Lexington Ins. Co. v. North Am. Interpipe, Inc., #08-3589 (S.D. Tex. June 19, 2009)
The vast majority of insurance coverage disputes are decided either at trial (based on findings of fact --usually by a jury -- and conclusions of law) or by a motion for summary judgment (based on stipulations of fact and conclusions of law). The judge decides a summary-judgment motion based on paper submissions alone, without live witnesses. This case illustrates a third procedure by which the defendant seeks dismissal of the action simply because the plaintiff has failed to sufficiently allege a claim in the first place. In federal court, the procedure is called a 12(b)(6) motion for failure to state a claim. 12(b)(6) dismissals are rare in insurance cases because the policyholder can usually find the words to allege, "I bought a policy. I submitted a covered claim. My insurance company wrongly denied the claim."
In the Lexington case, the 12(b)(6) motion was actually brought by the insurance agent who procured the policy. The insured was sued for an allegedly defective pipe casing that leaked and damaged an underground oil formation. The insured must have realized that it would lose on coverage (most policies issued to oil patch suppliers exclude damage to underground resources) because it also sued its agent for negligent misrepresentation (i.e., "you told me you got an adequate policy")and breach of fiduciary duty ("you had a ironclad duty to get an adequate policy"). The agent moved for dismissal under 12(b)(6) on two grounds.
First, the agent argued that Texas is a strong duty-to-read jurisdiction. Even if the agent misrepresented the adequacy of the policy, the insured's failure to read the terms for itself trumps any misdeeds by the agent. The court refused to dismiss for this reason, noting that Texas courts have long recognized a cause of action for an insurance agent's negligent misrepresentation of coverage. Besides, the insured alleged that it never received the policy and therefore couldn't read it.
Second, the court did find that the allegations of breach of fiduciary duty were too thin. Insurance agents do not owe a blanket fiduciary duty to their customers. Only if a special relationship of trust and confidence has been established over time can an insured prevail on a fiduciary-duty claim. The court, accordingly, dismissed the fiduciary-duty claim, but allowed the insured 10 days to replead facts that, if proven, might show a special relationship.
Policyholders have a hard time winning this type of claim against their agents. Even if the duty to read doesn't end the claim, an insured has to prove that it asked the agent to get insurance for a specific risk, the agent mispresented that it got the coverage, and the insured could not discover the failure by reading the policy. (For a particularly egregious example of an insured getting the shaft, see Omni Metals Decision). The insured in this case has an uphill fight. But insureds can, at least, usually get past the pleading stage.
Essex Ins. Co. v. Long Island Owners Ass'n, Inc., No. 08-179 (S.D. Tex. June 10, 2009)
Beware the "any auto" exclusion. Although the policyholder in this case dodged a bullet, risk managers everywhere should try to avoid this exclusion in their commercial general liability (CGL) policies.
In theory, insureds should be able to obtain insurance covering liability for most accidental physical injuries to others. If the insured causes the injury while driving or otherwise using an auto, the coverage is provided under a commercial auto liability policy. In all other cases, not arising from the insured's use of an auto, the CGL policy should apply. To avoid overlap, the CGL policy excludes claims arising from the use of the insured's auto, and the auto policy covers nothing but such claims. No claim should fall through a crack between the two. However, some CGL policies out there exclude claims arising out of "any auto" (not just one owned or used by an insured).
In Essex, a motorcyclist was struck by a swing bridge traffic arm that suddenly and unexpectedly lowered on the passing traveler. The vehicle operator sued the homeowners' association responsible for the traffic arm. The defendant's CGL carrier denied coverage under the following exclusion:
With respect to any "auto" . . . [t]his insurance does not apply to any claim, suit cost or expense arising out of, caused by or contributed to by the ownership, non-ownership, maintenance, use or entrustment to others of any "auto."
Since the motorcycle is an "auto" under the policy, Essex asserted that the accident arose form the motorist's use of "any auto." N.B., to avoid this challenge to coverage, purchase a CGL policy that excludes any claims arising from the insured's ownership, non-ownership, maintenance, use or entrustment to others of any "auto." A coverage lawsuit followed.
