Ridglea Est Condo v. Lexington Ins Co ( 2005 )


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  •                                                                    United States Court of Appeals
    Fifth Circuit
    F I L E D
    IN THE UNITED STATES COURT OF APPEALS
    August 10, 2005
    FOR THE FIFTH CIRCUIT
    _____________________                    Charles R. Fulbruge III
    Clerk
    No. 04-10447
    _____________________
    RIDGLEA ESTATE CONDOMINIUM ASSOCIATION,
    Plaintiff - Counter Defendant -Appellant,
    versus
    LEXINGTON INSURANCE COMPANY,
    Defendant - Counter Claimant -Appellee.
    __________________________________________________________________
    Appeal from the United States District Court
    for the Northern District of Texas
    _________________________________________________________________
    ON PETITION FOR REHEARING
    Before KING, Chief Judge, JOLLY and DENNIS, Circuit Judges.
    E. GRADY JOLLY, Circuit Judge:
    IT    IS   ORDERED    that    the   Petition    for   Panel   Rehearing      is
    GRANTED.     The opinion of the court issued on July 1, 2005, is
    withdrawn, and the following opinion substituted in its place, with
    the only change appearing in Part II D.
    In    November   2001,       Ridglea   Estate   Condominium     Association
    (“Ridglea”) submitted a claim to its insurer, Lexington Insurance
    Company (“Lexington”), for hail damage –- apparently occurring in
    1995 –- to the roofs of its property in Fort Worth, Texas.
    Lexington denied the claim and brought suit against Ridglea,
    seeking a declaratory judgment that it was not liable for the
    damage.   The district court realigned the parties, making Ridglea
    the plaintiff and Lexington the defendant. Both parties then moved
    for summary judgment.             The district court granted Lexington’s
    motion, holding that Ridglea’s claim was barred because Ridglea
    failed to provide prompt notice of the damage and rejecting the
    argument that      a    showing    of   prejudice   was   required.     Ridglea
    appeals, arguing, inter alia, that the district court erred in not
    requiring Lexington to show that its defense was prejudiced by
    Ridglea’s late notice.        We agree, and therefore VACATE and REMAND.
    I
    In July 2001, a roofing inspector informed Ridglea that the
    roofs of its property in Fort Worth, Texas had suffered significant
    hail damage.    In November 2001, Ridglea submitted a claim to its
    then-insurer, Chubb Custom Insurance.               Based on its inspection,
    Chubb advised Ridglea that the damage must have been caused by a
    May 5, 1995 hail storm, and that Ridglea would need to submit the
    claim to the insurer who insured the property on that date.
    Ridglea then submitted a claim to Lexington, the insurer of
    the property as of May 1995. After inspecting the roofs, Lexington
    concluded   that       the   damage     likely   did   not   exceed   Ridglea’s
    deductible. Lexington also asserted that it found no evidence that
    the damage was incurred during the policy period, which ran from
    February 1995 to February 1996.               As a result, in a letter of
    December 19, 2001, Lexington denied Ridglea’s claim.
    2
    After    roughly   a   year    of    negotiations    involving   Ridglea,
    Lexington, Chubb, and another insurer, General Star, Ridglea made
    a final demand against Lexington for $449,198.63 plus attorney’s
    fees of $10,000. Lexington again denied the claim and brought suit
    seeking a declaratory judgment that it was not liable for the hail
    damage to Ridglea’s property.             The district court dismissed the
    declaratory judgment action and realigned the parties, making
    Ridglea the plaintiff and Lexington the defendant in a direct suit
    for damages on the insurance policy.
    Both parties moved for summary judgment.             The district court
    granted Lexington’s motion, holding that Ridglea’s claim was barred
    because   it    had   failed    to    comply    with     the   policy’s   notice
    requirement.     Ridglea’s policy states, in pertinent part, that no
    policy holder may bring an action against Lexington without first
    giving “prompt notice of the loss or damage” to covered property.
    The policy further requires that prospective litigants provide, “as
    soon as possible[,] a description of how, when and where the loss
    or   damage    occurred”.      The   district    court    concluded    that   the
    interval between May 1995, when the damage allegedly occurred, and
    November 2001, when Ridglea notified Lexington of its claim, was so
    great that “no rational finder of fact could conclude ... that
    Ridglea reported the hail loss and damage to buildings within a
    reasonable time after it was suffered”.             Ridglea now appeals the
    grant of summary judgment.
