In its recent decision in St. Paul Surplus Lines Ins. Co. v. Davis Gulf Coast, Inc., 2012 U.S. Dist. LEXIS 81719 (S.D. Tex. June 13, 2012), the United States District Court for the Southern District of Texas had occasion to consider the enforceability of a provision requirement reporting of a pollution condition within ninety (90) days.
The insured, Davis Gulf Coast, operated an oil and gas lease on Matagorda Island in Texas. Davis’ general liability policy, issued by St. Paul, had a pollution exclusion with a sudden and accidental cleanup cost exception, thus granting coverage for cleanup costs associated with a “sudden and accidental pollution incident,” defined by the policy as:
Sudden and accidental pollution incident means the discharge, dispersal, escape, or release of a pollutant that:
• is sudden and accidental;
• begins on a specific date and at a specific time while this agreement is in effect;
• is first known within 30 days of its beginning by you or any of your employees, your operating agent or any of its employees, or your pumper-gauger or any of its employees;
• any protected person, your operating agent, or your pumper-gauger attempts to end as soon as possible after it first becomes known by you or any of your employees, your operating agent or any of its employees, or your pumper-gauger or any of its employees; and
• is reported to us within 90 days after it first becomes known to you or any of your employees, your operating agent or any of its employees, or your pumper-gauger or any of its employees. (Emphasis supplied.)
Thus, by its express terms, “sudden and accident pollution incident” is defined as a discharge, dispersal, release, etc. that becomes known to the the insured within thirty (30) days of its commencement and that it is reported to St. Paul within ninety (90) days of such knowledge. At issue before the court was Davis’ reporting of a pollution incident some two hundred days after it learned of the incident. Davis and St. Paul agreed that this delay was a breach of the ninety-day reporting requirement. Davis nevertheless argued that its non-compliance should be excused absent prejudice to St. Paul.
Applying Oklahoma law, the court agreed that the timing elements of the definition of “sudden and accidental pollution incident” (both as to learning of the release and reporting same) were not generic notice requirements, but instead were “an integral part of the definition of the risk covered.” The court contrasted this with the notice provision applicable to the remaining coverages under the policy (i.e., bodily injury, property damage, and personal and advertising injury), which required only notice “as soon as possible.” The court therefore concluded that there was an internally consistency within the policy of treating the cleanup cost coverage differently than the other risks covered under the policy, and that it would be improper to rewrite the policy so as to ignore the ninety (90) day reporting requirement.
More significantly, the court rejected Davis’ argument that the Oklahoma body of case law concerning the notice-prejudice rule should be applied. The court observed the ninety-day reporting requirement for cleanup cost coverage to be more akin to claims made coverage rather than occurrence-based coverage, and as such, case law concerning the latter were not relevant. Moreover, the court found the ninety-day reporting requirement consistent with the risk offered and the premium charged, explaining:
It is common knowledge that oil and gas pollution clean-up costs can be enormous, and any comprehensive general liability occurrence policy with open-ended liability for that risk would undoubtedly carry with it a commensurately enormous premium. The bargain struck here by Davis and St. Paul is quite different. Davis acquired insurance only for pollution clean-up costs arising from a release of a pollutant that is "sudden and accidental," beginning on a specific date and time, which becomes known to the insured within 30 days of the release and is reported by the insured to St. Paul within 90 days after the insured learns of it. Thus, St. Paul by definition effectively assumed a rolling window of exposure for a maximum of 120 days after the date of any sudden and accidental pollution incident. Concomitantly the premium for such limited and narrowly-defined pollution clean-up costs, in the words of Judge Cauthron of the Western District of Oklahoma, would be "much more reasonable and thus affordable." Id. In sum, the 90 days reporting requirement at issue here is not a general notice provision that requires the insurer to show prejudice if the insured does not comply, but rather, in language approved by Oklahoma caselaw, is "a definition of coverage."
In reaching its decision, the cited favorably to other cases from the Fifth Circuit that declined to apply a prejudice requirement where the insured failed to comply with a strict reporting requirement. See, e.g., Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999) (agreeing that insured’s eight day delay in reporting pollution incident negated coverage regardless of prejudice); Certain Underwriters at Lloyd's London v. C.A. Turner Constr. Co., 112 F.3d 184, 189 (5th Cir. 1997).