In PAJ, Inc. vs. The Hanover Ins. Co. 243 S.W.3d 630 (Tex. 2008) the Texas Supreme Court held that an insured’s failure to comply with a prompt notice provision in a CGL policy does not defeat coverage unless the insurer was prejudiced by the delay.
There, the insurance carrier, Hanover, provided commercial general liability insurance (CGL) coverage to PAJ, a jewelry manufacturer, who was sued for copyright infringement by a third party. While the CGL policy covered certain advertising injury, the terms of the policy required PAJ to notify it’s insurer of any claim or suit brought against it “as soon as practicable.” PAJ claimed to be initially unaware that the Hanover CGL policy provided coverage for a dispute over copyright infringement. Consequently, PAJ did not notify Hanover until several (4 to 6) months after the lawsuit was filed. The parties stipulated that PAJ did not notify Hanover “as soon as practicable” and that Hanover was not prejudiced by the delay. The trial court granted summary judgment in favor of Hanover, and the court of appeals affirmed, holding that Hanover was not required to show prejudice before it could deny coverage.
The insurer took the position that the prompt notice provision was a condition precedent to providing insurance coverage under the CGL policy. The court saw the case otherwise, noting that “when a condition would impose an absurd or impossible result, the agreement will be interpreted as creating a covenant rather than a condition.” The court concluded that a denial of coverage without a showing of prejudice would be such a result. The court stated that imposing “draconian consequences for even de minimis deviations from the duties the policy places on the insureds.” was unreasonable.
The court stated 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.” The court distinguished a 1972 case (Members Mutual Insurance Co. v. Cutaia, 476, S.W. 2d 278 (Tex.1972) which held that prejudice was not required, by stating that the Department of Insurance changed the provision in CGL policies in Board Order 23080, which mandates an endorsement to all CGL policies that requires a prejudice showing when the insured does not comply with the prompt notice provision.
The Court stated that 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. The Court felt that the failure to give notice of a claim poses a lesser risk of prejudice than the failure to obtain consent to a settlement. The Court rendered judgment that the insurer could not deny coverage because of untimely notice, and remanded the remaining issues to the trial court.
The sequelae of the Supreme Court’s PAJ decision is that PAJ has consistently made it more difficult for insurers to deny insurance coverage based on late notice in the absence of substantially convincing indications of prejudice. This interpretation has had a fairly profound impact on coverage determinations, particularly as may have related to occurrence-based policies. While the prejudice implicit in delay is not completely gone, it may well have been forgotten.
Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas insurance defense attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.