    II
    3
    We review the grant of summary judgment de novo, applying the
    same   standard    as    the   district          court.    American      Guarantee   and
    Liability Ins. Co. v. The 1906 Co., 
    129 F.3d 802
    , 805 (5th Cir.
    1997).   Summary judgment is appropriate where there are no genuine
    issues as to any material fact and the movant is entitled to a
    judgment as a matter of law.                  FED. R. CIV. P.           56(c); see also
    Celotex Corp.      v. Catrett, 
    477 U.S. 317
    , 322-23 (1986).
    Ridglea    contends     that     the      district       court   committed    four
    discrete,    reversible        errors    –-       all     relating      to   the   notice
    requirement of the policy –- in granting Lexington’s motion for
    summary judgment.        Specifically, Ridglea asserts that the court
    erred: (1) in finding that Lexington had not waived its late notice
    defense;    (2)     in   failing        to       find     the     notice     requirement
    unenforceable as a matter of public policy; (3) in failing to find
    the notice requirement ambiguous, and thus construe it in the
    manner most favorable to the insured; and (4) in not requiring
    Lexington to show prejudice in order to raise late notice as a
    defense.
    A
    We first address Ridglea’s contention that Lexington has
    waived any defense it might have under the policy’s prompt notice
    provision because it originally denied the claim (in its December
    19, 2001 letter) on the sole basis that the damage did not occur
    during the coverage period.
    4
    Ridglea relies on Farmers Insurance Exchange v. Nelson to
    argue that, when an insurer denies a claim for reasons unrelated to
    notice of damage, the insurer waives any requirement that the
    insured provide notice before filing suit.     
    479 S.W.2d 717
    , 721-22
    (Tex. Civ. App. 1972).      Ridglea notes that Lexington’s claims
    adjuster originally gave only one reason –- a lack of evidence that
    the hail damage occurred during the coverage period –- for denying
    Ridglea’s claim.    Thus, by failing to identify late notice of
    damage as an independent reason for its denial of the claim,
    Lexington waived its late notice defense.
    Lexington   replies   that   Texas   courts   have   recognized   an
    exception to the general rule of Farmers Insurance Exchange and
    points to United States Fidelity & Guaranty Co. v. Bimco Iron &
    Metal Co.   There, the Texas Supreme Court held that an insurer’s
    “total denial of liability on any grounds, after the time for
    filing [a] proof of loss had expired would not constitute a waiver
    of the defense of late filing of the proof of loss”.         
    464 S.W.2d 353
    , 357 (Tex. 1971).       In Stonewall Insurance Co. v. Modern
    Exploration, Inc., the Texas Court of Appeals applied the Supreme
    Court’s holding in Bimco to the precise issue before this court,
    holding that “waiver of [a] notice requirement occurs when the
    insurer denies liability within the time limited for giving notice”
    and “[c]onversely, a total denial of liability on any grounds after
    the time limited for giving notice would not constitute a waiver of
    the defense of unreasonably late notice”.          
    757 S.W.2d 432
    , 436
    5
    (Tex. App. 1988) (emphases in original) (citing 
    Bimco, 464 S.W.2d at 357
    ).
    Our task, then, is to determine whether the exception to the
    waiver rule set forth in Bimco and Stonewall Insurance applies in
    the case before us.     In order to do so, we must determine whether
    Lexington’s December 19, 2001 denial of liability was made within
    the policy’s time limit for giving notice, or after it had expired.
    Because Lexington’s denial of liability was made shortly after
    Ridglea’s November 2001 notice of damage, the district court’s
    conclusions   as   to   the   timeliness   of   notice   provide   a   useful
    benchmark for the waiver inquiry.
    The district court held that “no rational finder of fact could
    conclude from the summary judgment evidence that Ridglea reported
    the hail loss and damage to its building within a reasonable
    time”.1    In support of its conclusion, the court observed that
    Ridglea’s own expert, Patrick Brady, testified that there was
    “extensive damage to [Ridglea’s] buildings”, that said damage “was
    such that it would require replacement of the roofs”, and even that
    the “damage would have been evident on May 5, 1995".               Moreover,
    Brady testified that the buildings’ shutters and windows had been
    chipped and broken as a result of hail strikes, though he could not
    1
    As discussed infra, where, as here, an insurance policy does
    not precisely define the period within which notice must be
    provided, Texas courts will construe the policy as requiring notice
    “within a reasonable time”. See, e.g., Stonewall 
    Insurance, 757 S.W.2d at 435
    .
