The Texas Supreme Court handed down decisions in two cases this morning. In addition, it granted review in three new cases (one of which was a certified question from the Fifth Circuit), but only set one of those cases for its upcoming February 5th-7th sitting.

Details after the jump.

  • PAJ, Inc. v. The Hanover Ins. Co., No. 05-0849. Divided 5-4, the Texas Supreme Court held that an insurance policyholder did not lose the benefit of its coverage by the “immaterial breach” of failing to timely notify the insurer of a claim in this case, in which the insurer was not prejudiced by the delay.

    The dispute was about a commercial general liability policy and the insured did not initially realize that a particular claim (for copyright infringement) might fit within the policy.

    PAJ, Inc., a jewelry manufacturer and distributor, purchased a commercial general liability (“CGL”) policy from Hanover Insurance Company that covered, among other things, liability for advertising injury. The policy required PAJ to notify Hanover of any claim or suit brought against PAJ “as soon as practicable.” In 1998, Yurman Designs, Inc. demanded that PAJ cease marketing a particular jewelry line, and a month later sued PAJ for copyright infringement. Initially unaware that the CGL policy covered the dispute, PAJ did not notify Hanover of the suit until four to six months after litigation commenced.

    PAJ brought this suit against Hanover seeking a declaration that Hanover was contractually obligated to defend and indemnify PAJ in the copyright suit, and asserting several extracontractual claims. The parties stipulated that PAJ failed to notify Hanover of the Yurman claim “as soon as practicable” and that Hanover was not prejudiced by the untimely notice.

    The Court held that this breach was not a material breach, and thus it did not excuse the insurer’s performance (absent some showing of prejudice). It relied on the Court’s prior decision in Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex. 1994), which reached a similar result about a different policy involving uninsured motorist coverage. The Court noted that subsequent court decisions and treatises had cited Hernandez as establishing Texas as a “notice-prejudice” state for these purposes.

    The dissent focused on the difference between a “covenant” and a “condition precedent” in an insurance contract, arguing that the policy in this case was distinguishable from that in Hernandez and that the language here should be given effect until insurance regulators or the legislature say otherwise. “Courts should enforce unambiguous policy terms in accordance with their plain meaning. … The ‘better policy’ remains that insurance contracts should be construed by courts and spruced up, if necessary, by nonjudicial bodies.”

    Justice O’Neill wrote for the five-Justice majority, joined by the Chief Justice, Justice Brister, Justice Medina, and Justice Green. Justice Willett wrote a dissent, joined by Justice Hecht, Justice Wainwright, and Justice Johnson.

  • Houser v. McElveen, No. 06‑0504. Per curiam opinion. The Court held that the notice of appeal filed in that case was timely, and reversed and remanded to the court of appeals to consider the merits. The interesting feature of the case is that the notice of appeal had been filed by a prison inmate, and the Court explained that “[a]n inmate who does everything in his power to satisfy timeliness requirements may not be penalized for the error or tardiness of prison officials,” citing Williams v. T.D.C.J.-I.D., 142 S.W.3d 308 (Tex. 2004) (per curiam),

The Court also granted three new cases for review. As observed yesterday, the Court had a number of slots open on its early February argument calendar. But it only set one of these for argument then. One other was set for the late February sitting. And the third does not yet have an argument date. ((The third one is a certified question from the Fifth Circuit, which follows a different track within the Court. More briefs will have to be filed before that one is ready for argument.))

Set for argument on February 7, 2008

  • Robinson v. Crown Cork & Seal Co., No. 06‑0714. This is a case about asbestos/mesothelioma claims and whether the Texas Legislature’s enactment of a law that protected certain defendants from liability violated the plaintiff’s constitutional rights. The court of appeals held that the law was constitutional, although it noted that “the case law on vested rights is inconsistent and difficult to use as a guide” (Heading I.A. in that opinion). Seeking another test to use, the COA majority looked instead to whether the statute was within the State’s “police power” — a quite different analysis. The COA dissent would have found that the statute did violate vested rights. From the Fourteenth Court of Appeals. COA Majority COA Dissent

Perhaps not entirely coincidentally, both of the other grants today — like PAJ, Inc. v. Hanover — involve what happens when a policyholder does not give adequate notice to its insurance carrier:

Set for argument on February 26, 2008

  • Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Co., No. 06-0598. This is a summary-judgment dispute about whether adequate notice was given to the insurance carrier. From the court of appeals opinion:

    Prodigy is the successor in interest to Flashnet Communications, Inc. Flashnet purchased a directors’ and officers’ liability policy from Agricultural Excess & Surplus Insurance Company (AESIC). In November 2001, suit was filed against Flashnet in the United States District Court (Southern District of New York) alleging violations of federal securities laws. Process was served on Flashnet’s registered agent on June 20, 2002. Flashnet did not give written notice of the lawsuit to AESIC until June 6, 2003, nearly one year later. AESIC denied the claim because Flashnet did not give timely notice under the policy. Prodigy then brought suit against AESIC in this action. AESIC moved for summary judgment, arguing Flashnet’s late notice precluded coverage under the policy. Prodigy filed a cross-motion for summary judgment on its claim for breach of contract. The trial judge denied Prodigy’s motion and granted AESIC’s motion in part, ruling Prodigy failed to comply with the condition precedent of timely notice under the policy. AESIC then moved for summary judgment on the remaining issue, addressing Prodigy’s contention that the policy was sold in violation of Texas law governing surplus lines insurance. The trial judge granted summary judgment for AESIC on this ground and entered a final judgment in favor of appellees. This appeal followed.

    COA Opinion

Certified Question Accepted; No Argument Date Set

  • Financial Industries Corp. v. XL Specialty Insurance Co., No. 07‑1059 The Fifth Circuit’s order certifying the question is unpublished and explains:

    This diversity case raises an important and determinative question of Texas law: whether an insurer must show prejudice to deny payment on a claims-made policy, when the denial is based upon the insured’s breach of the policy’s prompt-notice provision, but the notice is nevertheless given within the policy’s coverage period. Because this question is not answered by any controlling Texas Supreme Court precedent, we certify it to the Supreme Court of Texas.