Settoon, Starr and Beyond

Requirement to Show Prejudice

Matador was the first case in which the Fifth Circuit considered whether to require the insurer to show prejudice before enforcing strict compliance with a pollution exclusion notice requirement. St. Paul issued a CGL policy to Matador Petroleum Corporation that contained an absolute pollution exclusion. The exclusion also contained an exception that provided coverage for “covered pollution incident[s]” so long as the insured satisfied several conditions. One of the requirements imposed by the exception was that the pollution event be “ reported to the [insurer] within 30 days of its beginning.”

On March 29, 1994, a drilling pit collapsed in one of Matador's wells. On May 6, 1994, 38 days after the incident, Matador notified St. Paul and requested coverage for damages claimed by landowners who were affected by the pit's collapse. St. Paul denied coverage on the basis that Matador failed to give notice within 30 days of the incident, as required by the pollution exclusion's notice provision. Matador subsequently filed suit against St. Paul and the latter obtained summary judgment on the grounds that the insured had not complied with the terms of the pollution exclusion's notice provision.

Matador appealed the district court's ruling and argued, among other things, that St. Paul was required to show prejudice as a result of its receipt of untimely notice. In analyzing Matador's arguments, the court recognized the distinction between claims-made and “occurrence”-based policies and observed that, unlike occurrence-based policies, courts typically do not require a showing of prejudice prior to enforcement of notice provisions contained in claims-made policies.

According to the Fifth Circuit, the occurrence of a covered event is of primary importance in an occurrence-based policy. Although these policies contain notice requirements, the court observed that they are merely included to assist the insurer in administering coverage of the claim.

By contrast, in a claims-made policy, the giving of notice by the insured is the event that actually triggers coverage. As a result, courts strictly interpret notice provisions in claims-made policies and do not require that the insurer show prejudice. One important reason for this distinction, the Fifth Circuit observed, is that unlike an occurrence-based policy, the notice provisions of claims-made policies are specifically negotiated for, and anything other than strict adherence to those provisions would result in an expansion of coverage not bargained for by the insurer.

The Matador Case

The difficulty presented by the policy before the Matador court was that it “share[d] characteristics in common with both an occurrence and a claims-made policy.” To determine how to properly interpret and apply the notice provision, the court analyzed the nature of the agreement between St. Paul and Matador. The pollution exclusion and the exceptions thereto had been added to the policy by way of endorsement. The court characterized the endorsement as one that supplemented the basic agreement and constituted additional bargained for coverage. An extension of the notice period under the endorsement would expand this coverage and would expose St. Paul to a risk broader than the risk expressly insured against in the policy.

Further, both St. Paul and Matador were sophisticated businesses capable of adequately negotiating the terms and conditions of the policy and any endorsements thereto. Based on the foregoing, the court concluded that the nature of the agreement between St. Paul and Matador was more akin to the bargain underlying a claims-made policy, rather than an occurrence-based one. In so ruling, the court held that St. Paul was not required to show prejudice as a predicate to enforcement of the pollution exclusion endorsement's notice provision.

Starr Indem. & Liab. Co.

Thereafter, in Starr Indem. & Liab. Co. v. SGS Petroleum Serv. Corp., 719 F.3d 700 (5th Cir. 2013), the Fifth Circuit was once more called upon to consider a notice provision contained in a pollution exclusion endorsement under Texas law. Starr Indemnity & Liability Company issued an excess bumbershoot policy to SGS Petroleum Service Corporation. The policy contained an absolute pollution exclusion that excluded coverage for “'liability or expense arising ' directly or indirectly in consequence of' the release or escape of pollutants and toxic chemicals.” The policy also contained a pollution buyback provision, which stated that the pollution exclusion would not apply as long as several conditions were met. One condition imposed by the buyback was that “the discharge, dispersal, release or escape [be] reported in writing to these underwriters within 30 days after having become known to the assured.”

On Nov. 7, 2010, an accidental release of hazardous chemicals occurred while an SGS employee conducted testing operations at a chemical plant in Baytown, TX. SGS, not realizing that the amount of damages would exceed the limits of its primary policy, did not notify Starr of the release until 59 days after the incident. Starr filed a declaratory judgment arguing that the absolute pollution exclusion barred coverage and that the buyback's requirements were not met because SGS failed to give notice within 30 days of the release. SGS argued, among other things, that Starr was required to show it was prejudiced by SGS' failure to provide timely notice.

The Fifth Circuit first noted that the language of the pollution exclusion in Starr's policy was “virtually identical” to that of the St. Paul policy in Matador. Nonetheless, SGS argued that subsequent Texas jurisprudence had overruled Matador. In support of its argument, SGS relied on two post-Matador decisions by the Texas Supreme Court: PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex.2008) and Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex.2009), which SGS argued changed Texas law with respect to notice provisions. In PAJ, the Texas Supreme Court affirmatively declared that Texas was a notice-prejudice jurisdiction and required that the insurer prove prejudice before it would enforce the notice requirements of an occurrence-based policy.

In Prodigy, the Texas Supreme Court went a step further and declined to enforce the notice requirement of a claims-made policy when the insurer was not prejudiced by the delay. The Fifth Circuit analyzed both decisions and held that neither case disturbed its previous holding in Matador. In both PAJ and Prodigy, the Texas Supreme Court specifically found that the notice provisions of the policies were not specifically negotiated for by the insurer and the insured. Further, as observed by the Fifth Circuit, neither case involved notice provisions that were an “essential part of the bargained-for coverage.”

