Johnson Dissent in
Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance, No. 06-0598 (Tex. Mar. 27,
2009)(Jefferson) (insurance law, effect of noncompliance with prompt notice requirement as condition
precedent for coverage of claim, prejudice factor)
PRODIGY COMMUNICATIONS CORP. v. AGRICULTURAL EXCESS & SURPLUS INSURANCE
COMPANY, N/K/A GREAT AMERICAN E & S INSURANCE COMPANY AND GREAT AMERICAN
INSURANCE COMPANY; from Dallas County; 5th district (05-05-00442-CV, 195 SW3d 764, 05-30-06)
The Court reverses the court of appeals' judgment, renders judgment in part, and remands the case to
the trial court.
Chief Justice Jefferson delivered the opinion of the Court, in which Justice O'Neill, Justice Wainwright,
Justice Brister, Justice Medina, and Justice Green joined.
Justice Wainwright delivered a concurring opinion.
Justice Johnson delivered a dissenting opinion, in which Justice Hecht and Justice Willett joined.
═══════════════════════════════════════════════════════════════════
Dissent in Prodigy Comm. Corp. v. Agricultural Excess & Surplus Ins. (Tex. 2009)
I would hold that on this record there is no evidence the condition precedent language requiring written
notice of claim to AESIC “as soon as practicable” was not essential to AESIC’s policy having been issued. I
would affirm the judgment of the court of appeals as to that issue. I would affirm the remainder of the court
of appeals’ judgment for the reasons stated in the court of appeals’ opinion.
═══════════════════════════════════════════════════════════════════
Argued April 1, 2008
Justice Johnson, joined by Justice Hecht and Justice Willett, dissenting.
Today the Court rewrites an unambiguous insurance contract and changes the agreement of
the parties. It holds that AESIC cannot deny coverage to Prodigy even if Prodigy breached explicit
contract language making it a condition precedent for it to give notice of the claim “in writing, as
soon as practicable.” The Court does so by departing from well-established insurance policy
construction rules as well as by failing to adhere to the choice made by the Court in Members
Mutual Insurance Co. v. Cutaia, 476 S.W.2d 278, 280-81 (Tex. 1972), to interpret insurance
contracts as written and leave changes to the Legislature or insurance regulatory agency. I dissent.
The rules governing interpretation of contracts in general apply to interpreting insurance
policies. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex.
1995). The parties do not contend AESIC’s policy is a form promulgated by the State or a
regulatory authority, so we seek to ascertain the intent of the parties and interpret the policy
accordingly. See Fiess v. State Farm Lloyds, 202 S.W.3d 744, 746 (Tex. 2006). In ascertaining
the parties’ intent, we look first and primarily to the written words used. Id. (“As with any other
contract, the parties’ intent is governed by what they said . . . .”); Balandran v. Safeco Ins. Co. of
Am., 972 S.W.2d 738, 741 (Tex. 1998) (“Our primary goal, therefore, is to give effect to the written
expression of the parties’ intent.”); Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex.
1994). Despite regular invitations to add to or ignore language when interpreting insurance
policies, this Court has generally adhered to the principle that judges interpret language to which
parties have agreed, not alter it. E.g., Fortis Benefits v. Cantu, 234 S.W.3d 642, 647, 649 (Tex.
2007) (noting that contract rights arise from the parties’ agreement, not principles of equity and
declining to “judicially rewrite the parties’ contract by engrafting extra-contractual standards”);
Fiess, 202 S.W.3d at 753 (“For more than a century this Court has held that in construing
insurance policies ‘where the language is plain and unambiguous, courts must enforce the
contract as made by the parties, and cannot make a new contract for them, nor change that which
they have made under the guise of construction.’”) (quoting E. Tex. Fire Ins. Co. v. Kempner, 27 S.
