Ridglea Est Condo v. Lexington Ins Co , 415 F.3d 474 ( 2005 )

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withdrawn, and the following opinion substituted in its place, with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