Texas SC rules against insurer in late claims case

AUSTIN (Legal Newsline)-The Texas Supreme Court has ruled against an insurance company in a dispute over late-reported claims.

In the high court's decision, the justices said Friday that insurers cannot deny coverage to corporate customers that fail to report claims "as soon as practicable" as long as the delay does not prejudice the insurer.

In the case of Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Co., the justices ruled 6-3 that insurers under a "claims-made" policy may not deny coverage based on late notice unless the claim came after a so-called drop-dead date specified in the insurance policy.

"I suspect there are dozens and dozens of pending cases in which insurers have wrongly denied coverage to deserving enterprises based on this late notice excuse," said Werner Powers, the attorney who represented Prodigy.

"It is extremely gratifying that our client had the courage to stick with our counsel in the face of losses in the trial court and in the court of appeals. Today, corporate policyholders everywhere owe Prodigy a debt of gratitude for carrying the banner," added Powers of the law firm of Haynes and Boone, LLP.

The case emerged after Austin-based Prodigy Communications, a subsidiary of AT&T, Inc., merged with FlashNet Communications Inc. in May 2000. At the time, FlashNet was insured under a claims-made directors and officers liability policy issued by Agricultural Excess & Surplus Insurance Co., now known as Great American E & S Insurance Co.

Before the merger, FlashNet had purchased a three-year "discovery period" policy, which extended coverage under its current policy to any claoms against either Prodigy or FlashNet between May 31, 2000, and May 31, 2003.

In November 2001, a class action securities lawsuit was filed against FlashNet, alleging violations of federal laws, but FlashNet did not give written notice of the lawsuit to the insurance company until nearly a year later.

The insurance company denied the claim, arguing that FlasNet did not give the insurance company timely notice of the lawsuit. Prodigy sued the insurer. The company lost at trial in Dallas County and in its appeal, but won a Supreme Court victory.

"In a claims-made policy, when an insured notifies its insurer of a claim within the policy term or other reporting period that the policy specifies, the insured's failure to provide notice 'as soon as practicable' will not defeat coverage in the absence of prejudice to the insurer," Chief Justice Wallace Jefferson wrote for the high court majority.

"Accordingly, we reverse the court of appeals' judgment, render judgment that AESIC cannot deny coverage because of Prodigy's alleged failure to give notice 'as soon as practicable,' and remand the remaining issues to the trial court."

From Legal Newsline: Reach staff reporter Chris Rizo at chrisrizo@legalnewsline.com.