PAJ, Inc. v. Hanover Insurance Co.

context, applies doctrine pur its PAJ, INC., Prime

poses have Art been served. The fíled-rate d/b/a Jewel, Petitioner, assures, first, doctrine & that the reasonable regulated ness of rates is determined sole v. ly by the appropriate regulatory authority. THE HANOVER INSURANCE Worldcom, Inc., Corp.

See Mincron SBC COMPANY, Respondent. (Tex.App.-Houston pet.) (citing Keogh [1st Dist.] No. 05-0849. Chicago Ry. & Nw. 260 U.S. 161- Supreme Court of Texas. (1922)). 43 S.Ct. 67 L.Ed. 183 Sec ond, the doctrine assures that rates im Argued Oct. 2006. posed on consumers are nondiscriminato Decided Jan. ry. Id. Both of purposes these been have Here, satisfied this instance. Rule 5.205 Rehearing Denied Feb. was adopted by the Commissioner his rate-regulatory capacity under several pro Code, including

visions the Insurance And, article 5.101 and article 5.98.5 said, have the rule establishes a mecha nism provide nondiseriminatory protecting rates while insurers’ constitu tional rights. While the rule allow charge policyholders

insurers to more $1 than rate, 30% above the my benchmark view the rule objectives harmonizes the

underlying 5.101, the ATPA and article provided

and therefore the insurers a valid pass-through charge. basis for the See R.R. Comm’n Tex. v. Lone Star Gas Conse quently, I concur in judgment, the Court’s join but I opinion. do Code, give 5. Article 5.98 authorizes the Commissioner to anee one of which was to adopt appropriate power just reasonable rules to accom- Board of Insurance the to fix plish purposes chapter 5 of the Insur- reasonable automobile insurance rates. under coverage a claim defeats insurer of prejudiced insurer was not if the hold, did delay. We that an Group Lloyds, Hernandez Gulf deprive immaterial not breach does bargain the benefit of insurer of the con- the insurer of thus cannot relieve 875 S.W.2d coverage obligation. tractual Accordingly, we re- judgment, ren- appeals’ court of verse the not that the insurer could judgment der notice, untimely deny coverage because issues to the remaining and remand court. trial

I.

PAJ, Inc., manufacturer and jewelry distributor, gener- a commercial purchased (“CGL”) Hanover liability al from covered, among Company Insurance advertising inju- things, other for notify ry. policy required The PAJ brought or suit any Hanover of claim against practicable.” “as soon as PAJ Designs, Yurman Inc. demanded marketing jewelry a particular PAJ cease Levine, Banowsky, Baxter W. Scott D. line, copy- later sued and month PAJ Levine, P.C., Banowsky, Betz & Dallas infringement. Initially unaware right TX, for Petitioner. dispute, PAJ policy covered the the CGL P.C., Fielder, Fielder, Lynn R. Fisk & until notify Hanover of the suit did not Jr., Sidney Bernays H. Davis Touchstone litigation com- four to six months after TX, Smith, LLP, Beall & Dallas Johnston menced. for Respondent. against Hanover brought PAJ this suit McCarroll, Bloch, Elizabeth Brown Hanover was seeking a declaration that Austin, Wulff, L.L.P., B. Frederick in- contractually obligated to defend and LLP, Dallas, Douglas Luce Al- Hughes & suit, and demnify copyright in the PAJ exander, Alexander Dubose Jones & extracontractual claims. asserting several Austin, TX, Townsend, LLP, Amicus failed to stipulated that PAJ parties Curiae. claim “as notify Hanover of the Yurman was and that Hanover practicable” soon as opinion Justice O’NEILL delivered the untimely notice. by the prejudiced not Court, of the Chief Justice which summary judg- moved for parties Both JEFFERSON, BRISTER, Justice Justice on these on the notice issue based ment MEDINA, joined. and Justice GREEN granted The trial court undisputed facts. PAJ’s, and denied hold- case, Hanover’s motion In this we must decide wheth required to dem- notify ing that Hanover was timely er an insured’s failure to onstrate to avoid insured to forward required Cutaia The court appeals immediately to the insurer papers affirmed. suit granted 259. We lie provided PAJ’s that “no action shall petition for review to unless, determine the effect as a against [insurer] the condition on coverage when an thereto, insured fails to time- precedent there shall have been ly notify its insurer of a claim but the compliance full the of this with all of terms insurer suffers no harm as a added). result. policy.” (emphasis Id. at 278 The papers to

insured failed to forward the suit his insurer until after the oc five months II. question. Stip currence in Id. at 278-79. The policies Hanover issued to PAJ harm, had no the ulating that it suffered provide coverage “advertising injury,” liability, contending insurer denied a condi which the policy defines to injury include precedent coverage tion had not been arising out of copyright infringement. agreed that met. Id. at 279. We policy The prompt-notice contains a provi timely comply failure to with the insured’s requires sion that notify PAJ to Hanover policy’sforwarding precluded condition of an occurrence or an offense that may liability prejudice whether or not insurer’s result a claim “as practicable.” soon as emphasized But we Id. at 281. resulted. parties dispute The policy’s whether the injustice which results apparent “the prompt-notice requirement constitutes a case,” and deferred consid this particular precedent condition merely or a covenant. to the Board of eration of the issue State Hanover policy contends the language cre Id. Legislature. Insurance or the precedent, ates the failure of which coverage defeats under the responded Board of Insurance The State irrespective prejudice to the insurer. very year by issuing Board Order next See Hohenberg Bros. v. George Co. E. Gib mandatory en- requires which (Tex.1976). bons & 537 S.W.2d policies dorsement to all Texas CGL PAJ, hand, on the other contends the in- precludes for an forfeiture prompt-notice language creates a cove notice or comply sured’s failure to with nant, the breach of perform which excuses the insurer is forwarding conditions unless only ance if the breach is “material.” See Board of prejudiced thereby. State See Dalton, Corp. Centex 840 S.W.2d Insurance, Standard Revision PAJ further asserts that Liability Poli- Provision For General even if language creates a condi Endorsement-Notice, Amendatory cies— tion coverage, Texas law (Mar. 13,1973). Order No. 23080 requires nonetheless an insurer to demon The endorsement provides: strate it may before avoid cover age based on untimely notice. agree We respects bodily injury liability As cover- with PAJ that a material breach of age liability cover- property damage timely provision will excuse age, prejudiced by company unless the performance Hanover’s policy. comply the insured’s failure to with the

