Opinion
CIVIL ACTION NO. H-01-1841
August 1, 2003
ORDER
Pending before the Court Pending before the Court is Plaintiff New Era's Motion for Partial Summary Judgment on Defendants' Late Notice Defenses. (Instrument No. 62) Based on the submissions of the parties and the applicable law, the Court finds that the above motion is DENIED.
I.
The Original Complaint was filed in this Court on June 1, 2001, by Plaintiff New Era of Networks, Inc. ("New Era") against Defendants Hartford Fire Insurance Co. ("Hartford"), Great Northern Insurance Company ("Great Northern"), and Federal Insurance Company ("Federal"), seeking a declaratory judgment and alleging breach of contract, breach of implied covenant of good faith and fair dealing and statutory violations under Texas law. (Instrument No. 1).New Era is a corporation with its principal place of business in Englewood, Colorado organized under the laws of the State of Delaware. In January 1996, New Era applied for registration of the trademark "NEON," claiming that they had used the mark as early as November 1, 1993 in interstate commerce. Neon Systems, Inc. ("Neon") a Delaware Corporation with its principal place of business in Fort Bend County, Texas, maintains that their use of "NEON" predates New Era's use of the mark. (Instrument No. 69, at Exh. 10). Both New Era and Neon are computer software companies that create "middleware," which is computer software that is involved in networking of computer systems. (Instrument No. 1, Exh. A). Neon Systems requested New Era to immediately stop using "NEON" via a September 20, 1996 cease and desist letter. The September 20, 1996 letter alerted New Era of its alleged offenses and of Neon Systems' intention to file suit if the matter was not resolved. (Instrument No. 72 Exh. 10). Based on the record, neither company had a registered trademark at this time.
On December 24, 1998 New Era filed a declaratory judgment action against Neon in Colorado. (Instrument No. 72, at Exh. 8). Plaintiff sought a declaration from the court permitting their use of the trademarks "NEON, New Era of Networks, Inc., NEONet and NEONSOFT." (Id.) The parties have not indicated to the Court the disposition of this suit.
In June 1999, Neon filed a separate civil action against New Era in the Judicial District Court of Fort Bend County, Texas, alleging trademark infringement in violation of Texas law ("underlying lawsuit"). (Instrument No. 1, at ¶ 20). The Texas state case proceeded to trial on May 15, 2001 and on June 1, 2001 a jury found in favor of Neon awarding Neon $ 14,000,000 in compensatory damages and $25,000,0000 in punitive damages. Subsequently, New Era and Neon were able to come to an agreement, to settle the case for $16,500,000. (Instrument No. 69, at 3-4).
Also on June 1, 2001 New Era filed its Original Complaint in this Court against its insurance carriers, Great Northern, Federal and Hartford, claiming that the Defendants each issued to New Era a business liability policy or umbrella policy which covered New Era's obligations for any "personal injury" or "advertising injury." (Id. at ¶¶ 7-16). Plaintiff admits that this is not a claim for bodily injury or property damage, and that the underlying lawsuit did not trigger bodily injury or property damage coverage. (Instrument No. 81, at 1).
New Era alleges eight causes of action against the insurers: two claims for breach of contract, alleging a failure to defend and failure to indemnify New Era under the policies; a breach of implied covenant of good faith and fair dealing claim; claim for declaratory relief, asserting that the insurance companies have a duty to both defend and indemnify New Era; Unfair Claims Settlement Practice Act Violation claims pursuant to Article 21.21 of the Texas Insurance Code; Texas Deceptive Trade Practices Act claim, alleging the violation of Texas Business Commercial Code sec. 17.41; and Prompt Payment of Claims Act claim pursuant to Article 21.55 of the Texas Insurance Code. (Instrument No. 1).
The Plaintiff's claims stem from allegations that all three Defendants, Hartford, Great Northern, and Federal ("Defendants") were obligated but failed to provide a defense and indemnification with respect to the underlying lawsuit brought in state court against New Era by Neon Systems. (Instrument No. 1, at 2). Moreover, New Era contends that Neon's claims are within the coverage of the policies. (Id. at ¶ 20). New Era submits, that the three insurers were timely and properly notified of the underlying lawsuit filed by Neon, and prompt demands for defense and indemnification were allegedly made, (Id. at ¶ 23-25), New Era avers that sometime during the pre-trial stage of the underlying lawsuit they received a settlement demand for $8 million from Neon, they then "timely and properly" forwarded the demand to Defendants. The insurers, according to New Era, "did not respond to New Era's demands regarding the settlement." (Id. at ¶ 27). New Era seeks coverage from Defendants for both the costs of defending the underlying lawsuit, as well as for the judgment that ultimately was entered against New Era in that action. (Instrument No. 62, at 3).