The court noted that the Texas Supreme Court has ruled that, for this type of exclusion to apply, "a causal connection must exist between the accident or injury and the use of the motor vehicle." (Mid-Century Ins. Co. v. Lindsey, 997 S.W.2d 153 (Tex. 1999). With this criterion in mind, the court decided the issue primarily by comparing two precedents. In Collier v. Employers Nat'l Ins. Co., 861 S.W.2d 286 (Tex. App. 1993), the court found that where a driver of a moving vehicle was shot by someone in a passing car, the use of the vehicle was not causally connected to the incident.
By contrast, in Markel Internat'l Ins. Co. v. Urban, LLC, #CA-160-OG (W.D. Tex. 2008), a woman was struck and killed by a passing vehicle when she was going from one bar to another across a busy street. The Markel court held that auto exclusions (in the bars' policies) excluded the claim because being hit by a car is clearly causally connected to the use of an auto.
The Essex court held that being hit by a traffic arm while driving through the gate was closer to the Collier facts than those in Markel. The motorcyle didn't cause the accident. The driver happened to be passing in a vehicle, but the accident could as easily have befallen a passing pedestrian. Accordingly, the court held in favor of the insured.
The insured taverns in the Markel case probably had no idea they would not be covered if patrons were struck by autos when leaving their establishments. That is a foreseeable risk, as is the lawsuit for the owner's negligence. Had they only checked the language in their policies and asked their agents for a broader policy, the claim would have been covered (as long as the patron was not so drunk as to trigger a dramshop exclusion -- but that is for another day).
Certain Underwriters at Lloyds London v. Law, # 08-20159 (5th Cir. June 2, 2009)
Sandra Day O'Connor magnanimously offered to help reduce the case backlog before the 5th Circuit Court of Appeals and sat by designation to review this lower court judgment in favor of the policyholder. Thieves climbed onto the roof of a commercial building in Houston, broke open panels to the air conditioning housing, and stole copper coils from inside the units.
The insured owner had insurance that excluded damage caused by theft, "except for building damage caused by the breaking in or exiting of burglars." The term "building" is defined to include "fixtures, including outdoor fixtures," which everyone agreed would include these air conditioning units. Nevertheless, the insurer denied the claim arguing that these thieves were not "burglars" breaking into or exiting the "building."
The lower court ruled in favor of coverage. On appeal, the three-judge panel reversed this judgment and rendered that the policyholder take nothing, with Justice O'Connor (Ret.) dissenting. Justice O'Connor found that Texas law required a little more insured-friendly interpretation than that adopted by the majority. She reasoned that the air conditioners, as outdoor fixtures, were part of the building, and the burglars went into and exited the air conditioner housing panels. A simple case based on the plain language of the policy.
However, the majority disagreed, "with the utmost respect," and held that "breaking in" to a building "unambigously contemplates nothing more expansive that an attempt to enter bodily into the interior space of the building as bounded by walls, floors, and ceilings." Any other interpretation, said the majority, was "tortured."
"But," Justice O'Connor (Ret.) admonishes, "nothing in the policy demands such a cramped understanding of intrusion to apply only to a building's 'inner space.' " Texas law urges a more liberal reading in favor of policyholders than this.
I believe some of our courts could benefit from this instruction from the Honorable Associate Justice (Ret.), and I hope she will not give up on us in Texas.
Matkin-Hoover Engineering, Inc. v. Everest Nat'l Ins. Co., No. 08-cv-0451 (W.D. Tex. May 23, 2009)
This case illustrates one of the deadliest coverage traps for policyholders in the coverage world: late notice under a claims-made liability policy. Matkin-Hoover (MH) designed a shopping center and parking lot. Drainage problems appeared soon after construction, and the owner sent a series of e-mails and letters to MH, the general contractor, and the paving subcontractor raising the problem and seeking a solution. Eventually, litigation ensued. MH promptly submitted the suit papers to Everest, MH's professional services liability insurer, but Everest refused to defend the suit, alleging untimely notice of the claim.
Like many errors & omissions type policies, MH purchased a "claims-made" (as opposed to "occurrence") policy. The distinction between an "occurrence" and a "claims-made" type policy is crucial. "Occurrence" policies cover the insured's liability for claims asserting that the covered event or conduct (the "occurrence") occurred within the policy period, without regard to when the claim was actually asserted or the lawsuit filed. By contrast, "claims-made" policies respond to claims asserted against the insured within the policy period, without regard to when the event or conduct occurred giving rise to the claim (although most claims-made policies impose a retroactive date limiting how far into the past the coverage will extend).
