Prodigy Comm. v. Agricultural Excess

• Decision Date: 27 March 2009
• Docket Number: No. 06-0598.,06-0598.
• Citation: 288 S.W.3d 374
• Parties: PRODIGY COMMUNICATIONS CORP., Petitioner, v. AGRICULTURAL EXCESS & SURPLUS INSURANCE COMPANY, n/k/a Great American E & S Insurance Company and Great American Insurance Company, Respondents.
• Court: Texas Supreme Court

288 S.W.3d 374

PRODIGY COMMUNICATIONS CORP., Petitioner, v. AGRICULTURAL EXCESS & SURPLUS INSURANCE COMPANY, n/k/a Great American E & S Insurance Company and Great American Insurance Company, Respondents.

No. 06-0598.

Supreme Court of Texas.

Argued April 1, 2008.

Decided March 27, 2009.

Werner A. Powers and Charles C. Keeble Jr., Haynes & Boone, LLP, Dallas, for Petitioner.

J. Richard Harmon, Jo Allison Stasney, Wade Caven Crosnoe, Thompson Coe Cousins & Irons, LLP, Dallas, Paul F. Matousek, Joseph J. Borders, Walker Wilcox Matousek, LLP, Chicago, IL, for Respondents.

Chief Justice JEFFERSON delivered the opinion of the Court, joined by Justice O'NEILL, Justice WAINWRIGHT, Justice BRISTER, Justice MEDINA, and Justice GREEN.

In PAJ, Inc. v. The Hanover Insurance Co., 243 S.W.3d 630, 636-37 (Tex.2008), we 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 involved an occurrence-based commercial general liability ("CGL") policy with a prompt-notice provision that required the insured to notify the insurer of "an occurrence or an offense that may result in a claim `as soon as practicable.'" Id. at 631-32. Noting that "the timely notice provision was not an essential part of the bargained-for exchange under PAJ's occurrence-based policy," we held that PAJ's untimely notice did not defeat coverage in the absence of prejudice to the insurer. Id. at 636-37.

Today, we decide whether PAJ's notice-prejudice rule applies to a claims-made policy when the notice provision requires that the insured, "as a condition precedent" to its rights under the policy, give notice of a claim to its insurer "as soon as practicable ..., but in no event later than ninety (90) days after the expiration of the Policy Period or Discovery Period." The parties dispute whether notice of the claim was given "as soon as practicable" but agree that the insured gave notice within the ninety-day cutoff period. The insurer also admits that it was not prejudiced by the delayed notice.

For the reasons explained below, we conclude that "notice as soon as practicable" was not an essential part of the bargained-for exchange under the claims-made policy at issue here. Following PAJ, we hold that, in the absence of prejudice to the insurer, the insured's alleged failure to comply with the provision does not defeat coverage. See id. Because the court of appeals held otherwise, 195 S.W.3d 764, 768, we reverse its judgment, render judgment that the insurer may not deny coverage based on the fact that notice was not given "as soon as practicable," and remand the remaining issues to the trial court.

I Factual Background

Prodigy Communications merged with FlashNet Communications in May 2000. At the time of the merger, FlashNet was insured under a claims-made "Directors' and Officers' Liability Insurance Policy Including Company Reimbursement" issued by Agricultural Excess & Surplus Insurance Company (AESIC).¹ In exchange for a $19,519 premium, the policy covered losses resulting from certain "claims first made" against FlashNet² and its directors and officers during the policy period of March 16, 2000 to May 31, 2000. In anticipation of its merger with Prodigy, FlashNet purchased a 3-year "Discovery Period" which, in exchange for a $93,750 premium, extended coverage under the policy to any "claims first made" against the Insureds between May 31, 2000 and May 31, 2003.³

The policy contained the following amended⁴ "notice of claim" provision:

The [Insureds] shall, as a condition precedent to their rights under this Policy, give the Insurer notice, in writing, as soon as practicable of any Claim first made against the [Insureds] during the Policy Period, or Discovery Period (if applicable), but in no event later than ninety (90) days after the expiration of the Policy Period, or Discovery Period, and shall give the Insurer such information and cooperation as it may reasonably require.⁵

On November 28, 2001, FlashNet was named as a defendant in a class-action securities lawsuit (commonly referred to as the "IPO litigation"). The underlying FlashNet lawsuit constituted a "Securities Claim first made against [FlashNet]" "during the ... Discovery Period" of the policy, as described in the insuring agreement added by Policy Endorsement 16. Prodigy was served with a copy of the complaint on June 20, 2002 and first notified AESIC of the FlashNet lawsuit in a letter dated June 6, 2003. Apparently assuming that AESIC was already aware of the underlying lawsuit, the June 6 letter requested AESIC's consent to a proposed settlement agreement of the claims brought against FlashNet, rather than purporting to provide the initial notice of the claim.