    6
    say with certainty that the May 1995 storm was the cause.                 Finally,
    the record indicates that automobiles in the area of Ridglea’s
    property suffered severe hail damage as a result of the May 1995
    storm.
    In response to this evidence, Ridglea offers only Brady’s
    assertion that the damage would have been difficult for Ridglea to
    discover, as the roofs involved are on two story buildings, and
    thus, “not visible from the ground”.                This argument is not on
    point.    Given the magnitude of the 1995 storm, as well as the hail
    damage to      other   portions   of    Ridglea’s    property     –-    i.e.,    the
    shutters and windows –- Ridglea should have been aware of the
    likelihood that its roofs had suffered hail damage, and thus,
    should have had the roofs inspected by an expert at some reasonable
    time soon after the hailstorm occurred.              The fact that Ridglea’s
    management neglected to do so does not serve to toll the policy’s
    prompt notice provision in Ridglea’s favor.
    Thus, we hold that the prompt notice period ran from on or
    about the date on which Ridglea’s hail damage was incurred:                 May 5,
    1995.    We need not determine precisely where, under Texas law, the
    boundaries of “prompt notice” or “reasonableness” lay. Instead, we
    simply affirm      the   district      court’s   holding   that    to    delay    an
    inspection for six years is unreasonable as a matter of law.
    In sum, because Ridglea gave its notice of damage after the
    period   for    prompt   notice   had    expired,    Lexington’s        subsequent
    general denial of liability likewise came “after the time limited
    7
    for giving notice” and thus did not constitute a waiver of the
    defense of late notice.         See Stonewall 
    Insurance, 757 S.W.2d at 436
    .2
    B
    Ridglea    next   contends   that   the   policy’s   prompt   notice
    provision is unenforceable as a matter of public policy, and thus
    void.       Ridglea’s argument stems from an aggressive interpretation
    of § 16.071 of the Texas Civil Practice and Remedies Code, which
    provides in pertinent part:
    A contract stipulation that requires a
    claimant to give notice of a claim for damages
    as a condition precedent to the right to sue
    on the contract is not valid unless the
    stipulation is reasonable. A stipulation that
    requires notification within less than 90 days
    is void.
    Ridglea then cites Western Indemnity Co. v. Free and Accepted
    Masons of Texas, for the proposition that a notice period violates
    2
    Ridglea further contends that, even if Farmers Insurance
    Exchange does not compel a finding that Lexington has waived its
    late notice defense, Article 21.55, § 3(c) of the Texas Insurance
    Code does so. This argument is without merit. Section 3(c) merely
    requires an insurer to state the reasons for its rejection of a
    claim. In 1995, four years after Article 21.55 was enacted, the
    Texas Supreme Court held that, where a plaintiff seeks to bar an
    insurer from raising a defense to liability, the insurer’s
    “reliance on a different, perhaps erroneous, reason for denying
    coverage [in its initial denial] is not dispositive.       What is
    dispositive is whether, based upon the facts existing at the time
    of the denial, a reasonable insurer would have denied the claim”.
    Republic Insurance Co. v. Stoker, 
    903 S.W.2d 338
    , 340 (Tex. 1995)
    (citing Aranda v. Insurance Co. of North America, 
    748 S.W.2d 210
    ,
    213 (Tex. 1988)). Ridglea does not allege that Lexington’s initial
    reason for denial was unreasonable or made in bad faith. As such,
    it has not stated a case for waiver of Lexington’s late notice
    defense.
    8
    § 16.0713 if it is capable of being interpreted as spanning less
    than 90 days.    
    268 S.W. 728
    , 728-29 (Tex. Comm. App. 1925).          Next,
    Ridglea cites Round Rock Independent School District v. First
    National Insurance Co. of America, in which this court held that
    provisions calling for “immediate notice” are capable of being read
    as requiring notice in less than 90 days and thus unenforceable.