Last year, the Texas Supreme Court simplified late-notice disputes under occurrence policies by requiring the insurer to defend despite late notice of the claim unless the insurer can prove prejudice, which is almost impossible as long as notice was sent before trial. See my discussion at PAJ Decision. By contrast, failure to submit timely notice of a claim under a claims-made policy is usually fatal. The insurer may avoid coverage simply by proving late notice.
Here, MH sent notice in May 2006, as soon as the lawsuit was filed. The annual policy period began April 15, 2006. Notice in May would be timely unless the owner first made a claim before April 15, which is the crux of the dispute in this case. What constitutes a "claim"? As defined in the policy:
"Claim" means a demand for money or professional services received by the insured for damages, including but not limited to, the service of a lawsuit or the institution of arbitration proceedings or other alternative dispute resolution proceedings, . . .
Everest argued that MH received a "claim" at least as early as January 29, 2006, when the owner sent an email to MH and the contractors stating that the parking lot, "does not drain properly and has gotten worse since the last repairs . . . I regret that I have to keep inviting you back to deal with the problem. . . Please get [MH] to evaluate the situation to determine what really is the problem and how best to solve it."
MH responded by blaming the paving contractor for failing to follow the engineering plans. The owner sent MH a letter in March 2006 asserting that the design slope was too flat and concluding:
You need to to develop a plan to correct the drainage problem. Your plan has to include an engineering design and a provision for adequate funds to finance the construction. Please provide such a plan to us by close of business on April 10, 2006.
The court rejected Everest's assertion that this constituted a sufficiently clear demand for money or professional services as damages. The court was influenced by the fact that the owner sued the contractors as well as MH. However, the primary basis for the decision was the court's determination that asking for a plan fell short actually demanding relief.
Nevertheless, I can tell you that other judges could come down on the insurer's side. This is a very close call. The court rightly gave the insured the benefit of any doubts, but this decision could be appealed, and the appellate court court reverse (the appellate court owes no deference to the lower court's interpretation of the language; it would make its own judgment). However weak the "demand" might seem, a reasonable person arguably could interpret the letter as a demand.
The practical problem with this scenario is that most risk managers are reluctant to submit correspondence about a problem early in process, perhaps because most disputes get worked out short of litigation. Also, insureds may fear that premature submission of "noise" letters might result in higher premiums or even non-renewal of coverage. However, in my experience, that doesn't happen.
I advise clients to err on the side of submitting this kind of correspondence early. Most claims-made policies allow the insured to send notice of circumstances that might result in a "claim" (even before receiving any communication that might be a "claim"), any any later claim, even if made after the policy has expired, will be deemed to have been made (and notice given) at the time of the notice of circumstances.
Early notice has little or no downside for the insured and avoids the risk of denial for untimely notice. If anyone has experienced a punitive bump in premium or cancellation because of early notice of a possible claim, please let me know.
Aubris Resources LP v. St Paul Fire and Marine Ins. Co., No. 07-41272 (5th Cir. April 23, 2009), see Aubris Decision .
This case reverses the lower court's judgment in favor of St Paul concerning the interpretation of limiting language in an additional-insured endorsement. United Oil and Minerals LP (later purchased by Aubris) hired J&R Valley Oil Services to service United's oilfield properties. In the contract, J&R agreed to add United as an additional insured to J&R's liability insurance, except for "any obligations for which United has specifically agreed to indemnify" J&R. The contract also required United to indemnify J&R generally against lawsuits arising from United's negligence. J&R's general liability policy added as an additional insured any person that J&R agreed in a written contract to add, "if that written contract for insurance specifically requires such coverages." (I discussed the lower court's decision in an earlier post, here)
An explosion on United's property injured two of J&R's employees who sued United alleging negligence. St Paul refused to defend asserting that United was not an additional insured for claims that United had agreed to cover in the indemnity clause, namely claims arising from United's negligence. Because the plaintiffs asserted negligence, their claims fell within the indemnity and thus were excluded from the additional-insured coverage. The lower court agreed.
