The 5th Circuit rebuffed an insured’s attempt to circumvent policy language requiring notice within 30 days of a pollution occurrence in a bumbershoot (umbrella) policy in Starr Indemnity & Liability Company v. SGS Petroleum Service Corporation. The insured argued that the insurer could not show prejudice because it was only 59 days late in providing notice and only recently had become aware that the amount of the damage would reach into the insurer’s layer of coverage.
The policy in question had initially contained a pollution exclusion but the insurer and the insured added a pollution ‘buy back’ endorsement that deleted the pollution exclusion and replaced it with a condition laden pollution coverage that provided the exclusion would not apply if the insured reported, in writing, the discharge, dispersal, release or escape within 30 days after the occurrence became known to the insured.
In early November 2010, an accidental release of meta-toluene diamine occurred. The insured timely reported the loss to its primary carrier and estimated that the loss would be within the primary carrier’s coverage level. In very late December 2010, the insured realized that the loss would exceed its primary limits. This was 59 days after the insured first learned of the loss. A few days later, the insured notified its excess insurer of the loss.
A few months after it received notice, the excess insurer filed a declaratory judgment action seeking a determination that its policy did not apply because of the late notice by the insured. The excess insurer thereafter moved for summary judgment. In response, the insured argued that the 30-day requirement was a covenant and not a condition precedent, that the excess insurer was not prejudiced, and the insured also cross-moved for summary judgment.
The trial court, relying almost exclusively upon the 5th Circuit’s prior decision in Matador Petroleum v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999) granted the excess insurer its summary judgment. In Matador, the insured had reported a loss only eight days late and had argued that St. Paul had not been prejudiced, distinguishing between “occurrence” policies and “claims-made” policies and noting that both parties were sophisticated commercial entities. The trial court noted that the fact pattern in SGS and in Matador were very similar.
The insured argued that the Texas Supreme Court had changed the law pertaining to notice requirements in PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008) and Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex. 2009).
The 5th Circuit rejected this argument noting that neither the policy in PAJ nor in Prodigy involved a negotiated buy back provision. The 5th Circuit noted that although in PAJ the Texas Supreme Court recognized a trend toward requiring proof of prejudice in situations where the policy was a non-negotiated policy, that the policy issued by the excess carrier in this instance was a specially negotiated buy-back of pollution coverage with a strict time period for reporting and thus PAJ was not controlling. Moreover, the 5th Circuit noted that the Texas Supreme Court had cited Matador with approval, significantly undercutting the insured’s argument.
Under somewhat similar reasoning, the 5th Circuit also rejected the insured’s argument that Prodigy required the excess carrier to prove prejudice, noting that the policy language required notice “as soon as practicable” but in no event later than 90 days after the expiration of the policy. Although it was not disputed that Prodigy had failed to give notice “as soon as practical” it had given notice within 90 days of the policy’s expiration date and there was no evidence that the as soon as practical language was a separately negotiated term of the policy.
Finally, the 5th Circuit summarily rejected the insured’s other arguments, including that Matador involved a primary policy while the excess insurer had issued a bumbershoot policy, that the notice language in the main portion of the policy only required notice “as soon as reasonably practical,” and that because the insurer was not required to assume the defense of the insured that the notice requirement had no material purpose.
The take away from SGS is that the 5th Circuit is going to strictly construe notice requirements against the insured where the reporting term is specifically negotiated beyond the boilerplate terms of a policy.