    
    324 F.2d 280
    , 284 (5th Cir. 1963).         Finally, Ridglea reasons that
    “prompt is a synonym for immediate”, thus rendering Lexington’s
    requirement of “prompt notice” unenforceable under § 16.071.
    The argument, although novel, is irrelevant to the case before
    us.   Section 16.071 provides that stipulations requiring notice of
    “claims for     damages”   within   90   days   are   unenforceable.     The
    provision in Ridglea’s policy requires notice of an “event of loss
    or damage” to insured property.          The distinction is significant.
    In Commercial Standard Insurance Co. v. Harper, the Texas Supreme
    Court held that VERNON’S ANN. CIV. STAT. art. 5546, a nearly identical
    predecessor to § 16.071, did not render unenforceable a stipulation
    requiring notice of an “event of loss or damage”.          
    103 S.W.2d 143
    ,
    145 (Tex. 1937).       The court reasoned that “[n]otice that an
    automobile has been stolen is not ‘notice of a claim for damages’
    as that term is used in [Article 5546].         It is only notice of the
    happening of an event upon which liability may or may not result”.
    3
    Western Indemnity Co. dealt with the proper interpretation
    of Article 5546, a nearly identical predecessor to § 16.071 that
    likewise barred notice periods of less than 90 days.
    9
    The Texas Supreme Court has reaffirmed its holding in Harper
    on several occasions.      See, e.g., Community Bank & Trust v. Fleck,
    
    107 S.W.3d 541
    , 542 (Tex. 2002); American Airlines Employees
    Federal Credit Union v. Martin, 
    29 S.W.3d 86
    (Tex. 2000).              As such,
    it   is quite     clear   that   Ridglea’s   contention   that   the    notice
    provision is unenforceable under Texas law is without merit.
    C
    Ridglea argues that the policy’s prompt notice provision is
    ambiguous, and thus, should be interpreted to favor the insured.
    See St. Paul Mercury Insurance Co. v. Tri-State Cattle Feeders,
    Inc., 
    628 S.W.2d 844
    , 846 (Tex. App. 1982) (stating, in dicta, that
    “[a]n ambiguous clause in an insurance policy is to be strictly
    construed in favor of the insured”). To that end, Ridglea contends
    that “interpreting the notice provision as requiring notice once
    the insured discovers a loss ... would certainly be reasonable”.
    (Emphasis added.)     Thus, Ridglea appears to contend that, because
    the term “prompt” is ambiguous, the prompt notice period cannot
    begin to run until the insured actually discovers the damage, no
    matter how objectively unreasonable its failure to discover the
    damage may have been.
    Ridglea’s     proposed     interpretation   of   the    prompt    notice
    provision is not supported by Texas precedent.               As the district
    court observed in its order, Texas courts have held that where “the
    policy does not define the term ‘prompt,’ we construe the term as
    10
    meaning that notice must be given within a reasonable time after
    the occurrence”.     See Stonewall Insurance 
    Co., 757 S.W.2d at 435
    (emphasis added) (citing National Security Corp. v. Diggs, 
    272 S.W.2d 604
    , 697 (Tex. Civ. App. 1954)).                 As 
    discussed supra
    , no
    rational finder of fact could conclude that Ridglea’s notice, which
    came six years after the alleged date of the hail damage, was given
    within a reasonable time.          As such, the ambiguity that Ridglea
    identifies does nothing to help it overcome Lexington’s defense of
    late notice.
    D
    Having established that Lexington's late notice defense is a
    viable   one   –-   i.e.,   that   it       has   not   been   waived,   is   not
    unenforceable, and is not void for vagueness –- we turn to the
    central issue in this case:         Ridglea's contention that Texas law
    requires Lexington to show that it was prejudiced by Ridglea's
    breach of the policy's "prompt notice" provision.
    As a preliminary matter, it is quite clear that Texas law
    requires a showing of prejudice in order to raise breach of a
    notice requirement as a defense against claims on certain types of
    insurance policies.     The Texas Department of Insurance has issued
    orders requiring mandatory endorsements in general liability and
    automobile insurance policies stating that "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 ... occurrence or loss ... shall not bar liability under this
    11
    policy".   See Hanson Production Co. v. American Insurance Co., 
    108 F.3d 627
    , 629 (5th Cir. 1997) (quoting Texas State Board of
    Insurance, Order No. 23080).
