Regular readers of this blog know that among my hobby horse issues are the various questions surrounding late notice of claim. Timeliness is of course a standard conditions for complying with an insurance policy’s notice requirements. Policies also contain other notice conditions, such as, for example, where the notice must be sent and so on. In an interesting recent ruling, the Fifth Circuit examined a professional liability insurance policy’s conditions of notice, finding that while the timely provision of notice is a material condition, others of the policy’s notice conditions were immaterial, and held, applying Texas law, that the insurer could be relieved of its coverage obligations for the policyholder’s failure to comply with an immaterial condition only if the failure prejudiced the insurer.
Gaylene Lonergan is a Texas lawyer. In 2015, she advised a group of investors in connection with a real estate transaction. After the investors lost money in the transaction, they sued Lonergan for malpractice. The malpractice lawsuit ultimately went to trial, resulting in a judgment against Lonergan.
During the period May 2015 to May 2016, Lonergan was insured under a professional liability insurance policy. Lonergan did not formally submit the malpractice lawsuit to her insurer as a claim under the policy. However, in April 2016, as part of her application to renew her professional liability insurance, she submitted a “Claim Supplement” which the trial court in the subsequent insurance coverage action described as “a concise synopsis of the underlying dispute” (i.e, of the malpractice lawsuit).
While the underlying lawsuit was still pending, Lonergan’s insurer filed an action in federal court seeking a judicial declaration that it did not have a duty to defend her in the underlying lawsuit, arguing that Lonergan had failed to “report” the Claim to the insurer during the policy period as required under the policy. The insurer argued further that the Claim Supplement to Lonergan’s insurance renewal application was insufficient to satisfy the policy’s requirement for insureds to “report” claims to the insurer. The insurer filed a motion for summary judgment, which the district court granted.
The real estate transaction investors, who had prevailed against Lonergan in the underlying malpractice lawsuit and who had appeared as intervenors in the insurance coverage lawsuit, appealed the district court’s ruling.
The February 19, 2020
In a February 19, 2020 per curiam opinion designated as not for publication, a three-judge panel of the Fifth Circuit, applying Texas law, reversed the district court’s entry of summary judgment and remanded the case to the district court for further proceedings.
On appeal, the investors had argued that Lonergan’s insurance renewal Claim Supplement had provided the insurer with the relevant information about the malpractice lawsuit and therefore that the district court erred in granting the insurer summary judgment.
The insurer countered that the plain meaning of the term “reported” must be informed by the policy’s “Notice of Claim” provision, which specifies that policyholders must “immediately send copies” of “demands, notices, summonses, or legal papers” to the insurer’s claims department. The insurer argued that since Lonergan had sent the Claim Supplement to the insurers’ underwriting department rather than its claims department, she did not “report” the claim as required by the policy.
The appellate court first noted that the policy does not define the term “reported,” and so, the Court said, as a matter of Texas law, it must interpret the term according to its “plain meaning.”
With that in mind, the appellate court agreed with the investors, noting that the insurer did not dispute that it received the Claim Supplement during the policy period. Lonergan, the appellate court said, had “therefore ‘reported’ – provided information – of the Claim to [the insurer] as required by the Policy.”
The appellate court went on to acknowledge that while the policy does contain “certain Notice of Claim conditions,” the Supreme Court of Texas has “distinguished an insured’s material obligations to report a claim from an insured’s immaterial obligation to comply with such notice conditions.”
(In support of this proposition, the appellate court cited the Texas Supreme Court’s 2009 decision in Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Company, which can be found here.)
While an insured’s “breach of a material reporting obligation relieves an insurer of its duty to defend and indemnify the insurer, the same is not necessarily true when an insured breaches an immaterial notice condition.” Instead, an insurer is relieved its obligations under the policy “only when the insurer that shows that it was prejudiced by the breach.”
Because the district court had not reached the question of whether the insurer was prejudiced by Lonergan’s failure to comply with the policy’s notice conditions, the appellate court remanded the case for district court for further proceedings to address that issue.
In my many prior posts bemoaning late notice cases, I have compared the notice defenses insurers sometimes raise to the childhood game of “mother may I,” where the players who fail to request permission to move are ruled out of the game. At other times, I have objected that some insurers’ late notice defenses amount to an attempt to have a mere foot fault result in a forfeiture of the entire match.
With its more succinct distinction between material and immaterial conditions of notice, the Fifth Circuit has much more directly made the point I was inartfully making with my comparisons to childhood games and tennis matches. If the condition of notice that the policyholder failed to fulfill is immaterial, then the insurer is excused from its obligations under the policy only if the failure to fulfill the condition prejudiced the insurer.
I can anticipate that insurer-side advocates will have several objections to the appellate court’s conclusion here. First, I can anticipate the insurer-side advocates asserting that all of the policy’s notice conditions are material, and none are immaterial, as the conditions establish what the insurer requires in order to be able to respond to its policyholder’s claims. Second, the insurer-side advocates will argue that it can’t be sufficient in order to fulfill the policy’s notice requirements to send claims information to the underwriting department, as the claims and underwriting departments are set up for different functions, and it is the claims department that must receive the claims information.
These insurer-side arguments are very familiar to me. Indeed, during my years as an insurer-side advocate earlier in my career, I made some version of these arguments myself.
However, in reflecting on these arguments now, it seems to me that the “all notice conditions are material” argument and “claims information can’t go the underwriting department” argument have at their core a common element, which is a sense that claims processing will get messed up if things don’t proceed in an orderly way. Which is, in the end, another way of saying that if things don’t proceed in orderly way, the insurer’s interests will be prejudiced. And of course, all the appellate court said here is that the insurer needs to show that it was prejudiced.
I think it is worth noting here that the appellate court didn’t say that it is just fine that Lonergan failed to fulfill one of her professional liability insurance policy’s conditions of notice. While the ultimate outcome of this insurance dispute is at this point uncertain, it is entirely possible that on remand her failure to fulfill the notice condition will result in her loss of insurance coverage, assuming that the insurer can show that it was prejudiced by her failure to fulfill the condition.
The policy’s conditions of notice still matter. Indeed, the appellate court said that it is only with respect to “immaterial” conditions of notice that the insurer must demonstrate that it was prejudiced in order to be relieved of its policy obligations. Presumably, and even under Texas law, if the insured fails to fulfill a material condition of notice – say, for example, in this case, if Lonergan had never provided the insurer with any information at all about the malpractice claim – then the insurer apparently would not even need to demonstrate prejudice.
The appellate court’s ruling was of course the result of the court’s application of Texas law. Other courts applying the law of jurisdictions other than Texas may not recognize the distinction in Texas law between material and immaterial conditions of notice. However, while the value of this ruling may be limited to cases governed by Texas law, I still find the court’s distinction between material and immaterial conditions of notice interesting and arguably illuminating when it comes to a set of issues that recur time and time again.