Opinion ID: 1213610
Heading Depth: 1
Heading Rank: 5

Heading: Necessity of Showing Prejudice

Text: We have concluded that the district court was correct to find that the Medical Center violated the policy's requirement to give separate written notice of the filing of the Cornelius lawsuit as soon as practicable. We now turn to whether Lexington should have been required to show it was prejudiced by the lack of prompt notice. At trial, the Medical Center proposed a jury instruction to require a finding that Lexington was prejudiced by a failure to be notified as soon as practicable of a lawsuit or to be sent documents immediately received about any suit. The district court refused to submit the instruction. It found that on this issue of prejudice, Texas law distinguishes between two kinds of policies. The contract here was a claims-made policy. The district court found that under Texas law, no showing of prejudice is needed before late notice bars coverage. For occurrence policies, though, prejudice must be shown before inadequacies of notice will bar a claim. Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653, 658 (5th Cir.1999) (applying Texas law). After oral argument on the present appeal, the Supreme Court of Texas decided two cases that guide us. See Prodigy Comm. Corp. v. Agric. Excess & Surplus Ins. Co., ___ S.W.2d ___, No. 06-0598, 2009 WL 795530 (Tex. Mar. 27, 2009); Fin. Indus. Corp. v. XL Specialty Ins. Co., 285 S.W.3d 877 (Tex.2009). The parties have filed supplemental briefs addressing these new cases. Prodigy involved a claims-made policy with a provision requiring notice of claim as soon as practicable ... but in no event later than ninety days after the expiration of the Policy. 2009 WL 795530, at . The court assumed that even though the notice was given within the ninety-day period, it was not given as soon as practicable. In order to deny coverage, though, the insurer was required to show it was prejudiced by a failure to give notice as soon as practicable. Id. at . This was because that provision was not an essential element of the bargained for exchange between the parties. Id. at . Prodigy held that a requirement of notice as soon as practicable was not essential to the bargain. Such promptness will `maximiz[e] the insurer's opportunity to investigate, set reserves,' and plan for possible payment of a claim. Id. at  (quoting 13 LEE R. RUSS & THOMAS F. SEGALA, COUCH ON INSURANCE § 186:13 (3d ed.2005)). By contrast, the requirement that a claim be made within the policy period `is directed to the temporal boundaries of the policy's basic coverage terms [and] ... defines the limits of the insurer's obligation.' Id. (quoting 13 COUCH ON INSURANCE § 186:13). Importantly, the same is true of a notice provision requiring that a claim be reported to the insurer during the policy period or within a specific number of days thereafter. Id. Such a provision `define[s] the scope of coverage by providing a certain date after which an insurer knows it is no longer liable under the policy.' Id. (quoting Resolution Trust Corp. v. Ayo, 31 F.3d 285, 289 (5th Cir.1994)). This last point led the Prodigy court to articulate a distinction, though it may not be one directly relevant to this case's outcome. A claims-made policy containing a requirement that claims must be reported to the insurer during a specified period is known as a claims-made and reported policy. Id. In such a policy, a provision will require not only that a claim be made but also that it be reported to the insurer within the specified time period. Both reports are considered essential to coverage such that an insurer need not demonstrate prejudice to deny coverage when an insured does not give notice within the policy's specified time frame. Id. Because of our sustaining the jury's finding that loss runs could provide notice of claim, here there was such notice within the policy period. After Prodigy, though, prejudice must be shown to use failure to give notice as soon as practicable as a bar to recovery, even under the terms of a claims-made or claims-made and reported policy. The policy in Prodigy was a claims-made and reported policy, but the insured complied with the 90-day time limitation in that policy. It ran afoul only of the as soon as practicable requirement. Thus, the insurer was required to show it had been prejudiced in order to deny coverage. See also PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 631 (Tex.2008) (explaining the notice-prejudice principle generally). In the companion case, XL Specialty, the Supreme Court of Texas applied the same principle to a more traditional claims-made policy. By that, we mean one without a clear-cut reporting deadline for the reporting of claims to the insurer, but with an as soon as practicable requirement. 2009 WL 795529, at -2. The insured had failed to report a claim as soon as practicable, but had done so before the expiration period of the policy. Id. at . The court held that, because notice had been received before the end of the policy period, XL was not denied the benefit of the claims-made nature of its policy, and could not deny coverage without showing prejudice. Id. With this new law to guide them, both parties in the present case agree that the policy here is more like the one in XL Specialty than that in Prodigy. The Lexington policy does not establish a particular number of days within which all claims must be reported. Section V.A.1. of the policy provides for a 60-day Optional Extended Reporting Period added to the expiration date of the policy if certain conditions are met, but under the facts of this case we need not address the import of this provision. As we held earlier, the jury was entitled to find that the Medical Center reported the claim to Lexington within the policy period via the loss runs. We also held, though, that the policy required separate notice of claims and suits. It is undisputed that the Cornelius lawsuit, though filed within the policy period, was not reported to Lexington until nearly seven months after the expiration of that period. Thus, it did not meet the as soon as practicable requirement. Before we too quickly apply the Prodigy and XL Specialty approach, we must recognize that nothing in those cases requires the same analysis to be applied to each of two separate notices. Both of those cases dealt with notice of the claim. The Medical Center has overcome that notice hurdle, though it took fact finding by a jury to get them over. Must an insured jump two notice hurdles? We have already concluded that this policy requires separate notices for claims and suits. We have been pointed to no case law indicating that once around the notice track is enough. Yet neither have we been shown case law stating that the notices must keep being given or coverage is lost. We find no principled basis on which to rule that Prodigy and XL Specialty, once satisfied as to a claim, are no longer relevant for later notices required under the policy. But we do not find that a second notice, the one given of the filing of a suit, is directed to the temporal boundaries of the policy's basic coverage terms [and] ... defines the limits of the insurer's obligation. Prodigy, 2009 WL 795530, at  (quotation marks omitted). Notice of suit does not need to be given within the coverage period or any other reporting time. That is because a suit based on a claim that arose during the policy period might not be filed until long after the policy's end. As long as notice of the underlying claim had been timely given, coverage would exist under either a claims-made or claims-made and reported policy. Once a claim has been timely reported, the insurer would be unable to obtain the bargained-for benefit of closing its books until it had ascertained whether a suit would actually be filed. We find, then, that notice of suit is an obligation that is subject to the need to show prejudice. On remand, an issue will be whether Lexington suffered any actual prejudice as the result of the Medical Center's failure to send notification of the Cornelius lawsuit as soon as practicable.