Fifth Circuit Predicts Texas Law: Insurer Must Be Prejudiced to Use Late Notice as a Defense to Coverage
January, 2005
The U.S. Court of Appeals for the Fifth Circuit has predicted that, under Texas law, an insurer raising a late notice defense to coverage must show evidence of actual prejudice suffered as a result of the late notice in order to prevail. Ridglea Estate Condominium Ass'n v. Lexington Ins. Co., 398 F.3d 332 (5th Cir. 2005).
Facts
In July 2001, Ridglea Estate Condominium Association (“Ridglea”) learned that the roofs on its condominium property in Fort Worth, Texas, had suffered significant hail damage. Ridglea submitted a claim to the carrier on the risk in 2001, Chubb Custom Insurance (“Chubb”). Chubb advised Ridglea that the claimed property damage occurred prior to the inception of the Chubb policy because it was caused by a May, 1995 hailstorm. Ridglea was insured by Lexington in 1995 and accordingly submitted its claim to Lexington. After inspecting the roofs, Lexington concluded that the damage likely did not exceed Ridglea's deductible and that it found no evidence that the damage was incurred during its policy period, which ran from February 1995 to February 1996. Lexington therefore denied Ridglea's claim on December 19, 2001.
After approximately a year of negotiations, Ridglea issued a final demand to Lexington for $449,198.63 plus attorneys' fees of $10,000. Lexington again denied Ridglea's claim and brought suit seeking a declaratory judgment that it was not liable for the hail damage to Ridglea's property. The U.S. District Court for the Northern District of Texas dismissed Lexington's declaratory judgment action and realigned the parties, which created a direct suit for breach of contract damages against Lexington.
Thereafter, both parties moved for summary judgment. The district court granted Lexington's motion for summary judgment, “holding that Ridglea's claim was barred because it had failed to comply with the policy's notice requirement”:
Ridglea's policy states, in pertinent part, that no policy holder may bring an action against Lexington without first giving ‘prompt notice of the loss or damage' to covered property. The policy further requires that prospective litigants provide, ‘as soon as possible[,] a description of how, when and where the loss or damage occurred.'
Analysis
On appeal, Ridglea first argued that Lexington “waived any defense it might have under the policy's prompt notice provision because it originally denied the claim (in its December 19, 2001 letter) on the sole basis that the damage did not occur during the coverage period.” In support of this argument, Ridglea relied on Farmers Ins. Exchange v. Nelson, 479 S.W.2d 717, 721-22 (Tex.Civ.App. 1972), for the proposition that “when an insurer denies a claim for reasons unrelated to notice of damage, the insurer waives any requirement that the insured provide notice before filing suit.” Lexington responded that Texas recognizes an exception to this proposition: an insurer's “'total denial of liability on any grounds, after the time for filing [a] proof of loss had expired would not constitute a waiver of the defense of late filing of the proof of loss.'” United States Fidelity & Guaranty Co. v. Bimco Iron & Metal Co., 464 S.W.2d 353, 357 (Tex. 1971). Additionally, Lexington presented evidence that although Ridglea may not have been aware of the damage to the roofs, other property damage caused by the May, 1995 hailstorm was known to Ridglea in 1995. The Fifth Circuit agreed with Lexington on the first issue:
Ridglea should have been aware of the likelihood that its roofs had suffered hail damage, and thus, should have had the roofs inspected by an expert at some reasonable time soon after the hailstorm occurred. The fact that Ridglea's management neglected to do so does not serve to toll the policy's prompt notice provision in Ridglea's favor. … In sum, because Ridglea gave its notice of damage after the period for prompt notice had expired [six years], Lexington's subsequent general denial of liability … came ‘after the time limited for giving notice' and thus did not constitute a waiver of the defense of late notice.
Ridglea then argued that “Texas law requires Lexington to show that it was prejudiced by Ridglea's breach of the policy's ‘prompt notice' provision.” Lexington argued that the prejudice requirement only applies to automobile and general liability policies. The court agreed with Ridglea: “… we conclude that the prejudice requirement applies equally to all insurance policies issued in Texas, including the property insurance policy at issue here. As such, we hold that the district court erred in holding that Lexington was not required to show prejudice in order to raise breach of the policy's prompt notice provision as a defense.”
The court vacated the entry of summary judgment in favor of Lexington, and ordered the “district court on remand to determine whether Ridglea has raised questions of material fact as to whether Lexington was prejudiced by its breach of the policy's prompt notice provision.”
Learning Point:
Although the Fifth Circuit in Ridglea recognized that a six year delay in providing notice of property damage was contrary to the policy's prompt notice requirement, the court nonetheless refused to affirm the district court's entry of summary judgment, thus confirming that a late notice defense under Texas law must be supported by evidence that the insurer suffered prejudice because of late notice.
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