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A federal judge in Dallas held recently that an insurer asserting a late-notice defense for not defending an insured against a defamation suit must show that it has been prejudiced by the insured’s failure to provide timely notice of the claim. Ernest Martin Jr., a partner in and chairman of the insurance coverage practice group at Dallas’ Haynes and Boone and founder of the State Bar of Texas Insurance Section, says the Feb. 25 memorandum opinion and order that U.S. District Judge Jorge Solis of the Northern District issued in Travelers Indemnity Co. of Connecticut v. Presbyterian Healthcare Resources is a step in the right direction for policyholders. “It’s a step that provides a lot of relief to policyholders,” says Martin, lead counsel for Presbyterian Healthcare. Brad Kizzia, Travelers’ lead counsel, says Solis’ decision coupled with an earlier one by U.S. District Judge Sam A. Lindsay, also of Dallas, “obliterates” the late-notice provision in the insurance policy. The degree and level of evidence required makes it almost impossible for an insurer to show it has been prejudiced, says Kizzia, a partner in Strasburger & Price in Dallas. According to Solis’ opinion, the case involves an insurance dispute that arose after Presbyterian Healthcare, a hospital, made a claim for coverage under its general liability policy with Travelers after a physician sued the hospital and physicians on the hospital’s peer-review committee for defamation. Travelers filed a declaratory judgment action seeking a ruling that it has no duty to defend or indemnify the hospital and the defendant physicians in Poliner v. Texas Health Systems, et al., which is pending in the U.S. District Court in Dallas. Alleging defamation and business disparagement, Dr. Lawrence Poliner sued the hospital and the physicians on the peer-review committee in 2000. Lea Courington, a partner in Gwinn & Roby in Dallas and the attorney for the hospital and committee, did not return two telephone calls seeking comment before presstime on March 4. Travelers declined to defend the peer-review physicians and alleged, among other things, that it was not notified of the claim for 18 months after Poliner filed the suit, according to the opinion in Travelers. NOT OVER Solis noted in the opinion that case law in Texas and the 5th U.S. Circuit Court of Appeals “is not well settled” on the late-notice issue. In making his ruling, Solis agreed with Lindsay, who concluded last year in St. Paul Guardian Insurance Co. v. Centrum G.S. Ltd. that insurance companies are required to show prejudice resulting from late notice in order to void coverage. St. Paul Guardian also involved allegations of defamation. But U.S. District Judge Vanessa Gilmore of the Southern District in Houston held in 2003′s New Era of Networks Inc. v. Great Northern Insurance Co., et al. that insurance companies did not have to show that an insured’s late notice of a claim involving an advertising injury detrimentally affected the insurers’ ability to defend that insured. Controversy has surrounded the issue for the past three decades. In 1973, the Texas State Board of Insurance issued Order 23080, which requires prejudice as an element in late-notice defenses in cases involving bodily injury or property damage. The Texas Supreme Court held in 1994′s Hernandez v. Gulf Group Lloyds, a case involving a claim of bodily injury, that an insurer should not be relieved of its obligation to provide coverage to an insured that breached its contract if the insurer is not prejudiced by the breach and the breach is not material. In 1997′s Hanson Production Co. v. Americas Insurance Co., the 5th Circuit extended the holding in Hanson to cases involving failure to give timely notice of a claim in violation of the insurance policy. Although Hanson involved property-damage claims, the 5th Circuit did not discuss the Board of Insurance order requiring a showing of prejudice, Solis wrote in Travelers. To confuse matters more, Solis wrote, the 5th Circuit affirmed U.S. Magistrate Judge Jeff Kaplan’s 1998 decision in Gemmy Industries Corp. v. Alliance General Insurance Co. without a published opinion. Kaplan, also of Dallas, said in Gemmy that the Board of Insurance order is limited to bodily injury and property damage cases. Gemmy involved an advertising injury claim. Martin says the “door is still open” on whether a showing of prejudice is required in late-notice affirmative defenses. “The 5th Circuit really hasn’t dealt with this issue because they [the court] haven’t discussed it,” he says. Steven J. Knight, an associate with Houston’s Chamberlain, Hrdlicka, White, Williams & Martin, says the 5th Circuit’s 1999 opinion in Gemmy gives a good indication of how the court might decide the issue. In the per curiam opinion, the 5th Circuit stated: “We are persuaded that the district court correctly concluded that the failure to give timely notice would preclude coverage of the alleged advertising injury claim under the policies without regard to whether defendants were prejudiced by the untimely notice.” “Essentially, [the 5th Circuit] has already decided the issue,” says Knight, one of the attorneys who defended Hartford Fire Insurance Co. in New Era. The 5th Circuit has another opportunity to address the issue because New Era has appealed Gilmore’s decision. Mike Kuhn, a partner in Houston’s Bracewell & Patterson and lead attorney for Great Northern and Federal Insurance Co., two other defendants in New Era, says the issue is one that should be left up to the Texas Legislature and regulatory agencies � not the courts. “This is an area of law that really needs legislative help,” Kuhn says. Solis granted Presbyterian Healthcare’s motion for summary judgment with regard to issues involving Travelers’ duty to defend the hospital and peer review physicians. Martin says bad-faith claims that Presbyterian Healthcare raised against the insurer are still pending. “The case is not over yet,” he says.

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