On appeal, the 5th Circuit reversed but not for the reason I suggested in my post. Aubris argued that the exception, "any obligation for which United has specifically agreed to indemnify J&R" (emphasis added), refers not to the general indemnification clause in the service contract, but to a separate, independent indemnity for a specific claim that the parties might make later. In other words, should a claim arise, and United agreed in a separate contract that it would indemnify J&R specifically against that claim, then that specific indemnity would be carved out of the additional-insured clause.
The appellate court agreed with Aubris. To accept St. Paul's argument, reasoned the court, would render the word "specifically" meaningless because the contract contains a general indemnity against all claims arising from United's negligence. The parties must have intended to carve from insurance coverage only specific instances of United's negligence that would be the subject of a separate agreement. Therefore, the court reversed and rendered judgment in favor of Aubris.
But I think my point is still valid. Another reason for ruling in Aubris favor is that the indemnification clause itself is unenforceable under Texas law because it fails to expressly state that United will indemnify J&R even if J&R is negligent. This is the "express-negligence" requirement that the Texas Supreme Court has consistently reaffirmed. Without it, the indemnity is pretty much a legal nullity. So, if J&R could never enforce the indemnity provision against United, how can St. Paul rely on it to limit the scope of the additional-insured endorsement? Put another way, St. Paul might avoid covering United only if United agreed to indemnify J&R. But United didn't agree to indemnify J&R because the indemnity is legally insufficient. Therefore, ST. Paul must defend Aubris.
Indemnification law in Texas borders on the irrational. Many businesses draft their indemnity agreements without consulting a lawyer, and a good many lawyers don't understand the quirks of Texas law on the subject. I usually advise my clients to approach contractual risk-shifting agreements with the goal of relying first on insurance before indemnities. Insurance is more reliable, and courts are instructed to interpret insurance policies liberally in favor of coverage. By contrast, courts are supposed to treat indemnities with suspicion. About half the indemnification agreements I come across are unenforceable. Courts more frequently err in construing indemnities than insurance policies.
But if you do rely on an indemnification agreement, make sure it meets Texas' tough enforcement standards.
Hartland v. Progressive County Mutual Ins Co., No. 14-07-00955 (Tex. App.- Houston [14th Dist.] April 23, 2009), see Hartland Decision
With this case, we review the throw-of-the-dice rule under Texas law governing when an insurer's acceptance of a late premium payment commits the insurer to paying a claim that arose before it accepted payment. Simply put, if the risk being covered has already occurred when the policyholder hurriedly licks the stamp to send in the overdue insurance premium, the insurer will be excused from covering the loss, even if it cashes the check and reinstates the policy. Texas cases follow this rule faithfully.
Charles Hartland had an auto liability policy that expired on May 9, 2004 at 12:01 am. Hartland received a renewal notice stating that the new premium was due by the time of expiration. Hartland claimed that he mailed the premium on May 8, but a jury found otherwise. Progressive received the renewal premium on May 16, and issued a renewal policy beginning May 12. Unfortunately, Mrs. Hartland was in a car accident at about 8 a.m. on May 9, 2009. Progressive denied the claim.
Hartland argued on appeal that, even if the premium was submitted after May 9, Progressive accepted the check and should be prevented from denying coverage (the legal jargon is "estopped to deny coverage"). Hartland relied for support on the venerable decision in Bailey v. Sovereign Camp, W.O.W., 286 S.W. 456 (Tex. 1926), in which Bailey was several days late in renewing his premium on a life insurance policy. Late payment would reinstate the policy but only with a new good-health certificate. Bailey, alas, sickened the day the late premium was submitted and died within 2 weeks after that. However, the insurer's agent accepted the late payment without asking for proof of good health. Upon receiving the death certificate and claim for benefits, the insurer denied coverage for breach of the good health requirement.
The Texas Supreme Court held testily that the insurer, having retained the late premium, couldn't deny coverage:
The time has not come in this State when an insurance company ... can, with knowledge that a policyholder has forfeited his right of protection, voluntarily accept and retain the premium which the insured has paid ... without also keeping [the policy] in full force and effect. One who places his bets after the dice are thrown is sure to win. ... Insurance companies cannot so gamble on the lives of their policyholders. Having accepted the wager in accepting the premiums, the [insurer] was bound by the consequences. [Emphasis added].