W. 122, 122 (1894)); but see PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 636-37 (Tex. 2008)
(holding that as to an occurrence-based policy, an insured’s breach of its obligation to timely
notify the insurer of a claim or suit does not defeat coverage if the insurer was not prejudiced by
the delay).
In Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., we
rejected an insurer’s claim for equitable reimbursement from its insured, in part, because allowing
reimbursement would have required us to “‘rewrite the parties’ contract or add to its language.’”
246 S.W.3d 42, 50 (Tex. 2008) (quoting Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154,
162 (Tex. 2003)). In Excess Underwriters we also quoted with approval language the Court used
in Fortis Benefits where we said we are “‘loathe to judicially rewrite the parties’ contract by
engrafting extra-contractual standards.’” Id. at 51 (quoting Fortis Benefits, 234 S.W.3d at 649).
But today the Court holds AESIC cannot deny coverage to Prodigy even if Prodigy breached
the explicit contract language requiring notice of the claim “in writing, as soon as practicable”
because (1) that part of the notice provision was not an essential part of the bargained-for
exchange; (2) AESIC did not show it was prejudiced by the timing of written notice; and (3) written
notice was given within the time period allowed by another part of the policy’s notice provision.
___ S.W.3d ___, ___. The Court poses the issue as “whether ‘notice as soon as practicable’ is
an essential part of the bargained-for exchange in the claims-made policy at issue here.” I
disagree that the record shows the “as soon as practicable” notice provision was not an essential
part of the parties’ agreement.
In determining whether the notice provisions of AESIC’s policy were essential to the
agreement, the first place to seek the answer is the policy itself. AESIC’s policy consists of a
declarations page, a cover page, three pages setting out the terms of the insurance, plus
endorsements. The statement “THIS IS A CLAIMS MADE POLICY, READ IT CAREFULLY”
appears at the top of the declarations page and the first page of the policy. The first section of the
policy is “Section I. Insuring Agreements” made up of two paragraphs—one applicable to
Flashnet’s directors and officers and the other applicable to Flashnet as a company. Page three
of the policy contains “Section VII. Notice of Claim.” The Notice of Claim provision originally
contained condition precedent language and a hard-and-fast requirement that written notice of
any claim be given within ninety days after the claim was made. It was amended to require written
notice to AESIC as soon as practicable “but in no event later than ninety (90) days after the
expiration of the Policy Period or Discovery Period.” The entire endorsement reads as follows:
The Directors or Officers shall, as a condition precedent to their rights under this Policy, give the
Insurer notice, in writing, as soon as practicable of any Claim first made against the Directors and
Officers during the Policy Period, or Discovery Period (if applicable), but in no event later than
ninety (90) days after the expiration of the Policy Period or Discovery Period, and shall give the
Insurer such information and cooperation as it may reasonably require.
(emphasis added).
Timely notice was clearly and explicitly a condition precedent to any rights under the policy.
Prodigy does not contend the endorsement language is unclear or that Flashnet ever sought any
other notice language. Nor does Prodigy contend that Flashnet, a company involved with
sophisticated legal matters such as public stock offerings and securities law was misled about or
protested the notice provisions when it purchased the policy and the endorsement.
The record and sequence of events indicate that all the notice language, including timing of
notice, was an important part of the policy: timely notice was a condition precedent in the original
policy and the condition precedent language was carried forward into the endorsement. Certainly
the record does not show as a matter of law that the notice language was not essential to the
parties’ agreement. The Court’s conclusion otherwise is in derogation of the parties’ intent as
expressed by policy language.
The Court concludes, relying on decisions from other jurisdictions and legal treatises, that in
order for an insurer to deny coverage under claims-made policies for breach of a reporting
requirement, the insurer (1) must show prejudice if the insured gives notice of a claim within the
policy period or a specified time after policy termination, even though the notice was not “as soon
as practicable,” but (2) need not show prejudice if the insured gives notice of a claim outside the
policy period or the time allowed in the policy for reporting claims after policy termination, if any.