On September 13, 2002 Plaintiff filed a Motion for Partial Summary Judgment, in which Plaintiff seeks a judgment that Defendants have the burden to establish that they were prejudiced by the alleged late notice, in order to raise a late notice defense. Plaintiff also seeks a ruling on whether Defendants' alleged admissions that they would have denied New Era's claim regardless of when they received notice preclude Defendants from presenting their late notice defenses as a matter of law. (Instrument No. 62, at 2).
New Era claims that the eighteen liability insurance policies it bought from the Defendants provide New Era with liability coverage for certain periods between 1994 and 2002 (Id.). Although the versions of notice provisions at issue are not identical among all of the policies, Plaintiff contends that the most stringent versions state, in essence, that the insured is to provide notice to the insurer of a claim "as soon as possible" and of a suit against the insured "immediately." (Id.). According to Plaintiff, Defendants' affirmative defense that New Era breached the notice condition and forfeited coverage entirely by providing late notice of Neon's claims and/or lawsuit against New Era, is not supported by the evidence, which according to New Era indicates that "defendants actually had been placed on notice of Neon Systems' claims and lawsuit much earlier," (Instrument No. 62, at 4). Plaintiff also contends that irrespective of the timing of the notice, Defendants must show actual and material prejudice in order to void the insurance contract. (Id., at 5).
Moreover, New Era believes that the application of established Texas and Fifth Circuit law, holding that an insurance company is precluded in certain circumstances from relying on a "late notice" defense-renders moot the question of exactly when Defendants were on notice. Specifically, New Era seeks to invoke two legal doctrines which it claims Texas courts have embraced. Plaintiff contends that the first doctrine, holds that even where an insured provides late notice, the insurance company may not escape liability based on late notice unless it can prove that it was prejudiced by such late notice. In other words, Plaintiff explains, "the insurance company must show that its ability to protect the insured's position — by providing a defense — has been detrimentally affected due to the late notice." (Instrument No. 62, at 4).
According to Plaintiff, the second doctrine holds "that where an insurance company admits that it would have denied the insured's claim regardless of the timeliness of the notice, the insurance company is precluded from asserting a late notice defense." (Id.). In this case, Plaintiff argues that Hartford "unequivocally stated numerous times that the allegations made by Neon in the UNDERLYING ACTION do not fall within the grants of coverage under the policies" and "that Hartford denied any duty to defend or indemnify under various specific policy provisions other than the notice provision." (Instrument No. 62, at 14). Plaintiff claims that the Chubb Defendants in their Original Answer denied any coverage obligation based on the lack of coverage and that a claims supervisor for Chubb in his deposition, "testified unequivocally that New Era's claims for defense and indemnity would have been denied under the domestic general liability and umbrella policies regardless of notice." (Id., at 15-16), Plaintiff states, that "Defendants are precluded as a matter of law from asserting late notice because based on their admissions, it would have made no difference if New Era had provided notice 1 day or 1,000 days before trial of the underlying case-they would have denied New Era's claim." (Id.).
On October 7, 2002 Defendants Great Northern Insurance Company and Federal Insurance Company (collectively hereinafter "Chubb Defendants"), filed a filed a single brief, with a motion in opposition to New Era's motion for partial summary judgment and a cross-motion for summary judgment on the issue of notice (Instrument No. 76). Chubb Defendants claim that they were notified of the underlying lawsuit when New Era filed a claim on May 17, 2001, two days after trial began. (Id., at 6). Chubb Defendants request that this Court deny Plaintiffs motion for partial summary judgment because Plaintiff's delay in reporting the offense, claim, and underlying lawsuit is a breach of conditions precedent established by the policies at issue. They further assert that "Prejudice" is not an element of Defendants' late notice defense, but that they were prejudiced, nonetheless, by late notice of the offense, claim and underlying lawsuit. Defendants assert that they may challenge late notice even though they determined that Plaintiff's claim was not covered for other reasons. Finally, according to Defendants, Plaintiff's delay in providing notice of the offense, claim, and underlying lawsuit precludes recovery under the policies at issue. (Instrument No. 76, at 2).