requirement, any provision of this III. requiring give the insured to notice of loss, pins analysis action, Hanover on our requiring decision occurrence or or demands, notices, in Members Mutual Insurance Co. v. Cut the insured to forward aia, (Tex.1972), 476 S.W.2d 278 and that is legal process, summons or other shall begin. where we will at issue bar under this consider, among other said, that, time courts must to note at the Id. important It is created this Board of Insurance the non- the State to which things, “the extent endorsement, cover- there was standard of the deprived will be breaching party injury.1 advertising age antic- reasonably it could have benefit that 2B080 after Board Order Two decades Id. at 693 performance.” from full ipated effective, we decided Hernandez. became (citing Restatement (Second) of CONTRACTS There, insured 241(a) (1981)). distinguishing § Without sought recovery under the uninsured/un- or clas- covenants and conditions between of an auto- derinsured motorist other, one or the sifying the exclusion as liability denied policy. mobile The insurer of that the insured’s breach concluded we had settled the under- because the insured provision the settlement-without-consent the insurer’s consent lying claim without the insurer could was immaterial and thus policy’s of the “settlement without violation Id. at liability policy. under the not avoid Applying exclusion. “fundamen- consent” Notably, recognized that “[m]ost 694. we law,” held principiéis] tal of contract we with this is- jurisdictions presented other commits party that when one to a contract re- imposed prejudice sue have likewise breach, party’s per- a material the other public policy on quirement, primarily Id. at In de- formance is excused. 692. dis- Id. breach, at 693 n. 4. The sole materiality grounds.”2 of a we termining Office, 1255, (1988) ("ISO”) (noting the insurer’s 1. The Insurance Services Inc. industry organization responsible argument compliance for with the consent- is the that issuing nearly prece See all standard CGL forms. a condition to-settlement clause was Martin, al., Jr., Coverage Ernest et Insurance recovery holding the insurer dent to but Trade the New Breed Internet-Related prejudice material in order must demonstrate of Claims, Infringement mark 54 SMU L. REV. rely that violation as an affirmative on 1973, (2001). Co., 1984 The standard 1973 ISO defense); Mann Ins. 324 Silvers v. Horace coverage only "bodily inju provided form (1989) (holding S.E.2d 26 N.C. 378 ry” "property damage,” did and not itself timely precedent concerning that conditions "advertising injury.” cover Id. at 1988. Not greater scope given than notice will not be “advertising until 1981 did the ISO issue an purpose, is to required to fulfill their which injury” Comprehensive Broad Form General ability by pre protect to defend the insurer’s pur Liability that could be Endorsement ability investigate acci serving fully supplemental chased as a endorsement to the Ezell, dent); S.W.2d Newark Ins. Co. v. 520 1986, sweeping 1973 Id. at form. (Ky.1975) (stating that an insurer changes were made to the ISO CGL noncompliance rely upon insured’s cannot form, "advertising injury” coverage was coverage to avoid if with a incorporated body into the of the form. Id. at prejudice be insurer has sustained no 1992. Since October the ISO version clause in these cause "to enforce the 'consent' mandatory Department Insur of the Texas prevail would be to let form circumstances included a ance endorsement has substance”); Thompson Am. States over showing prejudice requires for no Co., (M.D.Ala.1988) F.Supp. Ins. personal advertising injury tice defects in (noting clause that a consent-to-settlement cases to avoid under the coverage holding but created a condition to prejudice must that breach of the clause Her our treatment of the exclusion in Like liability); Kapadia v. to relieve it of insurer nandez, many the cases we the courts in Co., Mut. Ins. 418 N.W.2d Risk classify attempt Preferred cited made (Iowa 1988) (holding had to dem insurer conditions, provisions as either covenants or prejudice from insured’s non onstrate actual they employ terms. See nor did even those compliance with settlement-without-consent Hernandez, at 693 n. 4. Those complete rather than allow destruction clause principally on the courts that did focused recover); Tegtmeyerv. right to of the insured’s provi prejudice regardless how the issue of Snellen, MacInnis v. Aetna sion was classified. See (Mo.Ct.App.1990)(holding insurer must show 403 Mass. 526 N.E.2d & Cas. Life justice senting posited, anything, Hernandez If believe that the failure here, Hanover does that Cutaia likewise give poses notice of a claim a smaller coverage involved a condition and thus prejudice risk of than failure to obtain precluded liability irrespective of harm. consent to a In many settlement. in- J., Id. at 694 dissenting). The (Enoch, untimely claim, stances of notice of a apparently rejected Court position. all, prejudiced insurer is not at and ulti- mately may face obli- Hernandez, Since our decision in courts gation. Conversely, many if not most major and several treatises have acknowl cases where an insured settles a case edged Texas as a state that adopted has consent, without the insurer’s the insur- See, notice-prejudice e.g., Ridglea rule. er liability. faces least some If the Estate Condo. Lexington Ass’n v. Supreme Court does not presume (5th Cir.2005) 415 F.3d (relying on prejudice in a settlement-without-con- stating Hernandez that Texas re case, persuaded sent we are quires a showing for insurer presume prejudice would not in a fail- to avoid coverage untimely because of no ure- of-notice case. tice policy, occurrence even for types of insurance not by covered Board at Id. 631. The Fifth Circuit noted “a 23080); Booking Order Star Mgmt. requiring Gen. modern in of proof trend favor of (2d Co., Cir.2001) 254 F.3d 414 (citing prejudice” Her in and emphasized this context stating Hernandez, nandez and Texas courts allow an in our Court considered insurer deny coverage only