___ S.W.3d at ___. The Court says a requirement of notice “as soon as practicable” is more part
of the investigative process and not as much a part of the coverage bargain between the insurer
and insured as is an end-of-policy notice requirement. But the insuring agreements and notice
provisions of AESIC’s policy are completely separate. That separation militates against
classifying one notice provision in Section VII as more important because it is a coverage-type
provision and the other notice provision as less important because it is an investigation-type
provision. Neither of those classifications for the notice provisions is indicated by policy language.
Furthermore, the record demonstrates no logical reason to apply a different rule to AESIC’s
end-of-policy notice provision. There is no basis in the record for concluding Prodigy’s one-year
delay in reporting the claim was any more or less important to AESIC’s insurance business than if
Prodigy had delayed for a year reporting a claim made on the last day of the Discovery Period. In
the latter circumstance, the Court says AESIC would not be required to show prejudice and the
condition precedent language would preclude the insurer’s liability because the insurer needs to
close its books as to the policy. We should be bound by the record the parties bring, and the
record does not support either the latter statement or treating the delays differently. But first and
foremost, the policy language shows AESIC and Prodigy intended for the two notice provisions to
have the same effect: both are conditions precedent to Prodigy’s rights under the policy. We
should respect the agreement.
In holding a showing of prejudice is required for failure to give notice as soon as practicable,
but not for notice failing to comply with the end-of-policy provision, the Court relies on cases from
other states. But two cases emphasized by the Court highlight the very point made long ago in
Cutaia that the Court should defer to legislative and regulatory entities to (1) address the notice-
prejudice question, and (2) change policy language if change was deemed necessary. Cutaia,
476 S.W.2d at 280-81. In T.H.E. Insurance Co. v. P.T.P., 628 A.2d 223 (Md. 1993) and Chas. T.
Main, Inc. v. Fireman’s Fund Insurance Co., 551 N.E.2d 28 (Mass. 1990), referenced by the
Court, the notice-prejudice issue was addressed by statute and the courts were considering how
notice provisions should be treated in light of the statutes. In Chas. T. Main, the Supreme Judicial
Court of Massachusetts considered a claims-made professional liability policy in light of a statute
that provided, in part, as follows:
An insurance company shall not deny insurance coverage to an insured because of failure of an
insured to seasonably notify an insurance company of an occurrence, incident, claim or of a suit
founded upon an occurrence, incident or claim, which may give rise to liability insured against
unless the insurance company has been prejudiced thereby.
Mass. Gen. Laws ch. 175, § 112 (1988). The Massachusetts court said, without reference to the
record, “the requirement that notice of the claim be given in the policy period or shortly thereafter
in the claims-made policy is of the essence in determining whether coverage exists.” Chas. T.
Main, 551 N.E.2d at 30. However, the court, in summary fashion, held the statute applied only to
the “as soon as practicable” notice and not to the “within the policy year” notice. Id. It stated that
applying the statute to “within the policy year” notice provisions would defeat the fundamental
concept on which claims-made policies are premised, and it would be unreasonable to think that
the Legislature intended such a result. Id.
And in T.H.E. Insurance Co., the Maryland Court of Appeals considered the effect of a statutory
notice-prejudice provision on a claims-made policy. 628 A.2d at 223. The statute involved
provided:
Where any insurer seeks to disclaim coverage on any policy of liability insurance issued by it, on
the ground that the insured or anyone claiming the benefits of the policy through the insured has
breached the policy by failing to cooperate with the insurer or by not giving requisite notice to the
insurer, such disclaimer shall be effective only if the insurer establishes, by a preponderance of
affirmative evidence that such lack of co-operation or notice has resulted in actual prejudice to the
insurer.
Md. Ann. Code of 1957 art. 48A, § 482 (1991 Repl. Vol.).
