Paj, Inc. v. Hanover Ins. Co.
| Decision Date | 26 August 2005 |
| Docket Number | No. 05-04-01047-CV.,05-04-01047-CV. |
| Citation | 170 S.W.3d 258 |
| Parties | PAJ, INC. d/b/a Prime Art & Jewel, Appellant v. THE HANOVER INSURANCE COMPANY, Appellee. |
| Court | Texas Supreme Court |
Baxter W. Banowsky, Banowsky Betz & Levine, P.C., Dallas, for Appellant.
R. Lynn Fielder, Fisk & Fielder, P.C., Dallas, for Appellee.
Before Justices BRIDGES, FITZGERALD, and FRANCIS.
PAJ, Inc. d/b/a Prime Art & Jewel brought suit against The Hanover Insurance Company, seeking a declaration concerning Hanover's contractual obligation to defend or indemnify PAJ in copyright infringement litigation. The parties filed cross-motions for summary judgment below concerning the interpretation of their contract for insurance. The trial court granted Hanover's motion and denied PAJ's motion. PAJ challenges those rulings in five issues in this Court. For the reasons discussed below, we affirm the trial court's order.
The summary judgment proceedings were conducted on the basis of the following facts, to which the parties stipulated for purposes of summary judgment only:
1. PAJ is a manufacturer and distributor of jewelry.
2. Hanover provided general liability insurance to PAJ from July 10, 1993, through June 10, 1999, [under identified numbered policies].
3. On or about November 23, 1998, PAJ received a demand from Yurman Designs, Inc. ("Yurman") demanding that PAJ cease and desist from its marketing of a particular product line of jewelry claiming, among other things, a copyright violation (the "Yurman Claim").
4. In December 1998, Yurman filed a lawsuit against PAJ styled Yurman Design, Inc. v. PAJ, Inc. d/b/a Prime Art & Jewel, No. 98 CV 8697, 1998 WL 34324335, filed in the United States District Court for the Southern District of New York (the "Yurman Suit").
5. The Yurman Suit alleged, among other things, that PAJ had infringed Yurman's copyright on products marketed by Yurman.
6. PAJ received notice of the Yurman Suit on or about December 8, 1998.
7. PAJ did not notify Hanover of either the Yurman Claim or the Yurman Suit until it met with its insurance agent in anticipation of renewal sometime between April and June, 1999.
8. PAJ did not notify Hanover of either the Yurman Claim or the Yurman Suit as soon as practical, rather, the delay in notifying Hanover was due to PAJ's failure to recognize that it might have insurance coverage for the Yurman Claim and/or the Yurman Suit until it met with its insurance agent.
9. Hanover was not prejudiced by the untimely notice of the Yurman Claim and the Yurman Suit.
The parties further stipulated that the only issue to be presented in the summary judgment proceeding would be whether PAJ's untimely notice to Hanover would bar PAJ's recovery under the policy as a matter of law, despite the fact that Hanover was not prejudiced by the delay. Hanover's motion argued that an insured's violation of a notice provision is sufficient on its own to bar the insured's claim on a policy. PAJ's motion argued that untimely notice could only bar a claim if the delay caused prejudice to the insurer. The trial court, with the facts and issues thus limited, granted Hanover's motion for summary judgment and denied PAJ's. The court's order expressly found that Hanover did not have to show prejudice from PAJ's untimely notice. PAJ appeals.
When both sides have moved for summary judgment and one motion is granted and one denied, we address all questions presented and render the judgment the trial court should have rendered. Lubbock County, Tex. v. Trammel's Lubbock Bail Bonds, 80 S.W.3d 580, 583 (Tex.2002).
The parties agree that the dispositive issue in this appeal is essentially the same as the issue below: whether Hanover was required to show that it had been prejudiced by PAJ's untimely notice in order to rely on that untimely notice as a defense to coverage. PAJ offers three arguments in favor of requiring such a showing of prejudice: (1) the policy's notice provision is properly classified as a covenant rather than a condition, and only a material breach of a covenant (i.e., one that causes harm) will excuse performance by the non-breaching party; (2) the notice provision's classification is ambiguous, so it should be read in favor of coverage; and (3) even if the notice provision is a condition to coverage, Texas courts have still required a showing of prejudice before untimely notice will allow an insurer to avoid a claim. We address these arguments in turn.