However, the Hartland court held that in this case it was the policyholder trying to place his bet after the dice are thrown. Bailey submitted the late premium before the triggering event (death). Hartland, by contrast, didn't send the premium until after the event (car crash). If the car crash occurred after Hartland mailed the payment, then the reasoning in Bailey would apply, and Progressive would be held to have placed its bet when it accepted the check, even if the crash had already occurred.
As a footnote, Bailey may in fact have bestirred himself to send in the late premium because he fell ill, which appears to violate the dice rule. But the risk under a life policy is death, not health, and the Bailey Court estopped the insurer on two grounds: (1) accepting the premium without asking for a good-health certificate, and (2) cashing and retaining the check. So the insurer had only itself to blame.
Entergy Gulf States, Inc. v. Summers, No. 05-0272 (Tex. April 3, 2009) see Entergy Majority Opinion
Somebody needs to explain to me why this case has provoked such a firestorm. In a unamimous 2007 decision, the Texas Supreme Court held that the Texas' workers' compensation (WC) statute (Labor Code sec. 406.121) permitted a premises-owner to act as its own "general contractor" (the term used in the statute) and achieve the benefits of immunity from common law lawsuits by contracting with subcontractors to purchase WC insurance for all employees on the work site. (See my discussion at Entergy 1) This arrangement, called an Owner Controlled Insurance Program (OCIP), may be used on large construction projects to lower insurance costs. One big WC policy instead of 100 smaller ones.
Then all hell broke loose. Outcries of judicial activism seemed to arise from all sides. Even some lawmakers commented in the press that this was never the intent of the 1989 language changes that the Court construed. One reporter was so desperate for a comment, she called me. So the Court agreed to rehear the case. Now, in 87 anguished pages, a four-judge majority, joined by three concurrences (two of which wrote 51 of those pages, see Hecht Concurrence and Willett Concurrence) and opposed by a three-judge dissent (see Dissent), reached the same result.
The statute itself provides:
A general contractor and a subcontractor may enter into a written agreement under which the general contractor provides [WC] insurance coverage to the subcontractor and the employees of the subcontractor.
The controversy lurks in the definition of "general contractor":
"General contractor" means a person who understakes to procure the performance of work or a service, either separately or through the use of subcontractors. The term includes a "principal contractor," "original contractor," "prime contractor," or other analogous term. the term does not include a motor carrier that provides a transportation service through the use of an owner operator.
The majority and those concurring say a premises owner may "undertake to procure the work or service of another." The dissenters assert that common usage, as well as earlier versions of the statute, as well as court opinions, defined "general contractor" to mean one contracting directly with an owner; "subcontractors" being those who contract with the general contractor.
The majority says it is just giving the statutory language its plain meaning. But even Justice Hecht, writing one of the concurring opinions, admits the statute is ambiguous. He finds sound policy reasons for spreading the blessings of WC coverage as broadly as possible. Apparently, a number of amici ("friends of the court who submit briefs because the outcome affects their interests) argued against allowing owners to escape common law liability to injured employees because WC benefits are too meager.
Admittedly, it's hard to tell which interpretation is what the Legislature intended. There are currently at least three bills pending on the current legislative docket, H.B. 520, H.B. 1657, and S.B. 2063, that would bar owners from becoming statutory employers. But I ask again, why all the fuss?
One of the amici seeking to overturn the 2007 result admits that very few owners are large and rich enough to afford an OCIP arrangement. Insurance companies typically won't agree to them unless the project is huge. Opening the statutory protection to owners will not make much difference in the number and frequency of construction lawsuits.
I stand by what I told the reporter in 2007. I think this case is no big deal.
Tanner v. Nationwide Mut. Fire Ins. Co., No. 07-0760 (Tex. April 17, 2009), see Tanner Opinion.
You would think that an exclusion of intentional acts in a policy that covers only accidents would be easy to figure out, but, as this case shows, the intentional-acts exclusion is one of the most contentious features of a standard liability policy. If read superficially, this case reiterates a well-established principle of Texas insurance law that what is excluded is the intent to cause the injury, not the intent to do the act that causes the injury. Reading between the lines, however, the decision may be a warning to insurance companies not to try to broaden the exclusion to eliminate negligent or reckless conduct.
