LATE NOTICE EXCLUSION REQUIRES
"PREJUDICE"
PAJ, Incorporated (PAJ), a
jewelry manufacturer and distributor, was insured under a CGL issued by The
Hanover Insurance Company (Hanover) when it was sued. Another jewelry maker, Yurman Designs (Yurman), first
filed a cease and desist order; then a lawsuit against PAJ. Both the cease and
desist order and the suit alleged that PAJ had made and marketed jewelry that
infringed upon Yurman's product copyrights.
PAJ did not notify Hanover of
either of Yurman's actions. Approximately 15 months
after the suit was filed, PAJ was discussing a CGL policy renewal with Hanover.
During this time, PAJ became aware that the CGL might provide coverage for the Yurman lawsuit and Hanover became aware of the suit. Hanover
and PAJ filed cross motions for summary judgment. PAJ sought coverage and
Hanover sought a ruling that, due to the extreme delay in notification, the
insurer had no obligation to provide either coverage or a legal defense. The
trial court ruled in favor of Hanover, as a matter of law. The insurer did not
claim that their rights were harmed (prejudiced) by the late notification.
During the appeal, PAJ did not
dispute that it failed to notify Hanover in time. However, it did argue that,
since the late notice did not prejudice the insurer, it should be obligated to
respond to the Yurman claim. PAJ based its position
on their opinion that state law requires an insurer to handle a claim or suit
that is reported late as long as the insurer's rights have not been harmed.
The higher court reviewed PAJ's
argument, as well as the cases they cited to support their position. The court
pointed out that, while prejudice must be shown by an insurer that wishes to
deny coverage on the grounds of a late notice, the law only makes that
requirement on claims involving bodily injury and property damage. Yurman's
underlying claim against PAJ involved advertising injury.
In the end, the higher court
ruled that the trial court was justified in deciding that, as a matter of law, PAJ's
late notice barred coverage for the lawsuit. The trial court decision was
affirmed.
PAJ requested a review by the
Supreme Court of Texas. The court revisited its earlier decision cited and
extended it beyond only bodily injury and property damage to advertising
injury. PAJ was awarded summary judgment.
PAJ, Inc. d/b/a Prime Art & Jewel, Petitioner, v. The Hanover Insurance Company, Respondent. Supreme Court of Texas. No. 05-0849. Decided January 11, 2008