jurisdictions a materi law other and that our contract); al breach of its insurance analysis Han entirely “is consistent with [this Co., son Id.; Prod. Co. v. Ams. Ins. 108 F.3d modern see St. Paul trend].” Guard- (5th 627, Cir.1997) (same); Ltd., ERic ian Ins. Co. v. Centrum G.S. 383 Appleman (N.D.Tex.2003) 22 891, Holmes, on F.Supp.2d (reject- 901 Mills Holmes’ (2d § ing 139.4 traditional that an insurer view need InsuRance Law and Practice ed.2003). Hanson, In for example, prove prejudice in prevail a late- Fifth Circuit read require Hernandez to a notice case as inconsistent with Hernandez demonstration of harm for an insurer to and prej- the modern trend that considers coverage avoid obligation its when the in udice to an insurer a factor in relevant comply sured fails to policy’s determining with a whether to enforce a condition prompt-notice provision. precedent 108 F.3d at 630. coverage); to insurance see also Summarizing holding our “a George’s as material Prince County v. Local Gov’tIns. Trust, 81, breach one contracting party 162, excuses 388 Md. 879 A.2d 94 n. 9 (2005) performance by states, the other party, and an (counting thirty-eight includ- not,” immaterial Texas, breach does the Fifth ing Cir a having adopted notice- cuit concluded principle prejudice form, this “fundamental only rule in some with six applied contract law” with equal or states and the District of identi- Columbia greater rule).3 force to notice adhering clauses: fied as to the traditional (Alaska 2003); Co., prejudice escape liability under its Holt v. Utica Mut. Ins. (1988); for insured's breach of settlement-without- 157 Ariz. 759 P.2d provision). consent Clemmer v. 22 Cal.3d Hartford Cal.Rptr. 587 P.2d Ostrager (1978); generally 3. See R. & Thomas R. Clementi v. Nationwide Mut. Fire Ins. Barry Coverage (Colo.2001); 16 P.3d Aetna Cas. Newman, Handbook on Insurance Dis- 4.02(c)(2), (3d ed.2006), cases). § (citing Murphy, putes & Sur. Co. v. 206 Conn. See, Pharr, (1988); e.g., Tush v. 68 P.3d A.2d Nationwide Mut. Ins. Hernandez, dissenting like the in justice distin- today attempts to The dissent as rather language justices today, saw by characterizing Hernandez guish coverage. indicating a condition clearly clause at issue settlement-without-consent (“[T]his a breach a case is not about rather than id. in that case as a covenant See cover- condition, we This case is about though Hernandez contract. even Nevertheless, made no distinc- between the two. we age.”). made no distinction deciding They arrive at conclusion the two tion between backwards, that be- through reasoning, prejudice before had to show insurer required showing coverage obligation. a cause we its could avoid Hernandez, policy language is- poli- Hernandez involved The fact that truth, sue must have been covenant. cy rather than exclusion in Her- language construed distin- ground a valid supply does not pre- indistinguishable from that nandez here. Exclusions guishing application policy, As under PAJ’s sented here. in effect two sides of and conditions are before the Court Hernandez language coverage coin; avoid the same exclusions if provided: something, and conditions the insured does a) apply: does not This insurance an insured does coverage unless avoid bodily injury property damage or with construction something. The dissent’s insured, ... respect to which the with- consequence that would have the absurd company, out consent of the written creates a condi- policy language identical any person settlement with makes type as to one tion legally ... who be liable therefor. injury) a covenant as to (advertising but (bodily injury property dam- the other (policy language quoted 875 at 694 S.W.2d J., unequivocally have said by dissenting). dissenting age). The We Enoch, Ins., 1083, 268, (2005); Starr, (Del.1990); Pfizer, Employers 271 Inc. v. 575 A.2d 1088 Co. v. 634, 1216, 187, (1998); Macias, A.2d 644 So.2d 154 NJ. 712 Bankers Ins. Co. v. 475 Fund, (Fla.1985); 113 N.M. v. N.M. 1218 Standard Oil Co. v. Hawai Schroth Self-Insurer’s 399, (1992); Co., Ltd., 521, 708, Ins. 402 Great Am. 65 Haw. 654 832 P.2d ian Ins. & Guar. Co., 714, Dilts, 1345, (1982); 340 Tate Constr. 315 N.C. 1348 n. 4 Miller v. Co. v. C.G. P.2d 743, (1986); 257, (Ind.1984); Steiger Finstad v. 746 463 N.E.2d 261 Grinnell S.E.2d 392, Inc., (N.D. Tractor, N.W.2d 398 Jungling, 301 Mut. Reinsurance Co. v. 654 N.W.2d Atchison, 530, (Iowa 2002); 1981); Mut. Ins. Topeka Ferrando v. Auto-Owners & 541-42 Co., 186, 927, Co., 98, 781 N.E.2d 946 Ry. Ohio St.3d Santa Fe Co. v. Stonewall Ins. 275 Jackson, 698, 1097, (2002); (2003); 608 Indep. Dist. No. 1 v. Jones v. Sch. Kan. 71 P.3d 1139 798, 1153, (Okla.1980); Oregon v. 1155 Carl Corp., S.W.2d 801 P.2d Bituminous Cas. 821 861, Co., 515, Or.App. 918 P.2d Ins. 141 (Ky.1991); v. State Farm Mut. Auto. Auto. Lanzo Co., Co., 47, (1996); (Me. 1987); Brakeman v. Potomac Ins. Sher 863 Ins. 524 A.2d 50 66, 193, (1977); Brands, 371 A.2d 197 Avco Accident & In 472 Pa. wood Inc. v. Hartford 323, Co., Co., 32, 1078, A.2d Corp. v. Aetna Cas. & Sur. 679 Md. A.2d 1082-83 dem. 347 698 Co., (R.I.1996); Single (1997); Vt. Mut. Ins. Co. v. Mass. 328-29 Goodman v. Am. Cas. 419 417, (1994); ton, 5, 138, 432, (1994); 421 S.C. 446 S.E.2d 434 Koski v. 316 643 N.E.2d Hutchison, Co., 439, Reciprocal 15 v. N.W.2d Am. Justice Ins. 456 Mich. 572 Allstate Ins. 811, (Tenn.2000); 636, (1998); FDIC v. Employees 813 Lawler v. Gov’t S.W.3d 639 1529, Cir.1994) (10th (Miss. Co., 1151, Oldenburg, 1546 — 47 34 F.3d So.2d Ins. 569 S.W.3d 398, law); Coop. Fire Ins. Ass’n 1990); (applying Utah Sweany, 68 Johnston v. 355, Inc., A.2d (Mo.2002); Caps, 166 Vt. 694 Vt. v. White Mut. Auto. Ins. 402 State Farm 34, 945, (1997); Murnion, (9th Wright, 94 Wash. Benham v. Cir. 35 439 F.2d 947 Co. v. 1088, 875, (1999); law); Colo 1971) App. 973 P.2d 1092 v. (applying Montana Mefferd 706, Barrett, 532, Co., Inc., 542 208 W.Va. Ins. Co. v. Neb. 676 nial 267 Sieler Pierzina, 869, (2000); 245 (2004); Progressive 874 Wilson v. S.E.2d N.W.2d 26 Neff (2001). 185 629 N.W.2d A.2d Wis.2d 151 N.H. 868 Northern Ins. 636 law, impose