On October 9, 2002, Defendant Hartford filed its response to Plaintiff's motion for partial summary judgment (Instrument No. 84), in which Hartford contends that New Era's argument that a prejudice requirement applies in this case, an advertising injury case, "ignores" the unambiguous terms of the Texas Board of Insurance's 1973 Order, which imposes a limited prejudice requirement in cases involving "property damage" and "bodily injury," [and] also ignores case law that has addressed and rejected the identical argument now being advance by New Era." (Id., at 1). Hartford also argues that because there is no prejudice requirement in this case, "New Era's second argument automatically fails." (Id., at 5). Nevertheless, Hartford claims that even if there were a prejudice requirement, Hartford can still use the affirmative defense of late notice, while still asserting that coverage may be denied on other grounds, such as the claim is not covered by the policy or that the injury occurred prior to Hartford's Policy period. (Id.).
II.
Summary judgment is appropriate if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56. A fact is "material" if its resolution in favor of one party might affect the outcome of the suit under governing law. See Anderson v. Liberty Lobby, Inc., 106 S, Ct. 2505, 2510 (1986); see also United States v. Arron, 954 F.2d 249, 251 (5th Cir. 1992). An issue is "genuine" if the evidence is sufficient for a reasonable jury to return a verdict for the nonmoving party. See Anderson, 106 S.Ct. at 2510. If the evidence rebutting the motion for summary judgment is only colorable or not significantly probative, summary judgment should be granted. Id. at 2511; see also Thomas v. Barton Lodge, Ltd., 174 F.3d 636,644 (5th Cir. 1999). The summary judgment procedure, therefore, enables a party "who believes there is no genuine issue as to a specific fact essential to the other side's case to demand at least one sworn averment of that [specific] fact before the lengthy process continues." See Lujan v. National Wildlife Federation, 110 S.Ct. 3177, 3188-89 (1990).Under Rule 56(c), the moving party bears the initial burden of informing the district court of the basis for its belief that there is an absence of a genuine issue for trial, and for identifying those portions of the record that demonstrate such absence. See Matsushita Elec. Ind. Co. v. Zenith Radio Corp., 106S.Ct. 1348,1355-56 (1986); see also Burge v. Parish of St. Tammany, 187 F.3d 452, 464 (5th Cir. 1999).
Where the moving party has met its Rule 56(c) burden, the nonmovant "must do more than simply show that there is some metaphysical doubt as to the material facts . . . [T]he nonmoving party must come forward with `specific facts showing that there is a genuine issue for trial.'" See Matsushita, 106 S.Ct. at 1356 (quoting Fed.R.Civ.P. 56(e)) (emphasis in original); see also Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2552 (1986); Engstrom v. First Nat'l Bank, 47 F.3d 1459, 1462 (5th Cir. 1995), To sustain the burden, the nonmoving party must produce evidence admissible at trial. See Anderson, 106 S.Ct. at 2514; see also Thomas v. Price, 975 F.2d 231, 235 (5th Cir. 1992) ("To avoid a summary judgment, the nonmoving party must adduce admissible evidence which creates a fact issue").
The Court reviews the facts in the light most favorable to the nonmovant and draws all reasonable inferences in favor of the nonmovant. See Brown v. Bunge Corp., 207 F.3d 776, 781 (5th Cir. 2000). "The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff." See Anderson, 106 S.Ct. at 2512.
III.
Plaintiff seeks a partial summary judgment on the following two issues relating to the "late notice" provisions in its insurance policies. First, whether to prevail on an affirmative defense relating to alleged late notice, the defendant must, in order to establish that they were prejudiced by the late notice. Second, whether Defendants' alleged admissions that they would have denied New Era's claim regardless of when they received notice preclude defendants from presenting their late notice defenses as a matter of law. (Instrument No, 62, at 2).
A. Must Defendants Prove Prejudice
Plaintiff contends that in order to prevail on the affirmative defense of late notice, Defendants must prove that they were prejudiced by the alleged late notice. Plaintiff cites Hanson Production Co. v. Americas Insurance Co., a case involving property damage, for the proposition that there is a "modern trend" requiring proof of prejudice in late notice affirmative defenses. 108 F.3d 627, 630 (5th Cir. 1997) (relying in part on Texas State Board of Insurance Order No. 23080); (Instrument No. 62, at 5). Conversely, Defendants argue that "late notice" of New Era's claim results in forfeiture of insurance benefits-regardless of whether Defendants were prejudiced by the timing of that notice. Defendants note that but for the Texas State Board of Insurance Order No. 23080 which requires a showing of prejudice, "there would be no prejudice requirement imposed by Texas courts." (Instrument No. 76, at 13-14). Defendant argues that after a review of Order No. 23080 and Texas case law that it becomes apparent that the cases requiring prejudice as an element of the late notice defense involve bodily injury or property damage liability coverage. (Id., at 14).