Initially, PAJ argues that the policy's notice provision is a covenant, rather than a condition. A condition to a contractual obligation is an act or event that must occur before there is a right to immediate performance and before there can be a breach of the contractual obligation. See Hohenberg Bros. Co. v. George E. Gibbons & Co., 537 S.W.2d 1, 3 (Tex.1976). A contractual covenant, on the other hand, is a promise to perform, and a material breach of that promise can lead immediately to liability. See McMahan v. Greenwood, 108 S.W.3d 467, 484 (Tex.App.-Houston [14th Dist.] 2003, pet. denied) (citing Centex Corp. v. Dalton, 840 S.W.2d 952, 956 (Tex.1992)). Likewise, a material breach of a covenant by one contracting party excuses the performance of the other party. Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex.1994). A material breach includes an element of harm or prejudice to the non-breaching party. Id. at 693.
The distinction between condition and covenant is significant in this case. PAJ argues the contract's notice provision is a covenant. Given that understanding, PAJ's untimely notice would excuse Hanover's performance only if the untimely notice were a material breach, i.e., only if Hanover was prejudiced by the breach. Hanover, on the other hand, argues the notice provision is a condition to Hanover's performance. Thus, under Hanover's understanding, Hanover would have no obligation to perform unless PAJ gave timely notice, and prejudice to Hanover would be irrelevant.
Texas courts have consistently held that compliance with an insurance policy's notice provision is a condition precedent to the insurer's liability on the policy. See, e.g., Harwell v. State Farm Mut. Auto. Ins. Co., 896 S.W.2d 170, 173-74 (Tex.1995) (quoting Weaver v. Hartford Acc. & Indem. Co., 570 S.W.2d 367, 369 (Tex.1978)).1 Given the settled nature of this classification, we look at the policy at issue to determine whether it expresses a clear intention to the contrary. At the outset, the policy's notice requirements fall under the heading "Commercial General Liability Conditions." The provisions require that "If a claim is made or `suit' is brought against any insured, you must ... [n]otify us as soon as practicable." Under the same heading, the policy states that no one may "sue [Hanover] on this Coverage Part unless all of its terms have been fully complied with." The placement and language of these provisions support the conclusion that the insurer's obligations are conditioned on compliance with the policy's notice requirements. Accordingly, we do not find the provisions' language to be antithetical to the well-settled understanding that notice to an insurer is a condition to the insurer's obligations under the policy. See Hohenberg Bros. Co., 537 S.W.2d at 3 (). This classification of the notice provision as a condition rather than a covenant defeats PAJ's first argument for the requirement to show prejudice from the untimely notice.
We resolve PAJ's third issue against it.
PAJ argues next that if the notice provision of the policy is not a covenant, then the language of the provision is ambiguous. An ambiguous provision in an insurance policy, according to PAJ, must be construed against Hanover in a manner that favors coverage. If the language of a policy provision is worded so that it can be given a definite or certain legal meaning, then the provision is not ambiguous and we construe it as a matter of law. American Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 157 (Tex.2003). Our review of the notice provision under settled Texas law leads us to conclude it can be given definite meaning and legal effect. In the context at issue, the definite meaning and legal effect is that of a condition precedent to coverage. PAJ argues its reading of the provision is equally reasonable and plausible. We disagree, and a provision is not ambiguous merely because the parties offer conflicting interpretations. Id.
PAJ's fourth issue is not well-taken.
Finally, PAJ argues that even if the notice provision is an unambiguous condition precedent, Texas law still requires Hanover to show prejudice before it can defend on untimely-notice grounds. There are some cases decided under Texas law that classify a notice provision as a condition, but still require the insurer to show prejudice before violation of the condition becomes an effective defense. See, e.g., Harwell, 896 S.W.2d at 173-74 (). Accordingly, although we have determined the relevant notice provision is an unambiguous condition, we must look to Texas courts' treatment of similar provisions to determine whether a showing of prejudice might still be necessary.
In 1972, the Texas Supreme Court confirmed that if an insured breached the condition precedent regarding notice, then "liability on the claim was discharged, and harm (or lack of it) resulting from the breach was immaterial." Members Mut. Ins. Co. v. Cutaia, 476 S.W.2d 278, 279 (Tex.1972). The insured's failure to perform the condition was treated as an absolute defense to liability on the policy. When asked to imply a requirement to...
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