“when a condition would aptly absurd Texas insurance describes the result, or impossible agreement will be critical distinction between “occurrence” interpreted creating as a covenant rather polices policies and “claims-made” as fol- than a European condition.” Criswell v. lows: Ctr., Ltd., Shopping Crossroads policy, the case of an “occurrence”

S.W.2d subsidiary notice event triggers coverage. Moreover, question the dissent’s permitted Courts have not premise timely fundamental that the companies deny coverage on the basis provision before us creates a condition untimely notice under an “occur- precedent rather than a covenant. The rence” the company unless shows language specifically Cutaia pro delay. actual from the vided that against “no action shall lie unless, company Corp. Matador Petroleum condition St. Paul Sur- thereto, (5th plus fully the insured shall Lines Ins. 174 F.3d have com Cir.1999) (citations omitted); plied with all the see policy.” terms of this also added). Booth, (5th at FDIC v. (emphasis 82 F.3d Cir. The G.S., 1996); precedent” F.Supp.2d “as Centrum language was 900-01; Lawyers’ deleted v. Tex. from the standard CGL Hirsch fol Exch., lowing (Tex.App.-El our decision in does denied). dissent, appear Paso writ PAJ’s Section While focusing type IV is entitled on the “Commercial General Liabili rather Conditions,” ty than type policy, entirely disregards the notiee-of-claim require appears important ment in a distinction. subsection entitled Occurrence, “Duties the Event of Claim Finally, perhaps most disturbingly, or speaks Suit” and terms what the analysis the dissent’s of the lan- insured “must do” if a claim is made guage impose would draconian conse- it, against language that closely more re quences for even de minimis deviations sembles a covenant. See 8 CatheRine policy places from the duties the on in- M.A. McCauliff, CoRbin on ContRacts sureds. The in requires, this case § ed., 1999); (Joseph 30.12 M. Perillo issue, the same section at not notice Constr., Landscape Design & Inc. v. Ha practicable,” of suit “as soon as but also Inc., Excavating, rold Thomas 604 S.W.2d that “immediately copies PAJ send ... 376 (Tex.Civ.App.-Dallas writ demands, legal papers.” summonses or n.r.e.). refd Conditions are not favored in Thus, construction, under the dissent’s law; thus, the when another reasonable promptly insured’s failure to forward a reading that would avoid a forfeiture is deposition a of confer- notice or certificate available, we must construe contract lan coverage, ence would a forfeiture of work guage as a covenant rather than a condi even when the insurer is not at all harmed. Criswell, 948; tion. See 792 S.W.2d at see precisely This is the result that Board Petrochemicals, also ATOFINA Inc. v. attempted Order 23080 to avoid and we (Tex. Cont’l Cas. rejected in Hernandez. 2005). addition, timely

In the notice part was not an essential bargained- hold that an insured’s failure to We for exchange timely notify occurrence- its insurer of a claim or suit PAJ’s Circuit, applying based The Fifth does not defeat if the insurer was poli unless the requirement, Accordingly, prejudice delay. prejudiced by the not statute, text, agency or an judgment, appeals’ cy’s the court of literal we reverse insurer could judgment that the it. render demands directive notice, untimely deny coverage because Timely Is a Notice Provision A. The remaining issues to and remand the Precedent, aNot Covenant Condition trial court. policy’s dispute whether parties The dissenting filed Justice WILLETT a con- language constitutes prompt-notice HECHT, Justice Justice opinion, which (as argues), Hanover dition precedent WAINWRIGHT, and Justice JOHNSON coverage,5 or a defeats failure of which joined. (as argues), the breach covenant PAJ WILLETT, joined by Justice Justice immaterial, which, not defeat cover- if does WAINWRIGHT, HECHT, Justice years, Tex- age.6 “[f]or PAJ concedes JOHNSON, dissenting. Justice timely notice of have held that as courts I would follow respectfully poli- I dissent. provisions suit Insurance Co. v. Cutaia1 Members Mutual coverage” [are] cies unambiguous no- policy’s and hold that a that the cases “long hold[s] line of Texas language, precedent a condition tice-of-suit policies similar requirements notice a defense to liabili- coverage, constitutes are conditions Policies [in case] written, ty enforced as unless and must be liability,” but contends precedent otherwise.2 Because positive law dictates “materially those cases involved differ- ” otherwise, I positive law does not dictate language. ent appeals. affirm the court of would repeatedly de- has indeed This Court I. Discussion provisions notice scribed insurance coverage.7 precedent as conditions argues that under Hernandez v. PAJ a notice held in Cutaia that when Group Lloyds3 and Harwell v. State Gulf the immediate for- provision requiring Co.,4 Farm Mutual Automobile Insurance breached, “liabili- warding papers of suit policy’s provisions are cove harm discharged, the claim ty [was] on nants, not conditions to cover (or it) resulting [is] lack of from the breach demon age, and therefore Hanover must pro- Cutaia immaterial.”8 denying coverage before strate “ against lie vided that ‘no action shall untimely disagree. notice. Settled unless, precedent a condition company as provi precedent construes thereto, fully com- the insured shall have precedent impose conditions that sions as 173-74; Harwell, Liberty (Tex.1972). S.W.2d at 7. 896 1. 476 S.W.2d 279 Cruz, S.W.2d 165 Mut. Ins. Co. v. 883 (Tex.1993); Accident & Weaver v. 2. Id. at 281. Hartford (Tex.1978); S.W.2d 369 Indent. 570 Roman, 498 Dairyland County Co. v. (Tex.1994). Mut. Ins. 3. 875 S.W.2d 691 Cutaia, (Tex.1973); S.W.2d 278; Klein, at 96. at 275 S.W.2d S.W.2d 4. 896 S.W.2d 170 Cutaia, (discussing Century Lloyds, 476 S.W.2d 154 Tex. 8. 5. Klein Hamblen, (1955). 144 Tex. Cas. Co. v. New Amsterdam Klein, (1945)); see also 190 S.W.2d Hernandez, 275 S.W.2d at 96. 6. 875 S.W.2d at 692. See plied with all policy,’” the terms of this performance.15 As the Court including requirement the notice in issue.9 explained, “usually has such terms connote an intent for a condition rather than a