    Lexington argued, and the district court agreed, that the
    prejudice requirement applies only to those types of policies --
    i.e.,   automobile    and   general   liability   --   designated    in   the
    Insurance Board orders.      Ridglea, however, contends that Texas law
    also requires a showing of prejudice in order raise late notice as
    a defense to liability under certain policies not designated in the
    orders, including the property insurance policy at issue here.
    When deciding questions of state law, this court is bound by Erie
    to rule as it believes the state's supreme court would.           See, e.g.,
    Browning Seed Inc. v. Bayles, 
    812 F.2d 999
    , 1002 (5th Cir. 1987)
    (citing Erie R.R. v. Tompkins, 
    304 U.S. 64
    (1938)). Given the
    decision of the Texas Supreme Court in Hernandez v. Gulf Group
    Lloyds, we believe that Ridglea's position is the correct one. See
    
    875 S.W.2d 691
    (Tex. 1994).
    In Hernandez, the Texas Supreme Court held that an insured's
    violation of a settlement-without-consent provision was not a bar
    to recovery under an uninsured motorist policy, unless the insurer
    could show that it was prejudiced by the violation.         
    Id. The court
    made no reference to the orders by the Board of Insurance; instead,
    the court based its holding on general principles of contract
    interpretation.      The court observed that "[i]nsurance policies are
    contracts" and thus subject to the "fundamental principle of
    12
    contract law ... that when one party to a contract commits a
    material breach ... the other party is discharged ... from any
    obligation to perform."      
    Id. at 692.
      In order to determine whether
    a breach is material, the court observed, it must consider, inter
    alia, "the extent to which the non-breaching party will be deprived
    of the benefit that it could have reasonably anticipated from full
    performance".      
    Id. at 693.
    The   court    then   considered    the   varying   extents   to   which
    violation of a settlement-without-consent provision might deprive
    an insurer of the benefit of its bargain.           The court ultimately
    reinstated the trial court's verdict for the plaintiff, holding
    that "an insurer who is not prejudiced by an insured's settlement
    may not deny coverage under an uninsured/under-insured motorist
    policy that contains a settlement-without-consent provision".             
    Id. Given the
    method of the Texas Supreme Court's reasoning, and
    the general principle underlying that reasoning, we conclude that
    the prejudice requirement applies to the property insurance policy
    at issue here.4     As such, we hold that the district court erred in
    holding that Lexington was not required to show prejudice in order
    4
    We emphasize that our holding is a narrow one. We do not
    read Hernandez as necessarily creating a prejudice requirement for
    all insurance policies issued in Texas. We have previously held,
    for example, that an insurer may deny coverage under a “claims
    made” liability policy without a showing of prejudice. See Matador
    Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 
    174 F.3d 653
    ,
    659 (5th Cir. 1999). Whether other types of policies likewise fall
    outside the scope of Hernandez is a question we need not reach.
    13
    to raise breach of the policy's prompt notice provision as a
    defense.
    Because the district court erred as a matter of law in failing
    to require a showing of prejudice, we need not address whether
    questions of material fact exist with regard to the prejudicial
    effect   of   late   notice.   Where    a   trial   court   grants   summary
    judgment, but fails to consider an element of a cause of action or
    defense, it has erred, not because it has decided factual issues
    properly reserved for trial, but because it has failed to determine
    that no genuine issue of material fact exists with respect to the
    omitted element.     See Trevino v. Celanese Corp., 
    701 F.2d 397
    , 407
    (5th Cir. 1983).      As such, it will be the task of the district
    court on remand to determine whether Ridglea has raised questions
    of material fact as to whether Lexington was prejudiced by its
    breach of the policy's prompt notice provision.5
    III
    For the reasons set forth above, we VACATE the district
    court’s grant of summary judgment for Lexington and REMAND for (1)
    a determination of whether Ridglea has raised questions of material
    fact as to whether Lexington’s defense was prejudiced by Ridglea’s
    5
    Although we have agreed with the district court that failure
    to give notice for six years is "unreasonable" as a matter of law,
    the parties have not cited, and we have not found, any Texas case
    holding that a six-year delay gives rise to a presumption of
    prejudice, rebuttable or irrebuttable.
    14
    breach of the prompt notice provision; and (2) if such questions
    exist, trial on the merits.
    VACATED and REMANDED with instructions.
    15