The court noted that under one of its previous holdings, if a claim had been reported within the
extended reporting period, the insurer would have had to prove actual prejudice. T.H.E. Ins. Co.,
628 A.2d at 226 n.7. However, the court held that the statute did not operate to revive the policy
as to notice of a claim given after the end of the policy period. Id. at 227. Texas does not have a
statute, regulation, or agency directive that similarly applies to AESIC’s policy.[1]
Even disregarding the record, the general discussion of claims-made policies by which the
Court eventually differentiates between the two types of notices does not support the step the
Court takes. The claims-made policy involved here insures against claims first made against
directors and officers during the policy period. As noted above, the notice and insuring
agreements of AESIC’s policy are separate: the Insuring Agreements are in Section I; the Notice
of Claim provisions are in Section VII. For all practical purposes AESIC’s policy insures against
events—claims first made during the policy period—just as an occurrence policy insures against
events—occurrences during the policy period. The difference is that under occurrence policies the
insurer may not know of the event it has insured against for a long time after the event, whereas
AESIC should know of the event it has insured against (a claim against its insured) during the
policy period or within ninety days after expiration of the Discovery Period. Thus, under AESIC’s
claims-made policy as it is written, the notice requirements terminate the insurer’s obligations (1)
as the policy period passes without notice of claim being given, or (2) at the latest, ninety days
after the Discovery Period ends. But when courts rewrite existing policy provisions as the Court
does in this case, insurers’ actuarial predictions of losses and expenses, and the process of
setting premium rates to cover projected losses and expenses are disrupted. See Neil A.
Doherty, The Design of Insurance Contracts When Liability Rules are Unstable, 58 J. of Risk and
Ins. 227, 227 (1991) (“[T]he recent liability insurance ‘crisis’ in the United States appears to be a
response to a destabilization of the legal system. Insurers argue that they are able to insure the
liabilities of clients arising under an unchanging set of liability rules, but they cannot insure against
changes in the rules themselves.”). Policy language and its effects on the insurer’s business are
matters better addressed through the legislative and regulatory processes than through the
judicial process. The legislative and regulatory processes allow prospective implementation of
changes to policy language and prospective calculation of premiums based on risks assumed by
the insurer. Modifications to agreements through the judicial process, however, are primarily
retrospective, long after the contracts were entered into and premiums calculated and paid based
on agreed-to policy language.
In Cutaia, the Court recognized these policy reasons behind leaving changes to the Legislature
or regulatory agency. Cutaia, 476 S.W.2d at 280-81. But here, the Court does not respect the
agreement of the parties or exercise the restraint that it did in Cutaia. In Cutaia an automobile
liability policy required, as one of several conditions precedent to the insured’s rights under the
policy, that the insured give notice of any accident to the insurer and immediately forward any suit
papers. Id. at 278. Cutaia, the insured, was sued but failed to forward suit papers to the insurer.
Id. Following a trial and entry of judgment against Cutaia, the insurer denied coverage because
Cutaia did not forward the suit papers. Id. at 279. In rendering judgment for the insurer, we noted
“[t]here is no provision in the policy that failure to comply with the conditions precedent would be
excused if no harm or prejudice were suffered by the insurer; and such a provision would have to
be inserted into the policy by implication.” Id. at 278 (emphasis added). The Court declined to
override the insurance policy language and by judicial fiat add a prejudice provision to the policy:
We are, therefore, faced with plain wording of the contract and the holdings of this Court; and
we are also faced with facts which show an apparent injustice. The problem then arises as to
whether, or what, changes should be made, and by whom. Should this Court overrule its former
decisions and say that provisions in the policy are Not conditions precedent to liability? Or should
we imply into the policy a provision that failure to comply with the condition precedent will be
excused if no harm or prejudice is shown? Or should we enforce the provisions as written and call
the matter to the attention of those who, for the public, are charged with prescribing policy forms
as well as with the approval or disapproval of the provisions of the policy?
.