By letter dated June 18, 2003, AESIC denied coverage on the ground that the June 6 letter did not comply with the policy's notice requirements.⁶ In response Prodigy provided AESIC with formal written notice of the claim on June 26, 2003. Along with this notice, Prodigy attached a letter asserting that notice was timely because it had been sent within ninety days of the expiration of the Discovery Period. Despite Prodigy's efforts, AESIC never retreated from its no coverage stance.

II Procedural Background

Prodigy sued AESIC, seeking a declaration that Prodigy was contractually entitled to coverage. Prodigy also asserted several extra-contractual claims alleging, among other things, that AESIC violated certain Insurance Code provisions as an unauthorized surplus lines insurer and was thus liable to Prodigy for the full amount of coverage. AESIC moved for summary judgment arguing that Prodigy did not satisfy the policy's condition precedent that notice of a claim be given "as soon as practicable." Prodigy filed a cross-motion for summary judgment. The trial court denied Prodigy's motion and granted AESIC's motion in part, ruling that Prodigy failed to comply with the condition precedent of timely notice and that this failure "avoids coverage, with or without prejudice to AESIC." AESIC and Great American Insurance Company then moved for summary judgment on the remaining Insurance Code issues, and the trial court granted a final summary judgment in their favor.

The court of appeals affirmed, holding that: (1) Prodigy was required to give notice "as soon as practicable," even though the policy allowed notice within ninety days after the expiration of the discovery period; (2) notice given almost one year after the filing of the lawsuit against the insured was not "as soon as practicable" as a matter of law; (3) AESIC was not required to prove that it was prejudiced by Prodigy's late notice; and (4) Insurance Code provisions did not prevent AESIC from enforcing the policy's notice provision. 195 S.W.3d 764, 766-69. Prodigy petitioned this court for review on the issues of late notice and Insurance Code violations. We granted the petition. 51 Tex. Sup.Ct. J. 292 (Jan. 14, 2008).

III Discussion

We must decide whether, under a claims-made policy, an insurer can deny coverage based on its insured's alleged failure to comply with a policy provision requiring that notice of a claim be given "as soon as practicable," when (1) notice of the claim was provided before the reporting deadline specified in the policy; and (2) the insurer was not prejudiced by the delay.

As noted earlier, we recently held in PAJ, 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." 243 S.W.3d at 636-37. In reaching that conclusion, we followed our holding in Hernandez that "an immaterial breach does not deprive the insurer of the benefit of the bargain and thus cannot relieve the insurer of the contractual coverage obligation." PAJ, 243 S.W.3d at 631 (citing Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex.1994)). Prodigy argues that, even assuming it breached the policy's requirement that notice of a claim must be given "as soon as practicable," under our holding in PAJ, that breach was immaterial and cannot defeat coverage given AESIC's admitted lack of prejudice. See id. AESIC responds that our holding in PAJ does not control the outcome of this case for several reasons.

First, unlike the PAJ policy, this one states unambiguously that the insured's duty to give "notice, in writing, as soon as practicable" is a "condition precedent" to coverage. Importantly however, our holding in PAJ did not rest on the distinction between conditions and covenants. See id. at 633 (noting that in Hernandez "[w]ithout distinguishing between covenants and conditions or classifying the exclusion as one or the other, we concluded that the insured's breach of the settlement-without-consent provision was immaterial and thus the insurer could not avoid liability") (citing Hernandez, 875 S.W.2d at 693); see also id. at 633 n. 2 (noting that "the courts in many of the cases we cited made no attempt to classify the policy provisions as either covenants or conditions, nor did they even employ those terms"). Instead, we followed our reasoning in Hernandez, where we applied "`fundamental principle[s] of contract law,'" to hold "that when one party to a contract commits a material breach, the other party's performance is excused." Id. at 633 (quoting Hernandez, 875 S.W.2d at 692). We noted that one consideration in determining the materiality of a breach is "`the extent to which the nonbreaching party will be deprived of the benefit that it could have reasonably anticipated from full performance.'" Id. (quoting Hernandez, 875 S.W.2d at 693 (citing RESTATEMENT (SECOND) OF CONTRACTS § 241(a) (1981))). Thus, while the Prodigy policy describes the notice provision as a "condition precedent," we must go further to determine whether prejudice is, or is not, required.

This brings us to AESIC's second reason for distinguishing this case from PAJ. Unlike the occurrence-based...