Insurer Need Not Demonstrate Prejudice from Late Notice, Texas Appeals Court Decides

An appellate court in Texas, affirming a trial court’s decision, has ruled that an insurance company that had issued a claims-made pollution liability and environmental damage policy to a the owner and operator of a gas station did not have to prove that it had been prejudiced by the insured’s late notice of a claim to deny coverage.

The Case

Nicholas Petroleum, Inc. owned and operated a gas station in Dallas, Texas. On May 10, 2006, the Texas Commission on Environmental Quality (“TCEQ”) sent Nicholas a letter advising that subsurface contamination had been reported, and “[b]ecause the storage tank system at your facility was close to the area of contamination … you are requested to make immediate arrangements to determine whether there is any evidence of contamination due to leakage or spillage from your tank system.”

The letter specified samples that should be tested for certain hazardous substances, including benzene, toluene, ethylbenzene, and total xylene (“BTEX”), total petroleum hydrocarbone (“TPH”), and polycyclic aromatic hydrocarbons (“PAHs”), volatile organic compounds (“VOCs”), and methyl tertiary butyl ether (“MTBE”). The TCEQ further required Nicholas to contact an environmental consulting firm to conduct a subsurface assessment of the area around its storage tanks. The letter also informed Nicholas that, “[a]s a potential responsible party, you are responsible to pursue whatever actions are necessary to minimize any imminent impacts or threats to human health and safety and to stabilize the conditions caused by your storage tank system.”

On August 2, 2006, an attorney representing Coit Partners, L.P., which owned a Washington Mutual building next to Nicholas’ gas station, referred to as the “WAMU site,” sent Nicholas a letter explaining that the firm was pursuing claims related to the contamination of the WAMU site from what appeared to be leaking underground storage tanks at the gas station. The letter alleged that Coit Partners had been damaged because a buyer had terminated a contract to purchase the WAMU site after discovering the contamination during an inspection.

On August 23, 2006, the TCEQ sent another letter stating it received Nicholas’ Phase I Environmental Site Assessment sent in response to the TCEQ’s May 10, 2006 letter, but the assessment did not contain any subsurface investigation as requested in the May 10, 2006 letter. The TCEQ again advised Nicholas to contact a registered environmental consulting firm.

The TCEQ sent similar letters to Nicholas on July 12, 2007, September 12, 2007, February 5, 2008, and July 13, 2008. Nicholas never responded. Nicholas also never responded to Coit Partners’ demands for alleged damages to the WAMU site caused by leakage from the storage tanks.

On August 4, 2008, Coit Partners filed a petition against Nicholas for damages it allegedly suffered because of the “migration of off-site contamination onto its property.”

In early September 2008, motorists in the area of the gas station reported smelling gas and shortly, thereafter, the TCEQ sent an investigator to conduct an investigation. The investigator located a leak in a super unleaded line, which was repaired by October 20, 2008. The investigator, on behalf of the TCEQ, directed Nicholas to contact a licensed correction action specialist to assess the extent of the contamination and submit a release determination report.

According to Nicholas, the TCEQ first “formally notified” it of a “release” on its property in a February 5, 2009 letter. Approximately two months later, on April 10, 2009, Nicholas notified Mid-Continent Casualty Company, the insurance carrier that had issued it a claims-made pollution liability and environmental damage policy, of the litigation with Coit Partners resulting from environmental contamination. Mid-Continent denied coverage, asserting that Nicholas had failed to notify it of a claim within 30 days, as required by the policy.

Nicholas ultimately settled the lawsuit with Coit Partners and entered into an agreed judgment in which Nicholas agreed to pay $175,000, plus five percent interest, over a period of years. Mid-Continent had denied coverage and had refused to reimburse Nicholas for the agreed judgment. Nicholas sued Mid-Continent, alleging breach of contract, violations of the Texas Insurance Code, and breach of the duty of good faith and fair dealing.

Mid-Continent moved for summary judgment and the trial court granted its motion. Nicholas appealed, arguing that because it had provided notice within the policy coverage period, Mid-Continent had to establish that it had been prejudiced by Nicholas’ late notice before denying coverage.

The Appellate Court’s Decision

The appellate court affirmed, ruling that an insurer did not have to show prejudice before denying coverage when an insured failed to provide notice under a claims-made policy that included a specific time-frame for providing written notice.

In its decision, the appellate court pointed out that the Mid-Continent policy required that Nicholas not only provide notice of a claim “as soon as possible,” but also required notice of a claim “in any event no later than thirty (30) days after receipt of the Claim by the Insured.” The policy, the appellate court continued, “unambiguously” stated that the notice provision was a condition precedent to coverage. Thus, it decided, given the specificity of the language, the notice provision was a “material part of the bargained-for exchange in this policy” and Nicholas’ failure to comply with the notice provision was a “material breach.”

The appellate court then found that because the purpose of a claims-made policy was to define the limits of the insurer’s obligation, when there was no timely notice, there was no coverage. Therefore, it concluded, Mid-Continent had established as a matter of law that Nicholas had failed to comply with the policy’s notice provision and the trial court had properly granted summary judgment in the insurer’s favor.

The case is Nicholas Petroleum, Inc. v. Mid-Continent Cas. Co., No. 05-13-01106-CV (Tex. Ct. App. July 21, 2015).