The insured led police in central Texas on a dangerous high-speed chase that ended with a collision that seriously injured the Tanner family. The insured apparently skipped bail and was never prosecuted. The Tanners submitted a claim under the miscreant's auto coverage. The Nationwide policy excludes the following:
Property damage or bodily injury caused intentionally by or at the direction of an insured, including willful acts the result of which the insured knows or ought to know will follow from the insured's conduct. [Emphasis added]
Nationwide denied coverage arguing that the insured ought to have known that driving at speeds between 80 and 100 mph would result in bad things. As the dissenting justice in this case observed, "[A]nyone who drives a huge 4-ton pickup at 100 miles an hour through city streets during rush hour 'ought to know' that someone is going to get hurt."
A jury diagreed and found that the insured did not intentionally cause the collision. The trial court threw out the verdict and ruled as a matter of law that the exclusion applied. The intermediate applellate court sided with the trial judge, but the Texas Supreme court in this opinion reversed and rendered in favor of the Tanners, holding:
[W]e emphasize this critical point: "intentionally" as used in the exclusion speaks to the resulting damage or injury, not to the actions that led to it. That is, the language is effect-focused and not cause-focused, voiding coverage when the resulting injury was intentional, not merely when the insured's conduct was intentional. [Emphasis in original]
The majority noted that the insured tried to brake and avoid the collision; he didn't intend to cause the injury. Admittedly, this critical point would end the argument in most standard intentional-act exclusions, but the Nationwide exclusion is broader than usual. (The most common standard exclusion is for "bodily injury and property damage expected or intended from the standpoint of the insured."). The Nationwide policy also excludes "willful acts the result of which the insured knows or ought to know will follow from the insured's conduct."
"Ought to know" is short hand for negligence. You ought to know something if an ordinary person under the same or similar circumstances would know it. That is the negligence standard. In other words, Nationwide might be trying to shoe-horn ordinary negligent conduct into its intentional-acts exclusion. What does the majority say about this? The opinion focuses on the words, "will follow." Taken literally, the "ought to know" part kicks in only when a person is capable of absolute certainty that injury will result. Can that ever happen? The ancient Greek sceptic philosophers demonstrated that it is impossible to truly know anything, especially the future (thus giving an early boost to the science of probabilities).
What the Court is really saying, I think, is that no insurer in Texas should be allowed to broaden this type exclusion to include less than intentionally caused injury. Earlier in the opinion, the majority observed:
A contrary reading of the exclusion -- that reckless acts absent deliberate injury are sufficient to forfeit coverage-- would render insurance coverage illusory for many of the things for which insureds commonly purchase insurance. For example, Texas mandates liability coverage for drivers, but if ordinary Texans are unprotected from those who intentionally run red lights, but intend no harm to to others by doing so, then Texas is replete with noncoverage notwithstanding its mandatory-coverage requirement.
The dissent argues for a police-chase exception that would deem as intentional any injury caused in the course of the chase. But that seems arbitrary.
But what if an insurer comes out with an exclusion similar to Nationwide's that excludes "willful acts the result of which the insured knows or ought to know would likely follow (or "could follow")? Under the reasoning above, the high court would (I should say, likely would) refuse to enforce it as a matter of public policy.
Christi Bay Temple v. Guideone Specialty Mut. Ins. Co., #13-07-537 (Tex. App.--March 31, 2009) see Christi Bay Temple Decision.
I don't usually comment on cases that deal only with court procedure, not the merits of an insurance dispute, but the insurer's slick use of the rules of procedure to avoid an insurance claim merits consideration. Not a good story for Good Friday.
Christi Bay Temple, a Pentecostal Church of God, submitted property damage claims to its insurer, Guideone, some time before 2004. The court doesn't say what the claims were or why Guideone refused to honor them. We must assume that the church in fact purchased the policy and thinks it had legitimate damage claims. All we know is that the church sued Guideone over coverage in 2004. During the lengthy discovery process, the insurer asked for certain documents, including the church's title deed to the property. It was then that the insurer hit upon an important and curious fact. The case doesn't say, but one infers that the title deed showed ownership by Christi Bay Temple, Inc.
