In a recent decision, the Fifth Circuit considered when the 18 percent damages interest under the Texas Prompt Payment of Claims Act (Prompt Pay Act) accrues and whether an insurer can waive a policy’s one-year cost reporting requirement.
This coverage action arose out of pollution cleanup costs Cox Operating, L.L.C. incurred in complying with federal statutes and regulations after Hurricane Katrina damaged its facilities in Louisiana. Cox was insured by St. Paul under primary commercial general liability and umbrella excess liability policies. Cox notified St. Paul of the claim on October 17, 2005, but St. Paul did not request any invoices or other documents until July 24, 2006. In response, Cox submitted invoices and statements in excess of $15,000,000. Cox completed its cleanup work in September 2007.
After paying $1,480,395, St. Paul – under its excess policy – initiated a declaratory judgment action and denied the claim on August 30, 2007 on the basis that the remainder of the invoices were not timely submitted. Cox counterclaimed for breach of contract and violation of the Prompt Pay Act. After a lengthy trial, the jury rendered a verdict awarding Cox more than $9.4 million in damages.
The jury found that St. Paul did not start its investigation of Cox’s claim or request all items, statements and forms required from Cox within 301 days of receipt of the notice of the claim in violation of § 542.055(a). By failing to do so, the district court reasoned, St. Paul had “signaled” to Cox that notice of the claim was all the information needed. Based on the jury’s finding, the district court assessed the statutory 18 percent interest starting 60 days after St. Paul’s receipt of the notice of the claim. St. Paul only argued on appeal that the statutory interest did not accrue until 60 days after it received sufficient information to adjust the claim, which should be determined on an invoice-by-invoice basis. The Fifth Circuit disagreed.
Making an Erie guess, the Fifth Circuit held that the violation of any of the Section 542.055 acknowledgement of claim notice deadline under the Prompt Pay Act starts the accrual of interest under § 542.060. The court explained that the statute provides that the statutory interest applies to an insurer that is not in compliance with the subchapter, which includes any of the three prompt pay deadlines. Holding otherwise, the court explained, would make the other deadlines inconsequential.
With respect to coverage, St. Paul challenged the district court’s award of the pollution cleanup costs which were not reported within the excess policy’s one-year reporting requirement. The district court found that the reporting requirement was a condition precedent to coverage that was waived when St. Paul denied the claim. Citing to Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999), St. Paul argued that the district court erred because this reporting requirement relates to the scope of coverage and cannot be waived.
The Fifth Circuit rejected this argument and explained that whether a policy provision is a condition that can be waived is determined by the “objective intent” of the parties by reviewing the policy as a whole. The court found that the excess policy language did not unambiguously state that the reporting requirement defined the scope of coverage.
In addition, the Fifth Circuit explained that, unlike the reporting requirement in Matador, this provision related to the insured’s reporting of costs and not the reporting of the incident. The court held that the one-year reporting requirement is unlike a reporting provision in a claims-made policy and does not restrict the insurer’s liability to an ascertainable time frame. Rather, the St. Paul provision only required that Cox report the pollution cleanup costs within one year “of the ending date of that pollution work.” The Fifth Circuit, therefore, held that the one year reporting requirement was a condition precedent that could be waived.
The opinion leaves significant questions for carriers with first party type damages payable by their policies. Two of these include: (1) the court was not asked, and did not specifically address, whether the Prompt Pay Act applies to a claim for pollution cleanup under a CGL policy and (2) whether the deadlines of the Prompt Pay Act were initiated for St. Paul’s excess policy only because it also had the primary coverage. The case is reported as Cox Operating LLC v. St. Paul Surplus Lines Ins., Case No. 13-20529, (5th Cir. (Tex.) July 30, 2015).
1Because St. Paul was a surplus lines carrier, the initial time to acknowledge and commence the investigation was 30 days instead of 15 days. The opinion does not explain why the 15-day extensions for a Catastrophic Loss were not applied to the statute’s deadlines.
