Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:PAJ Inc., a jewelry manufacturer and distributor, purchased a commercial general liability (CGL) policy from Hanover Insurance Co. 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.” Specifically, the Hanover policies issued to PAJ provided coverage for “advertising injury,” which the policy defines to include injury arising out of copyright infringement. The policy contains a prompt-notice provision that requires PAJ to notify Hanover of an occurrence or an offense that may result in a claim “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 months to six months after litigation commenced. PAJ brought suit against Hanover, seeking a declaration that Hanover was contractually obligated to defend and indemnify PAJ in the copyright suit and also 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. Both parties moved for summary judgment on the notice issue. The trial court granted Hanover’s motion and denied PAJ’s, holding that Hanover was not required to demonstrate prejudice to avoid coverage under the policy. The 5th Court of Appeals affirmed. The 5th Court granted PAJ’s petition for review to determine the effect on coverage when an insured fails to timely notify its insurer of a claim but the insurer suffers no harm as a result. HOLDING:Reversed and rendered in part, reversed and remanded in part. The parties dispute whether the policy’s prompt-notice requirement constituted a condition precedent or merely a covenant. Hanover contended that the policy language created a condition precedent, the failure of which defeated coverage under the policy irrespective of prejudice to the insurer. PAJ asserted that even if the policy language created a condition precedent to coverage, Texas law nonetheless requires an insurer to demonstrate prejudice before it may avoid coverage based on untimely notice. The court noted that in 1973, the State Board of Insurance issued Board Order 23080, which required a mandatory endorsement to all Texas CGL policies precluding forfeiture of coverage for an insured’s failure to comply with notice or forwarding conditions unless the insurer suffered prejudice from the omission. In Hernandez v. Gulf Group Lloyds, the Texas Supreme Court in 1994 held that an immaterial breach does not deprive the insurer of the benefit of the bargain and thus cannot relieve the insurer of the contractual coverage obligation. Thus, the court followed Hernandez to hold that an insured’s failure to timely notify its insurer of a claim or suit does not defeat coverage if the insurer was not prejudiced by the delay. Accordingly, the court found that only a material breach of the timely notice provision would excuse Hanover’s performance under the policy. OPINION:O’Neill, J., delivered the opinion of the court, in which Jefferson, C.J., and Brister, Medina and Green, JJ., joined. DISSENT:Willett, J., filed a dissenting opinion, in which Hecht, Wainwright and Johnson, JJ., joined. “I respectfully dissent. I would follow Members Mutual Insurance Co. v. Cutaia [a 1972 decision by the Texas Supreme Court] and hold that a policy’s unambiguous notice-of-suit language, a condition precedent to coverage, constitutes a defense to liability and must be enforced as written, unless positive law dictates otherwise.”

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 1 article* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?

Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.