The church had been formed in 1980 as a non-profit corporation but had forfeited its corporate charter in 1983. The church's attorney indicated at one point that giving up the corporate charter had something to do with the church's decision to affiliate with the Pentecostal Church of God. It may have some theological basis. Perhaps all church property must be held in common. But for whatever reason, the Christi Bay Temple chose to operate under the legal form of an unincorporated association and neglected to properly dissolve its legal existence as a corporation.
So what does this have to do with Guideone's defense in the lawsuit? Two things: First, a corporation that forfeits its charter is still a corporation, just one with diminished powers. Reinstating its charter is merely a matter of paying the back taxes, penalties, and interest required to maintain the charter. Second, and this is the tour de force, Section 171.251 of the Texas Tax Code provides that a defaulting corporation not only forfeits its charter, it also forfeits other privileges of incorporation, including the right to sue or defend in state court.
So Guideone pulled the procedural strings and filed the motions necessary to get the case dismissed because the church lacked the legal capacity to prosecute its coverage case. The court was not hasty. Years went by to allow the church time to cure its defunct corporate status. However, for whatever reasons, financial or theological, the church failed to do so. Finally, case dismissed.
The obvious lesson is to keep up with those pesky legal formalities. Christi Bay Temple is in a hopeless bind. To properly dissolve the corporation would require payment of of some 25 years of back franchise taxes. But failing to do so leaves it a corporation with no real rights. This certainly is not an equitable result for the policyholder. Guideone sold a policy to what appeared to be an unincorporated association. The church paid good premium for the policy but now is barred from enforcing its rights to have the coverage issues, whatever they are, adjudicated. It is easy to feel that Guideone took unfair advantage of the situation. Nevertheless, the interests of the state to require corporate citizens to live up to their tax obligations appears to outweigh the possible unfairness of letting the insurance get away with avoiding a meritorious insurancee claim.
The only way forward for the church may be to transfer all its property to a new entity and cut the defunct corporation adrift. But that would mean giving up its claim against Guideone on this one.
Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., # 06-0598 (Tex. March 27, 2009) see Prodigy Decision.
A little over a year ago, the Fifth Circuit Court of Appeals certified a question to the Texas Supreme Court (see my discussion at 5th Circuit Asks Texas Supreme Court to Clarify Prejudice Requirement for Late Notice Under Claims-Made Policies) , which it answered last week in the Prodigy case. The question was:
Must an insurer show prejudice to deny payment of a claims-made policy, when the denial is based upon the insured's breach of the policy's prompt-notice provision, but the notice is nevertheless given within the policy's coverage period?"
The High Court, over three dissenting Justices, held that the insurer must prove prejudice under these circumstances, even though the policy is claims-made. The distinction between an "occurrence" type and a "claims-made" type policy is crucial. "Occurrence" policies cover the insured's liability for claims asserting that the covered accident, event or conduct (the "occurrence") occurred within the policy period, without regard to when the claim was actually asserted or the lawsuit filed against the insured. By contrast, "claims-made" policies respond to claims asserted against the insured within the policy period, without regard to when the event or conduct occurred giving rise to the claim (although most claims-made policies impose a retroactive date limiting how far into the past the coverage will extend).
The Texas Supreme Court had earlier put to rest any dispute over the insurer's obligation to demonstrate that late notice caused prejudice under an occurrence type policy in the PAJ case (see discussion CGL Insurers Must Prove Prejudice to Avoid Coverage for Late Notice of Claims). By holding that the insurer must show prejudice for late notice, as long as notice is still within the policy period or any extended reporting period, the Prodigy decision seems to resolve the issue fairly.
On the one hand, the claims-made insurer retains the benefit of its bargain by being able to curtail further claims at the end of the reporting period. On the other hand, requiring the insurer to show that the delay actually prejudiced its interests prevents a harsh forfeiture of coverage yet still protects the insurer's interests.
The dissenters argued that requiring a demonstration of prejudice in effect rewrites the policy. But that argument was aired and discarded in the PAJ case.
The effect of Prodigy is that notice of a claim must now be given within the time allowed for reporting claims under the policy even if the policy requires notice as soon as practicable. Failure to provide prompt notice shifts the burden to the insurer to show that the delay actually caused prejudice.