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Texas Supreme Court Prodigy Decision to Affect Insurance Claims?

By Lindsay M. Sestile, Litigation News Associate Editor – May 27, 2009

Insurance coverage litigators are debating whether a recent decision by the Texas Supreme Court reflects a marked shift in the treatment of coverage claims. In Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co. [PDF], the court held that a policyholder’s alleged failure to provide notice of the claim “as soon as practicable” will not defeat coverage in the absence of prejudice to an insurer under a claims-made policy.


Background of Prodigy
At issue in the Prodigy casewas a claims-made policy for director and officer liability insurance that provides coverage for claims first asserted during the policy period. The insurer in Prodigy denied coverage under the policy on the basis that the policyholder had failed to give timely notice of the claim. The policy required, as a condition precedent to coverage, written notice of the claim “as soon as practicable,” but in no event later than a reporting period specified in the policy.


Although it was undisputed that the policyholder gave notice to the insurer by the specified reporting deadline, the policyholder did so almost one year after it was served with the class-action securities lawsuit that formed the basis of its claim for coverage. The insurer argued that it could deny coverage based on the policyholder’s alleged failure to comply with the “as soon as practicable” notice provision, even though it admitted it had not been prejudiced by the delayed notice.


Texas Supreme Court Reversal
While the trial and intermediate appellate court both sided with the insurer, the Texas Supreme Court reversed. It found that the “as soon as practicable” provision was not an essential part of the bargained-for exchange under the policy.

The state high court held the policyholder’s failure to provide notice “as soon as practicable” did not defeat coverage in the absence of prejudice to the insurer, since the policyholder had provided notice within the reporting period specified in the policy.


Some insurance coverage litigators are expecting this ruling to have a ripple in the their field. Several have noted that Texas is a large jurisdiction and that many D&O policies have a provision calling for notice of claims “as soon as practicable.” However, whether there truly will be a ripple and how far-reaching its effects, seem to turn on which side of the aisle you ask.


A Major Win for Policyholders?
Although he believes this case is a major win for policyholders, David S. Coale, Dallas, TX, cochair of the Section of Litigation’s Commercial and Business Litigation Committee, does not believe it will lead to a surge in new claims.


“A party who really needs coverage—and who believes it is entitled to coverage—will always file a claim and do its best for notice. This case just eliminates one on a checklist of issues defense counsel will raise on a denied claim,” Coale notes.


“The policyholder is going to bring the case no matter what, but this decision provides more confidence for the policyholder going in and is one more case in her counsel’s arsenal,” agrees Tonya G. Newman, Chicago, IL, a member of the Section’s Insurance Coverage Litigation Committee.


On the other hand, counsel for insurers remain unconvinced that Prodigy is anything more than a neutral opinion, without much practical effect for their clients. “Notice is still a key issue and is still alive and well,” says Ruth S. Kochenderfer, Washington, D.C., vice cochair of the Section’s Insurance Coverage Litigation Committee.


“This decision simply clarifies that the prejudice requirement that already existed in Texas applies also to claims-made policies,” Kochenderfer explains.


The effect of the Texas decision would be unlikely to reach far beyond its borders, as insurance coverage is very state-specific, she notes. “Some jurisdictions do not have a prejudice requirement, while New York, for example, has enacted legislation explicitly requiring a showing of prejudice when a claim is denied based on notice,” Kochenderfer says.


Counseling Clients
Although he does not believe that the fundamentals of defending an insurer against a coverage claim will change, David Hopkins, Atlanta, GA, chair of the Section’s Class Action and Derivative Suits Committee Insurance and Regulated Industries Class Actions Subcommittee, notes that the best practice for an insurer engaged in coverage litigation is to concentrate on the notion of prejudice, which was left undefined by the Texas court.


“The client should focus very hard on whether any evidence has dissipated, whether any witnesses have disappeared or become uncooperative, whether any strategic errors have been made in the way the case has been handled prior to notice, or whether the insured has made any statements against interest. Any of these things could be the ‘prejudice’ that would lead a court to affirm denial of coverage,” advises Hopkins.


And even though counsel for policyholders view the court’s decision in Prodigy as a win for their clients, they stress that it also does not affect how they counsel those clients. The best practice is, and has always been, “to do what the policy says when it says,” says Coale.


“The best practice for claims-handling has not been drastically changed by Prodigy; the court’s decision just provides a fail-safe,” he notes.


“We always tell our clients, when in doubt, get your notice out,” Newman says.


Keywords: Insurance coverage, liability, Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co.


 

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