Texas Supreme Court Distinguishes "No Notice" from "Late Notice" for Liability Insurers
Last Friday, the Texas Supreme Court answered “no” to the following certified questions from the Fifth Circuit:
"Where an additional insured does not and cannot be presumed to know of coverage under an insurer's liability policy, does an insurer that has knowledge that a suit implicating policy coverage has been filed against its additional insured have a duty to inform the additional insured of the available coverage?" and,
"Does proof of an insurer's actual knowledge of service of process in a suit against its additional insured, when such knowledge is obtained in sufficient time to provide a defense for the insured, establish as a matter of law the absence of prejudice to the insurer from the additional insured's failure to comply with the notice-of-suit provisions of the policy?"
In National Union fire Insurance Co. v. Crocker, 2008 WL 400398 (Tex. February 15, 2008), a nursing home resident sued the insured nursing home and its employee for injuries suffered when hit by a door swung open by the employee. The employee was terminated after the incident but before suit was filed. The insurer defended the nursing home but did not defend the employee even though the claims against him were covered and the insurer knew he had been served. The insurer attempted to contact the employee by phone and mail without success. During the suit, the employee spoke privately with plaintiff’s counsel at a deposition but refused to speak with the nursing home’s defense counsel. At trial, the jury returned a take nothing defense verdict against the nursing home but the court entered a $1,000,000 default judgment against the employee. The injured resident then sought to collect against the liability insurer because of its alleged coverage on the employee.
The federal district court hearing the coverage case found the insurer breached its duty to defend the employee by failing to notify him of the available coverage. That court also found prejudice had to be shown to establish a coverage defense based on late notice and the insurer’s “actual awareness” of the suit against the employee precluded it’s ability to establish the required prejudice. On appeal, the Fifth Circuit certified the above questions to the Texas Supreme Court. In addressing the notice requirement in last Friday’s decision, the Texas Court observed that a “more basic purpose” of requiring an insured to forward suit papers to the insurer is to advise them that the insured has been served and the insurer is expected to file an answer on their behalf. An insurer’s knowledge that suit has been filed “does not satisfy this ‘more basic purpose’ or require the insurer to “gratuitously subject itself to liability.” The high court noted: “Simply put, there is not duty to provide a defense absent a request for coverage.”
Addressing the prejudice question, the court distinguished its recent decision in PAJ, Inc. v. Hanover Insurance Co. 2008 WL 109071 (Tex. 2008) (See Texas Insurance Law Newsbrief January 14, 2008), by observing in PAJ the notice was actually late in contrast to the present case where there was no notice from the additional insured at all. Because an insured may opt against seeking a defense from an insurer for a number of reasons, the Texas Supreme Court concluded that “insurers owe no duty to provide an unsought, uninvited, unrequested, unsolicited defense.” As such, the insurer had no duty to inform the employee of available coverage or to voluntarily undertake his defense. And, the high court concluded actual knowledge of the suit against him did not establish prejudice as a matter of law.
