Starr Indemnity & Liability Co. v. SGS Petroleum Service Corp., No. 12-20545 (5th Cir. June 18, 2013)
When does an insured's failure to send timely notice of a claim allow a liability insurer to deny coverage altogether? For the last 5 years, ever since the Texas Supreme Court held in PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008) that an insurer could not use late notice as a basis for denying coverage under an "occurrence-based" liability policy unless it could show that late notice caused prejudice, many of us have grown complacent and forgotten that not all liability policies are occurrence-based. "Claims-made" policies may not follow the PAJ pattern, as the present case reminds us.
Occurrence vs Claims-Made Policies. Most CGL polices are occurrence-based and cover claims resulting from accidents that "occurred" within the policy period, usually year to year. So if I negligently cause injury to someone in 2011 who sues me in 2013, my 2011 occurrence-based CGL policy will cover me for that 2013 lawsuit. By contrast, a claims-made policy issued to me for the period January 1, 2013 through January 1, 2014 will cover me for lawsuits brought within that period, regardless of the year of the accident or event.
The PAJ court had held that the requirement in an occurrence-based policy that the insurer must receive notice of a claim "as soon as practicable" should be treated as a "covenant," not as a "condition precedent," that is, it is a mere low-level term, like most other terms in an agreement, and is not a core basis of the agreement. Of course the insurer must be notified of a claim, but the insurerd's failure to do so promptly will excuse the insurer from covering the claim only if the late notice was "material," i.e., it materially prejudiced the insurer's ability to defend the lawsuit. This can usually happen only if the insurer is not notified until after, or very close to trial.
However, courts treat claims-made policies differently. Claims-made insurers are understood to value as a core term of the agreement the ability to close their books on a policy as soon as the notice period has expired, which is soon after the policy period. Thus knowing that the insurer is on the hook for possible claims for only the policy period is considered a basis for the bargain, not just one term among many, and the insured's failure to send notice within that time is treated as an absolute condition precedent. Failure to meet this condition, excuses the insurer from further obligations.
Pollution Buy-Back Endorsement. The policy in this case was occurrence-based. Thus, had SGS negliently injured a third party who sued for damages, SGS could have submitted the claim several months too late and still have received coverage unless Starr could show prejudice. However, this was a pollution claim, and the policy contained a standard absolute pollution exclusion. SGS was in the business of hauling toxic chemicals for petrochemical companies. Like many in this industry, SGS purchased what is known as a pollution buy-back endorsement. For an additional premium, SGS purchased coverage for certain pollution liabilities. In return for assuming these dreaded pollution liabilities, Starr put certain limitations on the coverage, including the requirement that SGS notify Starr within 30 days of SGS's learning of the pollution event.
In fact, SGS did not notify Starr until about 50 days after leaning of the event. Starr refused coverage. Coverage lawsuit followed. Now this is not the first case to adress this very issue. In Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999), the Fifth Circuit held that the narrow notice window in a pollution buy-back endorsement should not be treated the same as the policy's general notice provision but rather should be viewed like a claims-made policy, as a specially negotiated provision in which the narrow notice window was part of the basis for the bargain, hence, a condition precedent. Nevertheless, since 1999, the Texas Supreme Court had issued PAJ and other notice cases, so SGS asked the court to please reconsider if Matador still governed this issue.
Not surprisingly, the SGS Court found that the parties' interests and intentions in negotiating the pollution buy-back endorsement were unchanged, and the insurer was still entitled to enforce the 30-day notice window strictly. In fact, the SGS Court noted that the PAJ Court had cited Matador approvingly, "to explain why a general notice requirement in an occurrence-based policy is not an essential part of the bargained-for exchange." Coverage denied.
So, risk managers take heed. The rule of thumb should always be to give notice early and often. There seems to be a certain reluctance out there to send notice of a claim before absolutely necessary. In this case, Starr was an excess-layer insurer, and SGS believed, wrongly, that it could dispose of the claim within its primary layer of coverage. The concern seems to be that the insurer might refuse to renew the policy if it receives notice of a potential claim. In my experience, however, notice of a potential claim that never materializes into a full-blown lawsuit never crosses the radar screen of the underwriting department, so mere notice of the event shouldn't provoke an adverse renewal decision. But which is worse for risk management, to incur the possible displeasure of the insurer's underwriters or to lose millions of dollars in coverage?