"Texas Embraces Notice Prejudice Rule" Joining Modern Trend of Resurrecting it as a Policyholder Favorable Jurisdiction
PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630(Tex. 2008)
The Court found that the “notice prejudice” rule applied. An immaterial breach does not deprive the insurer of the benefit of the bargain, and thus cannot relieve the insurer of its contractual obligation, citing Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex. 1994).
The Court also made short shrift of the dissent’s arguments, stating,
The dissent’s construction would have the absurd consequence that identical policy language creates a condition precedent as to one type of coverage (advertising injury) but a covenant as to the other (bodily injury and property damage). We have said unequivocally that “when a condition would impose an absurd or impossible result, the agreement will be interpreted as creating a covenant rather than a condition.” Criswell v. European Crossroads Shopping Ctr., Ltd., 792 S.W.2d 945, 948 (Tex. 1990). Texas now joins the majority of jurisdictions who follow that approach including Arizona, California, Colorado and Connecticut which joins Ohio and Florida but places the burden on the insured to show no prejudice. Delaware, Hawaii, Idaho, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, North Dakota, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin. Other jurisdictions either make notice a condition precedent to coverage (New York and Illinois) or apply a reasonableness standard. By embracing the notice as a covenant rather than a condition precedent, the court also logically adopts an approach which is consistent with permitting recovery of pretender fees where distinct grounds for denial, other than late notice, are also asserted. As the Texas Supreme Court explains “Conditions are not favored in the law; thus, when another reasonable reading that would avoid a forfeiture is available, we must construe contract language as a covenant rather than a condition.” Id. at *4.
The next question therefore that the Texas Supreme Court as well as other jurisdictions adopting the notice prejudice rule must address is whether pretender fees should be recoverable as well.
The Court found that the “notice prejudice” rule applied. An immaterial breach does not deprive the insurer of the benefit of the bargain, and thus cannot relieve the insurer of its contractual obligation, citing Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex. 1994).
The Court also made short shrift of the dissent’s arguments, stating,
The dissent’s construction would have the absurd consequence that identical policy language creates a condition precedent as to one type of coverage (advertising injury) but a covenant as to the other (bodily injury and property damage). We have said unequivocally that “when a condition would impose an absurd or impossible result, the agreement will be interpreted as creating a covenant rather than a condition.” Criswell v. European Crossroads Shopping Ctr., Ltd., 792 S.W.2d 945, 948 (Tex. 1990). Texas now joins the majority of jurisdictions who follow that approach including Arizona, California, Colorado and Connecticut which joins Ohio and Florida but places the burden on the insured to show no prejudice. Delaware, Hawaii, Idaho, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, North Dakota, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin. Other jurisdictions either make notice a condition precedent to coverage (New York and Illinois) or apply a reasonableness standard. By embracing the notice as a covenant rather than a condition precedent, the court also logically adopts an approach which is consistent with permitting recovery of pretender fees where distinct grounds for denial, other than late notice, are also asserted. As the Texas Supreme Court explains “Conditions are not favored in the law; thus, when another reasonable reading that would avoid a forfeiture is available, we must construe contract language as a covenant rather than a condition.” Id. at *4.
The next question therefore that the Texas Supreme Court as well as other jurisdictions adopting the notice prejudice rule must address is whether pretender fees should be recoverable as well.
