A copyright infringement suit has led to a change in Texas law regarding when an insurer may deny coverage after a policyholder fails to give prompt notice that a potential claim exists. In PAJ. Inc. v. Hanover Insurance Co., 2008 WL 109071 (Tex. 2008), the court held that to deny coverage to policyholders who delay in reporting claims, an insurer must demonstrate that the delay prejudiced the insurer.
PAJ, a jewelry manufacturer, purchased a commercial general liability policy from Hanover. The policy covered, among other things, liability for advertising injury. The terms of the policy required PAJ to notify Hanover of any claim or suit brought against it “as soon as practicable.” In 1998, PAJ was sued for copyright infringement and, initially unaware that the Hanover policy provided coverage for such disputes, PAJ did not notify Hanover until four to six months after the suit was filed. After Hanover denied coverage based on PAJ’s failure to promptly notify it of the dispute, PAJ filed a declaratory judgment action against Hanover. The parties stipulated that PAJ did not notify Hanover “as soon as practicable” and that Hanover was not prejudiced by the delay. The trial court granted summary judgment in favor of Hanover, and the court of appeals affirmed, holding that Hanover was not required to show prejudice before it could deny coverage.
In a 5-4 decision, the Supreme Court sided with PAJ. In arguing that it should not be required to show prejudice, Hanover contended that the prompt notice provision was a condition precedent to providing coverage. The court rejected this assertion, noting that “when a condition would impose an absurd of impossible result, the agreement will be interpreted as creating a covenant rather than a condition.” The court concluded that a denial of coverage without a showing of prejudice would be such a result, imposing “draconian consequences for even de minimis deviations from the duties the policy places on the insureds.” In reaching its conclusion, the court also noted that the timely notice provision “was not an essential part of the bargained-for exchange under PAJ’s occurrence-based policy.” Distinguishing such a policy from a claims-made policy, the court recognized that with respect to occurrence-based policies, a notice requirement “is subsidiary to the event that triggers coverage. The decision in PAJ will make it more difficult for insurers to deny coverage, particularly under occurrence-based policies, without demonstrating that they were prejudiced by a delay.
Full Opinion Text: http://www.supreme.courts.state.tx.us/historical/2008/jan/050849.htm