As New Era noted, the Fifth Circuit has addressed the question of whether an insurer must show prejudice where the insured, with a property damage claim, has failed to provide prompt notice of a claim. Hanson Production, 108 F.3d 627,630 (5th Cir. 1997). In Hanson, the plaintiff procured two comprehensive general liability and three excess liability policies from the defendant insurance companies. In 1991 a suit was filed alleging that Hanson had breached its contractual obligations, negligently operated the leased property and in an amended petition in 1993 it was alleged that Hanson damaged the reservoir through the over-production of oil and gas. Over two years after the initial suit was filed, and over five months after the amended pleading, Hanson first notified the insurers of the underlying suit and demanded a defense. The district court found for the defendant insurance companies and the Plaintiff appealed. The Court of Appeals concluded that the "Supreme Court of Texas would require proof of prejudice." Id., at 628. The Hanson court based their decision on both the 1973 Board Order 23080 and on the Supreme Court of Texas' reasoning in Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex. 1994), an automobile insurance case.
The Texas State Board of Insurance issued an order, requiring a mandatory endorsement in Texas general liability and general automobile policies stating that a failure to give notice under the policy does not bar coverage unless the insurer has been prejudiced in order to protect the average Texas insurance consumer. See Hanson at 629. The Texas State Board of Insurance Order No. 23080 ("Order") provides that:
As respects bodily injury liability coverage and property damage liability coverage, unless the company is prejudiced by the insured's failure to comply with the requirement, any provision of this policy requiring the insured to give notice of action, occurrence or loss, or requiring the insured to forward demands, notices, summons or other legal process, shall not bar liability under this policy.
STATE BOARD OF INSURANCE, REVISION OF TEXAS STANDARD PROVISION FOR GENERAL LIABILITY POLICIES-AMENDATORY ENDORSEMENT-NOTICE, Order No. 23080 (March 13, 1973).
The Texas Supreme Court in Hernandez recognized insurance policies as contracts subject to general rules of contract construction, reasoning that "when one party to a contract commits a material breach of that contract, the other party is discharged or excused from any obligation to perform," The court then concluded that where the insurer is not prejudiced by the breach and the breach is not material, then the insurer has not been deprived of the benefit of the bargain, and it should not be relieved of its obligation to provide coverage. See id. at 693.
The Fifth Circuit's holding in Hanson, that an insurer must also show that it was prejudiced by its insured's late notice of a claim involving property damage is entirely consistent with not only the policy consideration of protecting Texas insureds in cases involving property damage and bodily injury — policy considerations that resulted in the drafting of the Order but also the express provisions of the Order itself. Indeed, because Hanson involved claims for property damage, any other ruling would have created a conflict in Texas law — a situation the Fifth Circuit expressed it wanted to avoid when it stated, "We believe the court would opt for a uniform rule of construction." Hanson, at 630. The Court concludes that Hanson stands for the proposition that in cases involving property damage an insurer, issuing liability policies to a Texas resident must establish prejudice as a part of the late notice defense.
In contrast, the court in Gemmy Indus. Corp. v. Alliance Gen. Ins. Co., found that there was no prejudice element required as an element of the "late notice" defense to coverage for advertising injury claims. 190 F. Supp.2d 915 (N.D. Tex. 1998) The court acknowledged that Hanson is binding precedent, but found it inapplicable to the facts in Gemmy. Id., at 921-22. In Gemmy the Plaintiff was insured under two comprehensive general liability policies, providing coverage for advertising injuries including infringement of copyright, title or slogan. Id., at 916-17. Gemmy was sued for several claims including copyright infringement, but did not tender notice of the claims or the suit to its insurance companies until over a year after the complaint was filed. Once notified, both insurance companies denied coverage and refused to provide a defense. Subsequently, one of the insurance companies reconsidered the denial of a coverage for a defense in light of the copyright infringement claim. Gemmy settled with the defendant and then submitted demands to both insurance companies for the amount of the settlement and legal fees and expenses. The Court noted that Hanson involved a claim of property damage and that the Court's decision in that case was based on the Board Order No. 23080. Additionally, the District Court in Gemmy noted that by its own terms, the Texas State Board of Insurance unequivocally limits the prejudice requirement to bodily injury and property damage liability coverages. See Chiles v. Chubb Lloyds Insurance Co., 858 S.W.2d 633, 635-36 (no prejudice required to be shown where policy at issue was not subject to endorsement). Additionally, the Court found that Plaintiff's unexplained delay of more than a year before notification constitutes untimely notice as a matter of law. Id., at 921. Thus, the Gemmy Court held that "Plaintiff breached the notice provisions of the insurance policies and is not entitled to coverage or a defense for that reason." Id., at 922.
