Opinion ID: 1402084
Heading Depth: 2
Heading Rank: 2

Heading: Third Certified Question[30]

Text: The Fifth Circuit questions Weaver's applicability to this suit because of changes in Texas insurance law over the years, [31] including a mandatory endorsement issued by the Texas Board of Insurance (now the Texas Department of Insurance), which requires a showing of prejudice in certain suits before an insurer may use late notice to deny coverage. [32] The Fifth Circuit's third certified question asks us: Does proof of an insurer's actual knowledge of service of process in a suit against its additional insured, when such knowledge is obtained in sufficient time to provide a defense for the insured, establish as a matter of law the absence of prejudice to the insurer from the additional insured's failure to comply with the notice-of-suit provisions of the policy? [33] We also answer this question, no. National Union was obviously prejudiced in the sense that it was exposed to a $1 million judgment. The question, however, is not whether National Union suffered exposure to a financial risk, but whether it should be estopped to deny coverage because it was aware that Morris had been sued and served and had ample time to defend him. The answer must be no based on the discussion aboveNational Union had no duty to notify Morris of coverage and no duty to defend Morris until Morris notified National Union that he had been served with process and expected National Union to answer on his behalf. Because [National Union] was not under a duty to defend the suit against its insured when [it received notice of the claim], it is not estopped from asserting [the insured's] breach of the policy as a bar to its liability. [34] Absent a threshold duty to defend, there can be no liability to Morris, or to Crocker derivatively. Recently, in PAJ, Inc. v. Hanover Insurance Co., we held that tardy notice of a covered claim will not defeat coverage unless the insurer was actually prejudiced by the delay. [35] The issue in PAJ was whether a named insured's untimely compliance with the notice-of-suit provision is excused if the delay inflicts no prejudice on the insurer. There are fundamental differences, however, between PAJ and today's case: in PAJ, the named insured made a request for coverage under the policy, albeit several months after as soon as [was] practicable. In the pending case, however, the additional insured's notice was not merely late; it was wholly lacking. PAJ's notice was tardy; Morris's was nonexistent. More importantly, as we have said, the requirement that an additional insured provide notice that it has been served with process is driven by a purpose distinct from the purpose underlying the requirement for notice of a claim or occurrence. Notice of service of process lets the insurer know that the insured is subject to default and expects the insurer to interpose a defense. An insurer cannot necessarily assume that an additional insured who has been served but has not given notice to the insurer is looking to the insurer to provide a defense. Potential insureds, for a variety of reasons, might well opt against seeking a defense from an insurer. For example, an additional insured may opt against invoking coverage because it wants to hire its own counsel and control its own defense. Indeed, Emeritus's counsel believed that Morris had done just that in this case. Counsel for Emeritus testified that he had asked Morris before his deposition if he could speak to him and Morris refused on the basis that he was waiting for a call from his attorney. [Emeritus's counsel] assumed that [Morris] had an attorney and did not want to talk to [Emeritus's counsel] on that basis. [36] As explained above, despite its actual knowledge of a covered suit against and service of process on Morris, National Union did not incur a duty to inform Morris of available coverage or his entitlement to a defense or to sua sponte provide one without any indication from Morris, either explicit or implicit, that he wanted or expected to be defended. Neither TDI's 1973 endorsement, nor our recent decision in PAJ, nor any other changes to Texas law since Weaver alter that conclusion.