. During the 2003-2004 policy period, American Health submitted two renewal applications, wherein American Health advised National Union that it, along with several other entities, were named in a civil action filed by Med Alert alleging unfair trade practices and anti-trust violations. The renewal applications were sent to a National Union underwriter who worked at 80 Pine Street, New York, N.Y.

The Notice/Reporting provisions of the 2003-2004 National Union policy required that notice must be provided in writing to 175 Water Street, New York, N.Y. Of course, American Health sent the renewal applications, not to Water Street, but to Pine Street.

The United States District Court for the District of New Jersey, in applying New Jersey law, granted summary judgment in favor of National Union, holding that the renewal applications did not satisfy the reporting requirements under the policy. The District Court stated that strict adherence to the reporting provisions in a claims-made policy is essential and that the policy clearly required written notice to a specified address within a specified period of time.

On appeal to the Third Circuit, American Health argued that National Union was provided notice of the Med Alert lawsuit in writing (via the renewal applications) during the policy period and that the failure to send notice to Water Street, as opposed to Pine Street, which American Health asserted are one-tenth of a mile apart, is immaterial.

The Third Circuit was not persuaded by this argument. The court recognized that controlling New Jersey law dictates strict adherence to the claims reporting requirements in a claims-made policy and the reasoning behind such strict adherence derives from the fact that claims-made policies are underwritten to calculate risk based upon a fixed end point. Such policies are therefore less expensive. The court further stated that extending the reporting period would increase the insurer’s risk and the insured’s premiums.

Therefore, unlike under “occurrence” based policies where a notice provision may be afforded a liberal construction, the Third Circuit held that notice provisions in claims-made policies require strict application.

The court ultimately held that notice to National Union’s underwriters at the Pine Street address did not comply with the notice provision of the 2003-2004 policy and that coverage was therefore properly denied. In so holding, the Third Circuit noted that is would not be reasonable for an insured to insist that an underwriting department sift through renewal applications and determine what should be sent to the insurer’s claims department.

The court also took notice of the fact that American Health had a history of complying with the terms of policy’s notice provision – a point not lost on the District Court who noted that American Health’s July 23, 2004 and August 17, 2004 notice letters were sent to National Union’s Water Street address.

American Health also advanced the argument that National Union waived its right to assert defective notice since National Union failed to notify American Health of its objections to the purported notice contained in the renewal applications. The Third Circuit found that the renewal applications were used to identify claims that would be excluded under future policies and then quoted the District Court as stating, “nothing about the renewal application purports to inform the insurer that the insured is seeking to file a claim for coverage under an existing policy.”

Thus, the Third Circuit affirmed that National Union did not waive its right to assert defective notice.

What’s significant about the decision in National Union is that the insurer was provided actual notice of the Med Alert lawsuit during the policy period of a claims-made policy. However, the Third Circuit recognized that the policy clearly set out the specific procedure by which American Health was to provide National Union notice of a claim. In this regard, there could be no ambiguity – a claim was to be submitted to a specific address within a specific time.

The court’s decision is a reminder that when it comes to proper notice, insurers should be cognizant, not just about the timeliness of transmittal, but of the channel through which the claim was submitted. Under New Jersey law, a court will not write a better policy for an insured than that which was purchased. Accordingly, American Health’s renewal application, which was not submitted to provide notice of a claim, and which was submitted to a different address than that required under the policy, did not serve as proper notice.

Blake Palmer, Esq. is an associate at Carroll McNulty & Kull LLC in Basking Ridge, New Jersey and can be reached at bpalmer@cmk.com. Palmer practices primarily in the areas of complex insurance coverage litigation and commercial litigation.