Our conclusion is, however, that on balance it is better policy for the contracts of insurance to be
changed by the public body charged with their supervision, the State Board of Insurance, or by the
Legislature, rather than for this Court to insert a provision that violations of conditions precedent
will be excused if no harm results from their violation.
Id. at 280, 281 (emphasis added).
Similar to the situation in Cutaia, Prodigy’s written notice did not comply with requirements
agreed to as conditions precedent when the policy was purchased. Nevertheless, the court holds
Prodigy’s untimely notice of claim is now timely and presumably will require payment under a
policy with limits of three million dollars. Unlike its choice in Cutaia, the Court’s choice today is to
inject itself into a contractual relationship between two sophisticated parties, insert language into
the policy, and change the policy so it in effect provides:
The Directors or Officers shall, as a condition precedent to their rights under this Policy, give the
Insurer notice, in writing, as soon as practicable of any Claim first made against the Directors and
Officers during the Policy Period, or Discovery Period, (if applicable), but in no event later than
ninety (90) days after the expiration of the Policy Period or Discovery Period, and shall give the
Insurer such information and cooperation as it may reasonably require. Notwithstanding the
foregoing provision, the insureds shall not lose any rights under the policy if written notice of a
covered claim is given not later than ninety (90) days after the expiration of the Policy Period or
Discovery Period, (if applicable), unless the insurer proves it was prejudiced by the failure to give
notice as soon as practicable.
See Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653, 657 (5th Cir.
1999).
The language effectively added by the Court looks remarkably similar to language in notice-
prejudice statutes, regulations, and agency orders. See State Board of Insurance, Revision of
Texas Standard Provision For General Liability Policies--Amendatory Endorsement-Notice,
Order No. 23080 (Mar. 13, 1973); Mass. Gen. Laws ch. 175, § 112 (1988); Md. Code Ann. of
1957 art. 48A, § 482 (1991 Repl. Vol.). But in matters such as this the Court cannot enact
legislation or issue agency orders, and it should limit itself to interpreting or construing
agreements—not changing them.
The better choice for courts, as the Court noted in Cutaia, is if changes to insurance policy
language are to be mandated that affect timing and amount of insurers’ actual or incurred loss
provisions, other parts of the insurance companies’ business, and policy clauses related to rate or
premium calculations, the changes should be left to the Legislature and regulatory agencies. See,
e.g., J. David Cummins, Statistical and Financial Models of Insurance Pricing and the Insurance
Firm, 52 J. of Risk and Ins. 261 (1991). The Legislature and regulatory bodies such as the Texas
Department of Insurance have the time, staff, resources and expertise to investigate and bring all
relevant information to bear on such issues. I adhere to the opinion expressed by the dissent in
PAJ:
I would reaffirm Cutaia’s recognition that the Legislature and the state agency overseeing the
insurance industry are better suited to decide whether an insurer must show prejudice to deny
coverage based on late notice. TDI and legislators are free to supplant Cutaia’s no-prejudice rule
with a more liberal notice-prejudice rule if they believe, on public policy grounds, that the latter is
preferable.
PAJ, 243 S.W.3d at 641 (Willett, J., dissenting).
I would hold that on this record there is no evidence the condition precedent language requiring
written notice of claim to AESIC “as soon as practicable” was not essential to AESIC’s policy
having been issued. I would affirm the judgment of the court of appeals as to that issue. I would
affirm the remainder of the court of appeals’ judgment for the reasons stated in the court of
appeals’ opinion.
________________________________________
Phil Johnson
Justice
OPINION DELIVERED: March 27, 2009
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[1] Texas does have a State Board of Insurance Order relating to bodily injury or property damage liability
claims covered by general liability policies. See PAJ, 243 S.W.3d at 632; State Board of Insurance,
Revision of Texas Standard Provision For General Liability Policies--Amendatory Endorsement-Notice,
Order No. 23080 (Mar. 13, 1973) (“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.”).