PAJ insists the notice promise.”16 Hanover’s policy necessarily CGL is a cov enant because it omits the “as a condition provision The notice at issue is a condi- precedent thereto” present clause in the precedent, coverage tion as expressly is policy. disagree. Cutaia “Magic words” compliance conditioned on with the notice controlling; are not labeling something a requirement. policy, Section IV of the precedent” so, “condition does not make entitled “Commercial Liability General and the absence of such a label does not Conditions,” contains list of “Duties make it not provi so. Whether a notice Occurrence, Offense, The Event Of Claim sion constitutes precedent condition Suit,” Or one of which states: “If a claim turns on does, what the actually brought against is made or ‘suit’ is any its nature and purpose, merely on what insured, you .... [njotify must us as soon it is called or because it appears under a practicable.” Section also specifies IV here, heading, as that includes the word person organization or “[n]o has a “A precedent “Conditions.” condition may right Coverage under this Part ... to sue be either a condition to the formation of a us on Coverage Part unless all itsof contract or to obligation perform an to an ” (em- terms have fully complied been with existing agreement.”10 A prece condition added). phasis prompt-notice re- obligation dent to an perform is an act quirement, expressly identified in poli- or event that “must occur before there is a and, cy as a importantly, more right to performance immediate and before providing place no suit take ab- there is a duty” 11; breach of contractual sent full compliance, plainly a condition failure to comply with such a condition that precedes obligations the insurer’s forfeits and releases the insurer perform under the any duty from indemnify.12 to defend or contrast, By a covenant is “an agreement PAJ’s reliance on Hernandez is mis- to act or refrain from acting placed. a certain Hernandez involved insured’s way,”13 a material breach will breach of a settlement-without-consent ex- coverage.14 forfeit While no mantra or clusion in an policy, automobile which said magic necessary, words are an intent that the apply “bodily insurance did not create a condition injury is sometimes property damage or respect with shall, indicated the use of conditional terms which ... the insured without writ- “if,” that,” such as “provided “on company, any condition ten consent of the make that,” or some similar limiting phrase person organization settlement with or Lawson, 476 S.W.2d at 278. see also Reinert 1938, writ). (Tex.Civ.App.-Waco Hohenberg George Bros. Co. v. E. Gibbons (Tex.1976). & 537 S.W.2d 3 Group Lloyds, 14. 875 Hernandez Gulf (Tex.1994). S.W.2d 11. Id. European Shopping 15. Criswell v. Crossroads See, e.g., 12. 476 S.W.2d at 279. Ctr., Ltd., (Tex.1990); 792 S.W.2d Bros., Constr., Hohenberg see also 537 S.W.2d at 3. Landscape Design 13. & Inc. v. Harold Inc., Excavating, Thomas 604 S.W.2d n.r.e.); Bros., (Tex.App.-Dallas Hohenberg writ ref’d 16. at (which oper- a exclusion legally erage) be liable therefor.”17 who coverage obligation than treat the as a condi- the only Rather exclusion after ates the viewed it as a precedent, Further, every tion Court treating place).”22 inis covenant, ordinary an contractual obli- of a settlement-without-consent breach was ex- performance of which gation, automatically the insur- ending clause as only if the breach were material.18 cused little sense not makes obligations er’s such, found it absent As we “unenforceable standpoint also disserves timing from a but by the that it has been showing a insurer parties insur- of both to the the interests by an failure to obtain prejudiced insured’s It conceive of easy contract. is ance settling.”19 rec- consent before The Court a insured suc- where resourceful instances in Her- ognized prejudice requirement a obtaining through its own efforts ceeds with contract nandez consistent the basic that the third-party settlement a favorable one of a principle party’s law that breach happy only too to fund. Consid- insurer is must be in order covenant material if any, to the insurer ering prejudice, performance party.20 the other excuse is requirement of a breach of consent analy- materiality-of-breaeh Hernandez’s hand, On the other therefore warranted. here inapposite sis is because PAJ did where it is hard to conceive an instance Rather, breach a covenant. it failed notice of or claim give a failure to a suit comply precedent, with condition strict litigation operate ever the outset would precedes any obligation short, Hernan- to the insurer’s benefit. In part on the of Hanover under distinguishable. dez is above, concedes, As noted as PAJ long consistently Court has treated B. A Late-Notice Defense Should requirements prece- notice Showing Prejudice Require Un- No coverage dent to rather than covenants.21 Policy Specifi- less the or Positive Law treatment flows from the naturally Such cally Provides Otherwise performance obligation fact that an on PAJ’s reliance our 1995 decision indemnify ordinarily defend or cannot be Harwell, likewise falls short. Harwell expected of an insurer until it first receives expressly required by the prejudice was notice of a claim’s of a existence. Breach your “If we fail- policy itself: show exclusion, on settlement-without-consent our de- provide prejudices ure to hand, might long the other occur after the fense, there is learned of insurer has a suit and assumed unambiguous Given this policy.”23 Hence, duty agree to defend. with the contract’s requirement, enforced appeals recog- the court of in this case in in- literal text and examined whether nizing significant “a difference between actual had in fact demonstrated (performance surer of which contrast, necessary trigger cov- any obligation prejudice.24 policy, by PAJ’s Farm 17. 875 S.W.2d at n. 1. 23. Harwell v. State Mut. Auto. 896 S.W.2d 18. Id. at 692-93. (citing Liberty at 174 Mut. Ins. Co. 24. Id. 19. Id. at 692. Cruz, Cruz, (Tex.1993)). Hernandez, involved like 20. See id. required a show- with a notice es- ing prejudice before the insurer could supra accompanying note text. See cape coverage. stated: in Cruz company by in- prejudiced is 22. 170 S.W.3d at 263. “unless the does not require terms, prej- insurer show the Board’s endorsement reaches udice with respect advertising injury only certain lines of insurance and a de- claims. fined bodily subset of claims for injury and property damage. Cutaia,

