Absent Prejudice, Breach of Notice Conditions Does Not Relieve Insurer of Coverage Obligations
The United States Court of Appeals for the Fifth Circuit, applying Texas law, has held that an insurer could not deny coverage due to the insured’s failure to comply with “immaterial” conditions of notice, absent a showing of prejudice, where an insured complied with its “material” obligation to report a claim. Landmark Am. Ins. Co. v. Lonergan Law Firm, P.L.L.C., 2020 WL 833068 (5th Cir. Feb. 19, 2020); Landmark Am. Ins. Co. v. Lonergan Law Firm, P.L.L.C., 2020 WL 3024842 (5th Cir. June 4, 2020) (denying petition for rehearing en banc and issuing substitute opinion).
In the underlying action, investor clients of the insured attorney filed suit to recoup their losses from a real estate deal. At the time of the suit, the insured attorney held a professional liability policy, which provided coverage on a claims-made and reported basis and required the insured to “immediately send copies” of “demands, notices, summonses or legal papers” to the insurer’s claims department. The insured attorney did not report the investor suit to the insurer’s claims department. However, she did provide a synopsis of the suit to the underwriting department as part of her renewal application.
The insurer denied coverage for the investor suit on the ground that the insured attorney failed to comply with the policy’s notice provisions and then filed a declaratory judgment action. The district court granted summary judgment in favor of the insurer.
On appeal, the court reversed the district court’s ruling, concluding that, under Texas law, while the obligation to report a claim is material, the obligation to comply with conditions placed on that notice is immaterial, and an insurer may not deny coverage on the basis of an insured’s breach of an immaterial notice condition unless the insurer can show it was prejudiced by the breach. The appellate court remanded the case to the district court to determine if the insurer had suffered prejudice.