A New Landscape: Notice and Prejudice in Texas
In the past few years, the Texas Supreme Court has repeatedly addressed the meaning and operation of policy conditions. Perhaps nothing has received as much attention as the conditions relating to notice of an occurrence, claim or suit, and the obligation to forward suit papers under liability policies. As the rules are changing, or at least becoming more defined, a quick review of the new landscape is in order.
In Nat’l Union Fire Ins. Co. v. Crocker, on certified question, the Supreme Court concluded that an additional insured is not entitled to coverage, where it failed to provide notice or forward suit papers to the insurer. [246 S.W.3d 603 (Tex. 2008)]
In Crocker, an insured employee failed to provide notice or suit papers, and failed to respond to repeated communications from the insurer. Ultimately, a default judgment was taken. The Court concluded there was a breach of the policy conditions that defeated coverage. The Court reached this conclusion despite the fact that the insurer was well-aware of the occurrence and suit, and was, in fact, defending the named insured. Moreover, the Court found that the additional insured’s knowledge that it might be entitled to coverage was also irrelevant, and that an insurer has no duty to advise an insured that it might be entitled to coverage.
Now, in a recent case, a court of appeals has expanded this reasoning to conclude that it applies equally to a named insured. [Jenkins v. State and County Mut. Fire Ins. Co., 2009 Tex. App. LEXIS 4217 (Tex. App. – Ft. Worth, June 11, 2009)]. That is, the insurer’s knowledge of a suit against the named insured does not the excuse the insured’s compliance with the policy conditions, including timely notice and forwarding of suit papers.
In Jenkins, there was an issue as to whether the defendant was actually a named insured or an additional insured. The court of appeals concluded it didn’t matter.
At the same time, however, the Texas Supreme Court has made it abundantly clear that any policy condition is subject to requirement of prejudice or materiality before a breach of the condition will defeat coverage. While the prejudice requirement was originally based on a Board Order that applied only to certain coverages, the Court has expanded the prejudice requirement to other conditions and to other coverages.
In Hernandez v. Gulf Group Lloyds, the Court held a breach of a settlement — without consent provision — was subject to a materiality requirement. [875 S.W.2d 691 (Tex. 1984)] In PAJ, Inc. v. Hanover, the Court concluded that personal and advertising injury claims under Coverage B, while not within the scope of the original Board Order, were still subject to a prejudice requirement. [243 S.W.3d 630 (Tex. 2008)]
A Lingering Issue
The Court also has addressed the lingering issue of how the notice and prejudice requirements apply under claims made policy. Texas courts have long recognized that the basic distinction between claims made and occurrence based policies, and the distinction that usually affects the premium, is the ability of the claims made insurer to limit and quantify loss, because coverage extends only to claims made during the policy period. [Cf. PAJ, Inc., supra; Prodigy Communications, infra.]
In addition, however, most claims made policies also require that notice must be made “as soon as practicable.” The Supreme Court has recently reiterated that the claim must be made within the policy period, and that is an absolute requirement of coverage, and not simply a condition. Where coverage is within the policy period, but not timely, however, the Court has extended its reasoning regarding materiality or prejudice to any breach of a condition, and has concluded that late notice, within the policy period, may nevertheless give rise to coverage where the insurer cannot demonstrate prejudice. [See Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 52 Tex. Sup. Ct. J. 475 (Tex., Mar. 27, 2009); Financial Industries Corp. v. XL Specialty Ins. Co., 2009 Tex. Sup. Ct. J. 486 (Tex., Mar. 27, 2009).]
Accordingly, late notice is always better than no notice at all. While an insurer may reserve rights on late notice, it may be difficult to establish prejudice where there no liability defenses, or where a defense is that no evidence has been preserved, and all witnesses remain available. At a minimum, it is also that prejudice would be a fact issue and not an absolute defense.
There are still consequences to untimely notice, regardless of prejudice. For instance, the insurer will not owe any attorney’s fees incurred prior to notice and tender of defense. [Crocker, supra.]
As the Court noted in Jenkins, however, there is a difference between late notice and no notice. Although the court of appeals held that knowledge did not preclude prejudice, and the default against the insured was prejudice as a matter of law, it also suggested the breach itself might be sufficient. In other words, where there is no notice, there is no duty, no prejudice requirement, and, ultimately, no coverage.