In we held that a late-notice requires defense no showing prejudice, of policy provided PAJ’s for three kinds of refusing to “insert a that viola- coverage: A, Coverage bodily for injury of tions will be ex- property damage; B, Coverage for cused if no harm results from their viola- personal advertising injury; and Cov- (now tion.” The Board of Insurance C, erage payments. for medical agen- (TDI)) Department Texas of Insurance re- cy’s required endorsement is targeted sponded the following year, issuing two solely Coverage A. The endorsement Board orders mandating prejudice re- imposes for quirement for bodily injury property other types coverages. of damage coverage in gener- automobile and al liability policies: My text-based construction of the principle is consistent with the expressio respects bodily injury

As liability cover- alterius, unius est exclusio age meaning property damage liability cover- age, naming implies unless the of one company prejudiced is the exclusion of maxim, the insured’s comply failure to others.27 with the This while not conclu- requirement, any provision sive, applies perfectly here, useful and requiring give the insured to notice of prejudice requirement, where TDI’s by its action, loss, occurrence or or requiring terms, specified covers subset of demands, notices, the insured to forward My claims. construction also honors stare legal process, summons or other shall decisis explained recently in Fiess v. liability not bar policy.26 under this Fiess, Lloyds.28 State Farm In the Court discussed prior one of our decisions and PAJ casts this 1973 Board action as a observed that if TDI disputed our con- “regulatory rejection” of no-prej- Cutaia’s struction of the insurance udice rule. As concerns the dispositive case, us, strange issue “it is disagree. regu- before This Board- mandated lators did policy language, nothing change clearly while for applicable to a quarter century.”29 case, the automobile policy Har- the instant well, was not an Cutaia, abroga- following across-the-board the Board acted but in a tion rule; of Cutaia’s no-prejudice by its circumscribed manner. html; Ins., comply require- sured’s failure to with the State Bd. of Revision ment, any provision policy requiring of this Liability Standard Provision General Poli give

the insured notice ... shall not bar Endorsement-Notice, Order Amendatory cies— policy.” under this S.W.2d at (Mar. 1973), http:// No. 23080 available at 165-66 n. 3. www.tdi.state.tx.us/commercial/pcck23080. html. 25. Members Mut. Ins. Co. v. (Tex.1972). Assocs., 27. CKB & Inc. v. Moore McCormack (Tex. Petroleum, Inc., Ins., 26. State Bd. of Revision Texas Stan 1987). dard Provision Automobile Policies Edi April tions 1955 and October 196 6 — 28. 202 S.W.3d 744 Notice, Amendatory Order No. Endorsement — (Jan. 1973), http:// available at www.tdi.state.tx.us/commercial/pcck22582. Id. at 749-50. consistency entrusting policy in malism is out that the points prejudice The Court policymakers. matters to in imposed predat- TDI availability of CGL for ed event, it I find understandable enough, True injury. but advertising on a strict an would insist insurer acknowledges, cover- the Court also such An insured’s failure requirement. notice through has available stan- age now been a or claim notice of suit provide prompt to nearly dard CGL three decades policies resources and insurer, an who has the to during TDI to declined broaden which claims, can to obvi- experience handle such as new like coverages, order even hardship on both ously work substantial added to stan- advertising injury, were The insurer the insurer and the insured. inac- lengthy dard CGL Given discourage understandably to late -wishes by charged with agency tion mandat- ancillary litigation and to de- notice avoid forms, ing changes in Fiess counsels prejudiced to or not it was voted whether us to the invitation to “decline overrule” notice; provide prompt a failure liti- If precedent.30 anything, our earlier raising pre- gation could have the effect argument regulators deference to state thus parties, forcing miums on all insured stronger in the case is even than it instant punctual to subsidize those parties insured in was The Board responded Cutaia. requirements. flout the policy’s who Cutaia, swiftly sure, following to be but makes Regardless of which side the su- overriding also surgically, Cutaia as as to perior public policy argument what coverages some but not others. impli- The provide, I should targeted response cation from this fol- would to insert nonexistent lan- decline subsequent lowed by decades executive guage parties’ agreement. into the legislative plain: inaction is Hanover contract, not construing editing Court must from late prejudice show notice of it, just ago, six months Fortis Bene- bodily injury property damage claims Cantu, unanimously this Court fits but not of advertising from late notice rights generally stressed that “contract injury claims. they do language; arise from contract not eq- I validity principles would derive their from recognition reaffirm Cutaia’s uity directly parties’ agree- that the and the but from the Legislature agency state industry directs courts overseeing the insurance are bet- ment.” Fortis Benefits interpretation ter decide whether an contractual cases follow suited to insurer “modest, deny coverage approach” must text-based anchored show contract,32rather than parties’ agreed based on late notice. TDI and legislators external, judge-made rules. In- supplant no-prejudice imposing are free to Cutaia’s deed, Fortis cited which notice-prejudice rule with a more liberal Benefits believe, princi- public today, if for the sound they rule on should control concerns is grounds, preferable. ple balancing that the latter is best doing nonjudicial bodies.33 The Court af- would fault them for so. But left year firmed that last Fiess when interpreting when text —whether a con- view tract, edict, statute, political or branches of constitu- concluded: “If regulatory matters, mold government decide that should key tion—formalism to for- Texas Id. 32. Id. at 649. at 750. Id. at 31. 234 649-50.

