Virtually all insurance policies contain provisions requiring timely notice to the insurance carrier—sometimes “prompt”, sometimes “as soon as practicable” and sometimes “immediate—of events that could give rise to a claim. On January 11, 2008, the Texas Supreme Court held that “an insured’s failure to timely notify its insurer of a claim or suit does not defeat coverage if the insurer was not prejudiced by the delay.” PAJ, Inc. v. The Hanover Ins. Co., No. 05-0849, 2008 WL 109071 (Tex. Jan. 11, 2008). The 5-4 decision resolves a series of conflicting decisions in Texas and marks Texas’ conformity with a majority of jurisdictions adopting the modern trend requiring proof of carrier prejudice in late-notice cases.
The five justice majority rejected the lower court’s conclusion that a Texas Board of Insurance “prejudice” rule, which only applied to bodily injury and property damage liability claims, meant that the thirty-five year old ruling in Members Mut. Ins. Co. v. Cutaia, 476 S.W.2d 278 (Tex. 1972) required strict compliance with a notice in other types of cases, such as the “advertising injury” claim at issue in PAJ. The Court concluded that the outcome was not governed by Cutaia, but by its more recent decision in Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691 (Tex. 1994) holding that an insurance carrier could not rely on an “immaterial breach” of a policy provision (in that case a “settlement without consent” exclusion) to bar coverage. The PAJ Court agreed with the policyholder that “only a material breach of the timely notice provision” would bar coverage. The Court also rejected the carrier’s arguments distinguishing “conditions precedent” from “covenants” and conditions from exclusions, which the Court construed as “in effect two sides of the same coin,” one side barring coverage “if the insured does something” and the other barring coverage “unless the inured does something,” such as failing to comply with a notice clause.
The Texas Supreme Court’s ruling eliminates what the majority concluded could be a “draconian” forfeiture of coverage for even a “de minimis deviation” from the policy notice requirements. However, notice clauses should not be ignored. This is especially true in those states, including Georgia and New York among others, in which timely notice is considered a condition precedent that can bar coverage without any showing of carrier prejudice. See Board of Education of Township High School District No. 211, Cook County, Illinois v. TIG Insurance Co., No. 1-05-1732, Ill. App., 1st Dist.; 2007 Ill. App. LEXIS 1365 (Ill. App. December 27, 2007) (construing “immediate notice” clause). In those states, only a few months (sometimes less) delay in notifying the carrier of an occurrence or a default, with copies of the summons and complaint, might still bar all coverage. Moreover, while not considered in PAJ, the carrier’s burden of showing prejudice is not insurmountable, especially if, as a result of the delay in notice, important evidence is lost or destroyed or witnesses become unavailable. Because delay in sending timely notice can still be a valid basis for denying or restricting coverage, policyholders should send timely notice to their carriers of all events that could give rise to actual or potential claims that might trigger the policy coverage. Timely notice will not guarantee coverage, but it will eliminate one of the most common bases for denying it.