In this case, New Era claims that the denial of coverage by Defendants was a breach of their insurance contracts which provided that they would "pay all sums that New Era becomes legally obligated to pay as damages because of . . . [an] `advertising injury' . . . and to defend New Era in any suit which makes allegations that potentially fall within the. . . . `advertising injury' coverage. (Instrument No. 1, at 2). Therefore, contrary to the Plaintiff's assertions, the facts in this case are analogous to the facts in Gemmy, an advertising claim case, rather than Hanson a property damage liability coverage case. In addition, this Court agrees that the State Board Order requiring prejudice as an element in late notice defenses is clearly limited to bodily injury and property damage liability cases. If the Texas State Board had wanted to include all liability coverage, then it clearly could have done so. In addition, when the Plaintiff is a business and presumably not a consumer unlikely to be conversant with all the fine print of their policies, the requirement of insurers showing prejudice to balance the equities is not as significant. See Joslyn Mfg. Co. v. Liberty Mut. Ins. Co., 30 F.3d 630,633-34 (5th Cir. 1994). Therefore, the Court finds that there is no prejudice requirement element in Defendant's late notice defense.
B. Preclusion of the Late Notice Defense
Plaintiff New Era argues that an insurer which would have denied coverage anyway cannot assert a late notice defense. Plaintiff asserts, that this is logical, since there cannot be prejudice if the insurer would have denied the claim anyway-the insurer and the insured ultimately are left in the same position under either early or late notice. Defendants reject Plaintiff's argument and contend that if the Court were to adopt Plaintiffs argument, "an insurer could not invoke the unambiguous policy condition of prompt notice unless it admits coverage on all other grounds." (Instrument No. 76, at 8). Since the Court has found that there is no prejudice requirement, Plaintiff's argument precluding a late notice defense where the insurance company would have denied coverage regardless of the timing of notice has no merit.
Plaintiff cites Bay Electric Supply Inc., v. Travelers Lloyds Insurance Comp., involving the defense of an advertising claim, for the propositions that the insurer must affirmatively prove it has been prejudiced by the delay and that an insurance company which would have denied coverage regardless of the timing of notice may not present a "late notice" defense. 61 F. Supp.2d 611, 620 (S.D. Tex. 1999). However, the district court in Bay Electric concludes that
Travelers denial of coverage was not premised on late notice, but rather on its review of ACB's Complaint and its conclusion that the claims brought against Bay and FAE did not fall within the policy coverage. Thus, regardless of the timing of notice, Travelers would have denied coverage and was therefore not prejudiced by the timing of Plaintiffs' notice.
Id. (emphasis added).
Unlike the defendants in Bay Electric, Defendants in this case have clearly and consistently maintained late notice as a defense to coverage, where as, in Bay Electric the insurer's denial was not premised on late notice. Thus, it is not inconsistent for the Defendants to claim late notice as a defense. In addition, Bay Electric is distinguishable for a number of other reasons. Initially the Court would note that the notice delay in Bay Electric was approximately five months, while the delay notice in this case is arguably five years. Bay Electric is also a case that relates to the duty to defend, not the duty to indemnify, and Bay Electric was given notice and demands were made well in advance of any trial setting-without depriving the insurer of an opportunity to control the defense or participate in settlement conferences or mediations. Therefore, Bay Electric's reasoning is distinguishable from this case.
Courts generally agree that an indemnity obligation can be challenged under more than one policy provision, and that late notice is not disallowed when other provisions apply. See Liberty Mut. Ins. Co. V. Cruz, 883 S.W.2d 164, 165 (Tex. 1993) (cancellation and notice issues present by insurer); Duzich v. Marine Office of Am. Corp., 980 S.W.2d 857 (Tex. App-Corpus Christi 1998). Therefore, Defendants are not precluded from raising a late notice defense and a defense based on prior acts, first publication, fortuity, known loss, and loss in progress, that may also negate coverage. (Instrument No. 76, at 6).
IV.
For the foregoing reasons the Court DENIES Plaintiff New Era of Networks, Inc.'s Motion for Partial Summary Judgment on Defendants' Late Notice Defenses (Instrument No. 62).
The Clerk shall enter this Order and provide a copy to all parties.