be in covered policies, insurance required the use the in endorsement all they so; have tools at disposal their policies by to do approving CGL this form or Texas courts must stick to what those mandating otherwise through use some policies say....”34 holding Cutaia’s core other mechanism. Even if TDI now man- remains valid. balance it is “[0]n better dates a prejudice requirement for advertis- policy for the contracts of insurance to ing injury be in claims all policies, Texas CGL changed by public body charged with that requirement, notes, as Hanover was supervision their by ... or Legisla- imposed until some time 2000 at the ture, rather than for this Court to insert a earliest and apply does not policy provision that violations of prec- pending parties case. The stipulated edent will be excused if no harm results policies that the Hanover covered peri- from their violation.”35 od July through from June 1999. It undisputed the ISO endorsement post-submission brief, Hanover policy used the Hanover in issue did not points out that since October 2000 a “Tex- contain a prejudice requirement for adver- Changes” endorsement, as designated en- tising injury claims. For the reasons de- dorsement published “CG 03” and by above, scribed I would not impose preju- (ISO), Insurance Services Office has requirement dice policy where the contains included a per- no such language and where TDI did not sonal and advertising injury claims as well require such an endorsement at the time bodily as injury and property damage the policy was in if effect—even TDI has claims. Hanover alternatively describes changed since the endorsement language this endorsement “approved” or “re- that must be used. quired” by TDI. prior Under current and law, TDI has been approve authorized to Today the Court treats Cutaia as a dead policy letter, standardized forms.36 Hernandez, “a by ISO is overruled reasoning national organization that publishes stan- the Court Hernandez declined to policy dard forms.”37 The record and draw any distinction between covenants briefing before us are inconclusive as to “apparently rejected” conditions and whether TDI merely has approved the use holding Cutaia’s failure to comply of this endorsement as one which may be with a coverage precluded liabili- used in policies Texas CGL or has in effect ty irrespective of harm.38 I disagree. Fiess, 34. 202 S.W.3d at by 753. the commissioner in accordance with this 5.35(c) (Vernon article.” Tex. art. Ins.Code 35. Members Mut. Ins. Co. v. Supp.1997). Similarly, prior ap- law plicable policies, to CGL insurers were re- quired approval policy to file and obtain law, offering Under current an insurer TDI, forms with which was also authorized to policy CGL must use forms filed with and "promulgate policy standard TDI, approved Tex. Ins.Code 5.13-2, 2(a)(1), 8(a), § § forms.” See id. art. 2301.003(b)(3), 2301.006, §§ subject to an ex- 8(e), 24, 2005, repealed by May Act of 79th risks, emption large § for certain 2301.004. R.S., 18(d), Leg., § ch. 2005 Tex. Gen. "may adopt TDI standard insurance Laws 2186-87. forms ... that an insurer use instead of § insurer’s own forms.” 2301.008. "The Sink, Progressive County Mut. Ins. Co. v. may approve Commissioner the use of (Tex.2003) (Phillips, adopted by forms and endorsements a nation- C.J., dissenting). organization al companies of insurance or a organization, similar if such forms or en- dorsements are approved filed with and are 38. 243 S.W.3d at 634. my reading of the The Court finds expressly equated has never This Court lan- “identical unreasonable because with conditions or abolished the covenants as to (but precedent condition guage creates a significant) fine sometimes sometimes injury), type coverage (advertising one them; between Texas law has distinction (bodily a as to the other but covenant and traditionally viewed covenants condi- I think injury property damage).”43 and differently. not tions Hernandez is exactly is what my policy of the reading the have classified settlement-without-con- compa- a national insurance expected when one sent exclusion that case as or the a form modifies ny uses standard CGL but other, post-Hernandez but other decisions comply only necessary to to the extent certainly from this Court have done so. jurisdiction the the of the where with law Indeed, Hernandez, just year one after sold, is in this case Texas. policy Harwell, distinction, the we retained of an generally provides that notice policy deeming prompt-notice the prece- claim is a occurrence or condition and precedent that case a condition not a ... person to and that dent “[n]o covenant.39 right has a ... sue” insurer absent [t]o the simply, poli- Put Hernandez concerned a requirement, compliance this as dis- with cy policy exclusion—not a condition—and above, fully cussed modifies more but this has the Court restated distinction re- to provisions these standard as needed peatedly since Hernandez was decided.40 Hence, comply law. with Texas event, any In Hernandez did not overrule endorsement, “Texas includes an titled Cutaia, modify or expressly byor implica- Changes Notice” Requiring —Conditions tion; majority never Hernandez even and must be providing Cutaia. subsequent mentions Nor has “[wjith to to deny coverage regard shown Court, today, from this until case limited Bodily Property Damage Lia- Injury remotely Cutaia or criticized it. For the bility” The absence a similar en- only. above,41 reasons discussed Cutaia is advertising injury dorsement for claims reconciled, can be today’s Hernandez with re- unsurprising since Texas law did not falling squarely notice case nothing quire such an endorsement. see a this recently case Court cited and unani- to allowing odd or abhorrent an insurer mously reaffirmed teaching for the core policy using nationally sell a standard- regarding policy ized form that is to modified intervention/abstention.42 comply v. State Auto. an insured’s 39.Harwell Farm Mut. firmation that failure (Tex.1995) recovery precedent with a ("Compli- barred 896 S.W.2d 173-74 application undercuts the provision with the Hernandez ance notice of suit precedent. precedent 'condition to the insurer’s ” policy.’ (quoting Weaver v. on Hartford Maldonado, Har 963 S.W.2d at & Indem. Accident 570 S.W.2d well, 173-74, 896 S.W.2d at we characterized (Tex.1978))). post-Hernandez Another of our provisions as conditions insurance distinction, cases retained the label- insurance precedent. precedent ing a condition concluding did [the insured] "because supra 41. See Part I.A. comply with all conditions policy,” under the he was recover Cantu, Fortis not entitled sue or recover on contract. Benefits (Tex.2007). Maldonado, Lloyds State Farm Ins. Co. Maldonado did S.W.2d prejudice, but 43. 243 at 635. not reach issue of its reaf- comply law, extent necessary unique age. example, with a Texas long has requirement. recognized that compliance” “substantial policy’s proof-of-loss with a or provi- Finally, my the Court views approach as sions will suffice and trivial missteps imposing consequences “draconian in complying notice or with other even de minimis deviations from the requirements are excused.45 I would leave duties the policy places on insureds.”44 In intact compliance” “substantial doc- case, PAJ’s failure to comply with the trine as myriad to an insured’s policy obli- policy’s prompt-notice requirements can- gations, but there was no “substantial com- as de not be minimis. The pliance” here. described focus today Our sole should record shows that several months passed be judicially engraft whether to preju- before PAJ notified Hanover of the law- requirement dice where none exists in the suit, notification that PAJ admits was not wording law, of or in policy the and “as practicable.” soon as PAJ was not I would decline to do so. merely facing an “occurrence” or a poten- policy; tial claim it actually under the had II. Conclusion been sued. suggest do not intend to that even the most in missteps comply- trivial unambiguous Courts should poli- enforce ing with policy cy notice or other require- terms in with plain accordance their justify ments will total forfeiture of cover- meaning.46 recently As Court this af- 44. 243 S.W.3d give at 636. proper proof "failed to notice of of poli loss in with the terms accordance of the cy,” substantially complied that insured with Corp. 45. See Bituminous Cas. v. Vacuum agent’s Tanks, Inc., 1048, when he to office (5th went and Cir.1996) F.3d loss); particulars providing filled out a form of (stating that “this court and Texas courts have Co., Bldg. Austin Union Fire Co. v. Nat’l Ins. compliance held that substantial with an in- 499, (Tex.Civ.App.-Dallas 403 S.W.2d 505-06 requirement surance notice will suf- 1966, n.r.e.) (holding fice,” writ ref’d that insured holding and that failure to forward suit substantially complied policy require with papers required was excused claim, provide proof ment that sworn of "substantially where complied insured with provided proof where insured unsworn of by requirement apprising in- [the agent claim to and insurer’s communicated writing allegations surer] of essential loss); adjuster regarding particulars with suits”); underlying Moving Bekins & Stor- Co., Home Ins. Co. v. Flewellen Produce Williams, F.C. age Co. v. 947 S.W.2d 576 n. 1 (Tex. App. S.W. Comm’n 835-836 writ) (Tex.App.-Texarkana (recogniz- 1923, holding approved) (holding that failure ing "proof that of loss notice of claim are produce inventory to one record did not vio recovery poli- on the policy requiring preservation produc late cy,” but that “a claimant still recover records, pro tion of where business insured upon jury findings supporting theories of culpable duced all other and was not records compliance”); waiver Henry or substantial record); missing for loss of the see also Glad Aetna Cas. & Sur. 633 S.W.2d 584- Am., ding v. Prudential Ins. Co. 521 S.W.2d (Tex.App.-Texarkana writ ref'd 736, 737, (Tex.Civ.App.-Houston n.r.e.) [1st (holding comply failure that with n.r.e.) (holding Dist.] writ ref’d proof requirement written of claim was ex- substantially complied insured with substantially complied cused because insured change provision by beneficiary submitting requirement with when he had his mother referring designees by an insurance form report particulars of accident to insurance required by initials rather names as than full agent, prepared report who written on insur- form). form); Dairyland County er's own Mut. Ins. (Tex.Civ. Keys, Co. v. n.r.e.) App.-Tyler (holding, 46.Blaylock ref'd writ Bank Liab. Am. Guarantee complained where insurer insured affirm the Fiess, coverage.49 I would par- edent cannot fashion firmed that Hanover is judgment of appeals’ court contract, new-and-improved “nor ties indemnify PAJ not bound to defend or they made change that have which infringement suit. copyright construction,”47 by impose nor guise judicial justice, fiat a brand of however felt, find strongly that we

