TEXAS S. CT. HOLDS THAT VIOLATING "AS SOON AS PRACTICABLE" CLAIM NOTICE REQUIREMENT IN D&O POLICY DOES NOT VOID COVERAGE

On March 27, 2009, the Texas Supreme Court issued a major ruling dealing with policy language applicable to many directors and officers’ liability insurance contracts. Many directors and officers (“D&O”) liability insurance contracts contain a requirement that the insurer must give written notice of any claim made during the policy period (or some related time period) “as soon as practicable”. Many policies refer to this “notice of claim” provision as a condition precedent to the insured’s rights under the policy. Normally, “conditions precedent” are events which must occur in order for a party’s rights to come into being.

Despite similar language in the policy at issue before the Texas Supreme Court, that court held in Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Company, 52 Tex.Sup.Ct.J. 475 in favor of an insured who waited more than a year to report a claim. The parties admitted that the claim was not reported “as soon as practicable”. However, the Texas Supreme Court held that in the absence of prejudice to the insurer, “a claim which was reported within a claims cutoff period established in a claims-made policy was timely, even though it was not reported as soon as practicable.”

The Texas court reasoned that in claims-made policies, a notice provision requiring that a claim be reported to the insurer during the policy period defines the scope of coverage and failure can thus prevent coverage. The court reasoned that by this means a policy provides a certain date after which an insurer knows it is no longer liable under the policy. In contrast, a provision that a claim be reported “as soon as practicable” affects the insured’s duty to cooperate in assisting the insurer to investigate, set reserves, and participate in negotiations with the party asserting the claim against the insured. Thus, unless the insurer is prejudiced by notice which is not made as soon as practicable, there is no reason to negate coverage for late but non-prejudicial notice.

It is important to note that this holding deals with claims-made policies, not occurrence policies. Claims-made policy state that coverage is afforded during the policy period for claims made during the policy period. Thus, coverage is retroactive to dates before the policy period but not prospective coverage. In contrast, an occurrence policy provides unlimited prospective coverage, and no retroactive coverage. Most D&O policies and professional malpractice policies are claims-made policies, while CGL (commercial general liability) policies are occurrence policies.

In 2001, the Colorado Supreme Court adopted the notice-prejudice rule in Colorado as it applies to uninsured motorist (UIM) cases. In a lengthy opinion, the Colorado Supreme Court analyzed the evolution of the notice-prejudice rule throughout the country. In changing the rule the court observed that Colorado was one of only two states whose supreme court had considered the issue within the past twenty (20) years and not required a showing of prejudice to void coverage where notice is given late. The Colorado court observed that an insurer is prejudiced by delayed notice only when this delay compromises its ability to investigate or defend the claim. Clementi v. Nationwide Mutual Fire Insurance Company, 16 P.3d 223 (Colo. 2001). Under the Clementi rule, courts use a two-step process in late notice cases. First the courts determine whether the notice was untimely and the delay unreasonable. Second they determine whether the delay prejudiced the insurer. The insurer has the burden of proving it was prejudiced.

In 2005 the Colorado Supreme Court held that the notice-prejudice rule applies to liability policies as well. See Friedland v. Travelers Indemnity Co., 105 P.3d 639 (2005). Friedland dealt with a notice that was given after the insured had defended and settled its liability case. For such post-settlement notice cases, the court adopted a presumption of prejudice in favor of the insurer, placing the burden on the insured to show that the late notice did not prejudice the insurer.
Presumably, the Colorado Supreme Court would apply the notice-prejudice rule to a directors and officers’ liability policy, following Friedland. See, e.g., Board of Directors, Metro Wastewater Reclamation District v. National Union Fire Insurance Company of Pittsburg, PA, 105 P.3d 653 (Colo. 2005) (case sought advisory opinion and did not present actual case or controversy, where Wastewater Reclamation District had solicited a policy but had no intent of entering into it and filed case to obtain a declaratory judgment for future guidance).

Posted By: Wesley B. Howard, Esq.