United States: Claims Made Policy's Notice Provision Enforced By Texas Appeals Court

Case:   Nicholas Petroleum, Inc. v. Mid-Continent Casualty Co.
            Court of Appeals, Fifth District of Texas at Dallas
            No. 05-13-01106-CV

The Dallas District Appeals Court of Texas recently held an Insured to the plain language notice requirements of its policy. Nicholas Petroleum purchased Mid-Continent Pollution and Environmental Damage Policies for the periods September 2007 through September 2009. The Insured also alleged that Mid-Continent had issued it an earlier policy providing coverage for the period May 12, 2006 through May 12, 2007, but it could not provide a copy of the policy.

On May 10, 2006, the Texas Commission on Environmental Quality ("TCEQ") sent a letter to Nicholas advising that subsurface contamination related to its property had been reported. TCEQ requested Nicholas to investigate the matter. On August 2, 2006, Nicholas was contacted by an attorney for the owner of the neighboring building, who advised he had been engaged to pursue claims related to the owner's lost purchase contract because the buyer backed out due to the discovery of contamination during a pre-sale inspection.

On August 23, 2006, the TCEQ sent yet another letter advising Nicholas to consult with a registered environmental consulting firm regarding the purported contamination. Similar letters were sent in July and September 2007, as well as February and July 2008. Nicholas did not respond to these letters, nor did it respond to the neighboring owner's demands.

In August 2008, the neighboring owner finally filed suit against Nicholas for damages caused by alleged migration of off-site contamination onto its property.

In September 2008, the TCEQ investigated reports of gas on the property, and determined that there was a leak in a super unleaded line. The leak was repaired in October 2008. The TCEQ directed Nicholas to contact a correction action specialist to assess the extent of contamination and submit a release report. The report issued verified the presence of contaminating chemicals, and the TCEQ again wrote Nicholas on February 5, 2009 advising of the chemical release. According to Nicholas, this was the first time it was formally notified of a release as defined under the policy. Approximately two months later, on April 10, 2009, Nicholas finally notified Mid-Continent of the litigation with the neighboring owner. Mid-Continent denied coverage based on its insured's failure to notify it of the claim within 30 days as required by the policy, as well as other exclusions.

Nicholas ultimately settled the neighboring owner's lawsuit and then filed suit against Mid-Continent for breach of contract and violations of the Texas insurance code, and breach of the duty of good faith and fair dealing. In response to Mid-Continent's motion for summary judgment, Nicholas argued a question of fact existed as to whether Nicholas' storage tanks released regulated substances before the policy periods, and that Mid-Continent failed to conclusively prove it was prejudiced by the late notice of claim.

The appeals court turned straight to the notice required under the policy and affirmed the lower court. The policy provision at issue stated:

It is a condition precedent to coverage under this Policy that: ... the Insured shall give us  written notice as soon as possible, but in any event no later than thirty (30) days after the  receipt of the Claim by the Insured. (Emphasis added.)

It was this policy language that won the day for Mid-Continent.

Relying on Prodigy Communications Corp. v. Agricultural Excess and Surplus Insurance Co., 288 S.W.3d 374 (Tex. 2009), Nicholas argued that it had given notice during the policy period and, accordingly, Mid-Continent was required to show prejudice in order to avoid coverage. Mid-Continent, also relying on Prodigy, argued that the policy at issue was different than that interpreted in Prodigy, as the policy before the court was not a Directors' and Officers' Liability policy. This, the appellate court found to be a distinction without a difference. However, Mid-Continent also argued that the language of the notice provision at issue was different as well.

The Prodigy court had found that the policy language in the D&O policy requiring notice "as soon as practicable," was not "a material part of the bargain" exchanged in the policy, such as to defeat coverage. Accordingly, the Prodigy court concluded that, as long as the insured provided notice within the policy period, despite providing notice "as soon as practicable", it could not deny coverage without showing prejudice.

The Dallas appeals court noted that the language at issue in the instant policy not only required Nicholas to provide notice of a claim "as soon as possible" (as in Prodigy), but it also required notice "... in any event no later than thirty (30) days after receipt of the Claim by the Insured." The court considered this additional restrictive language, not present in Prodigy, sufficiently different to distinguish it from Prodigy and require further analysis.

Thus, the Court applied Texas' rules of contract interpretation, stating that the parties' intent is derived from the contract itself, observing that "[W]e may neither rewrite the contract nor add to its language." The Court concluded, given the specific, undisputed and unambiguous statement that the notice provision was a condition precedent to coverage, it was a material part of the bargained for exchange in the policy. Consequently, Nicholas's failure to comply with the notice provision was a material breach of the contract: "We will neither ignore the plain language of the policy which required Nicholas to comply with the notice provision as a condition precedent to coverage nor read into the policy language requiring Mid-Continent to establish it was prejudiced by Nicholas's failure to comply." The Court concluded, because of the purpose of the claims made policy, "when there is no timely notice, there is no coverage." Nicholas' extra-contractual claims necessarily failed, as Mid-Continent properly denied its Insured's claim.

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