earnest personally congenial. The “better more insurance contracts policy” remains spruced be should construed courts necessary, by nonjudicial if bodies.48 up, Accordingly, I would decline embellish policy’s unequivocal notice-of-suit and by imposing

“no action” restrictions extra-contractual prec- that excuses the failure of a condition concluding Lloyds, (applying v. 47. Fiess State Farm Arkansas law and 744, (Tex.2006)(internal cases, quotation divergent 753 although marks are some Ar there omitted) (quoting East Ins. impose Tex. Fire Co. v. kansas would not courts 229, 122, (Tex. Kempner, 27 87 Tex. S.W. 122 requirement); Greycoat F Ltd. Hanover St. 1894)). Co., 764, Liberty P’ship Mut. 657 A.2d v. Ins. (D.C.1995); Country Mut. Co. v. 768 n. 3 303, Marine, Inc., 48. Members Mut. Ins. Co. v. 476 222 Ill.2d 305 Ill. Livorsi 278, 533, 338, (2006); 281 Argo Dec. N.E.2d 346 856 Co., Corp. N.Y. Mut. Ins. 4 N.Y.3d v. Greater adopting 332, 704, 762, 49. Texas courts are not alone in N.E.2d 764 794 N.Y.S.2d 827 (1) concluding traditional rule (N.Y.2005); State Fire & Cas. Co. v. Farm requirements precedent, are 498, 188, see Walton, 192 244 Va. 423 S.E.2d Marine, 768; Greycoat, A.2d at 657 Livorsi (1992). 533, 343; 305 856 at Las Ill.Dec. N.E.2d otherwise; Maryland holds a court has held Taxi, 562; Argo, Vegas P.2d Star 714 at 794 provisions covenants rather that notice are 764; 704, Goodyear N.Y.S.2d 827 N.E.2d at precedent. See than conditions Sherwood Co., & Co. v. Aetna Tire Rubber Cas. & Sur. 95 Brands, Accident & Indem. Inc. Hartford 512, 835, (2002); Ohio St.3d 769 N.E.2d 842 Co., (Md. A.2d 1082 347 Md. 698 Walton, 192; 423 S.E.2d Colonial Ins. Co. however, 1997). Maryland Notably, has Barrett, W.Va. 208 542 S.E.2d proof preju- specific requires statute (2000); 874 Askren Hub Pest States Control (West dice, § 19-110 Servs., Ann., Insurance Md.Code Inc. v. Zurich Ins. 721 N.E.2d 1997), something Legislature has (2) (Ind.Ct.App.1999), 277 modern CGL something imposed and TDI has ex- never language "no action" renders the notice re damage property pressly only for mandated quirement coverage that a condition of must Ins., claims, injury State bodily see Bd. liable, be honored before insurer is see supra note 26. Fraley-Landers, Co. v. AIG Centennial Ins. Likewise, leading legal rec- 761, 764-65, (8th Cir.2006) commentators (citing F.3d provisions ognize have been treat- that notice prior reviewing case Arkansas law and so Taxi, rather than cove- ed as conditions holding); Vegas v. St. Star Inc. Paul Las nants. See 22 Eric Mills Appleman & Fire Marine Ins. Nev. P.2d Holmes, on ed.2003); (2d S. (1986); § 139.1 [B] 562-63 Federated Mut. Ins. Co. v. Donald Insurance Enters., Inc., L. Ga.App. Ownbey Flitner, Commercial Gener- Malecki & Arthur (4th ed.1992); (3) (2006), R. 13 Lee 2& n. S.E.2d Liability al Russ prejudice in & Thomas Segalla, insurer need not show order to on F. Couch Insurance AIG, 190.20, (3d ed.1999). §§ coverage, F.3d at 768 190.25 avoid see

Case Details

Case Name: PAJ, Inc. v. Hanover Insurance Co.

Court Name: Texas Supreme Court

Date Published: Jan 11, 2008

Citation: 243 S.W.3d 630

Docket Number: 05-0849

Court Abbreviation: Tex.