Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., # 06-0598 (Tex. March 27, 2009) see Prodigy Decision.
A little over a year ago, the Fifth Circuit Court of Appeals certified a question to the Texas Supreme Court (see my discussion at 5th Circuit Asks Texas Supreme Court to Clarify Prejudice Requirement for Late Notice Under Claims-Made Policies) , which it answered last week in the Prodigy case. The question was:
Must an insurer show prejudice to deny payment of a claims-made policy, when the denial is based upon the insured's breach of the policy's prompt-notice provision, but the notice is nevertheless given within the policy's coverage period?"
The High Court, over three dissenting Justices, held that the insurer must prove prejudice under these circumstances, even though the policy is claims-made. The distinction between an "occurrence" type and a "claims-made" type policy is crucial. "Occurrence" policies cover the insured's liability for claims asserting that the covered accident, event or conduct (the "occurrence") occurred within the policy period, without regard to when the claim was actually asserted or the lawsuit filed against the insured. By contrast, "claims-made" policies respond to claims asserted against the insured within the policy period, without regard to when the event or conduct occurred giving rise to the claim (although most claims-made policies impose a retroactive date limiting how far into the past the coverage will extend).
The Texas Supreme Court had earlier put to rest any dispute over the insurer's obligation to demonstrate that late notice caused prejudice under an occurrence type policy in the PAJ case (see discussion CGL Insurers Must Prove Prejudice to Avoid Coverage for Late Notice of Claims). By holding that the insurer must show prejudice for late notice, as long as notice is still within the policy period or any extended reporting period, the Prodigy decision seems to resolve the issue fairly.
On the one hand, the claims-made insurer retains the benefit of its bargain by being able to curtail further claims at the end of the reporting period. On the other hand, requiring the insurer to show that the delay actually prejudiced its interests prevents a harsh forfeiture of coverage yet still protects the insurer's interests.
The dissenters argued that requiring a demonstration of prejudice in effect rewrites the policy. But that argument was aired and discarded in the PAJ case.
The effect of Prodigy is that notice of a claim must now be given within the time allowed for reporting claims under the policy even if the policy requires notice as soon as practicable. Failure to provide prompt notice shifts the burden to the insurer to show that the delay actually caused prejudice.