By contrast, both Starr and SGS had specifically negotiated for the buyback provision contained in the policy. Thus, the Fifth Circuit held that it was bound by Matador's precedent, which clearly required a finding that Starr's denial of coverage was justified. In so ruling, the Fifth Circuit upheld the district court's grant of summary judgment in Starr's favor, and cast aside any doubts as to the continuing relevance of Matador.

Settoon

In In re Matter of Complaint of Settoon Towing, L.L.C., 720 F.3d 268 (5th Cir. 2013), an opinion issued the same day as Starr, the Fifth Circuit held that the Matador rationale also applied to a case decided under Louisiana law. The M/V Cathy M. Settoon, a vessel owned by Settoon Towing, struck an oil well in Bayou Perot, LA, on Jan. 20, 2007. The captain of the Cathy did not report the collision to the Coast Guard or Settoon. The next day, the captain of another of Settoon's vessels noticed an oil spill at the well, which he reported to both the Coast Guard and Settoon. The captain of the Cathy denied involvement until some 34 days after the incident, and confessed only after the Coast Guard showed him a reconstruction of the accident using information gained from the Cathy's tracking system.

Three days after the captain's confession, and 37 days after the incident, Settoon reported the claim to its insurers. The insurers sought a declaratory judgment that the policies' pollution exclusions precluded coverage for the damage caused by the collision.

New York Marine and General Insurance Company (NYMAGIC) issued an excess bumbershoot policy to Settoon, which contained an absolute pollution exclusion endorsement. The endorsement provided “that this policy shall not apply to any liability for ' 'property damage' ' arising out of the ' 'release' of 'pollutants' into ' any watercourse, water supply, reservoir or body of water.” Like the policy at issue in Starr, the endorsement contained a “Sudden and Accidental Buyback,” which provided that the pollution exclusion would not apply if, among other things, the occurrence was “reported in writing to those underwriters within 30 days after having become known to the assured.” Another excess policy insured by NYMAGIC, St. Paul, and Federal Insurance Company also contained the exact same Absolute Pollution Exclusion and Sudden and Accidental Buyback.

The insurers moved for summary judgment, arguing that by giving notice 37 days after the occurrence, Settoon failed to comply with the excess policies' buyback provisions. The district court granted the insurers' motion. On appeal, Settoon argued that the insurers must show they were prejudiced by Settoon's failure to provide notice within the time limit imposed by the buyback's notice provision. As noted by the Fifth Circuit, no Louisiana court had fully considered whether to enforce strict compliance with the notice provisions of a buyback endorsement. In addressing that issue, the Fifth Circuit observed that Louisiana courts enforce strict compliance with notice provisions found in claims-made policies, and that Louisiana courts have enforced notice provisions where notice was a “condition precedent” to recovery.

According to the court, the buyback clauses' notice provisions clearly indicated that notice was a condition precedent to coverage because the Absolute Pollution Exclusion “delete[s] from any and all coverage's [sic] ' any ' claim ' in any way arising out of [pollution].” The buyback provision thereafter states that “[i]t is hereby agreed that the above Absolute Exclusion shall not apply provided that the Named Assured established that all of the following conditions have been met.'”

According to the Fifth Circuit, “there is almost no stronger language that could establish a 'condition precedent' to recovery.” The 30-day notice provision in the exception to the exclusion “determines the scope of coverage bargained for,” and to hold “the umbrella insurers liable where the conditions of the buyback were not met would alter the terms of the parties' bargain.” Most importantly, the notice requirement did not serve to strip away liability for pollution; rather, failure to comply with the notice provision “prevents the exception of the exclusion from taking effect in the first instance.”

In other words, the buyback notice requirement created coverage where it would not have otherwise existed. Thus, the court held that the insurers could deny coverage on the basis of Settoon's failure to comply with the provision. The buyback's notice requirement, as bargained for, was a condition precedent to coverage, and anything less than strict adherence to the provisions thereof would not trigger the coverage afforded by the buyback requirement, regardless of whether the insurer was prejudiced by the delay.

A Strong Precedent

As these cases show, the Fifth Circuit has established a strong precedent that, even in traditional notice-prejudice jurisdictions, an insurer may deny coverage on the basis of the insured's failure to strictly comply with the notice requirements in a pollution exclusion endorsement buyback clause. At least one other court has followed the Fifth Circuit's lead.

In Venoco, Inc. v. Gulf Underwriters Ins. Co., 96 Cal. Rptr. 3d 409 (Cal. Ct. App. 2 Dist. 2009), a California Court of Appeal relied on Matador to require strict compliance with the terms of a notice requirement in a pollution exclusion buyback endorsement similar to the ones at issue in Matador, Starr and Settoon. The California court, like the Fifth Circuit, concluded that the insurer did not have to show it was prejudiced by the insured's failure to comply. Although few jurisdictions have confronted the issue, there is well-reasoned precedent to expect other notice-prejudice jurisdictions will require strict compliance with the notice requirements of pollution exclusion buyback provisions.

Furthermore, there is no reason that the logic and reasoning relied upon by the Fifth Circuit and the California Court of Appeal should not extend to allow enforcement of notice provisions contained in other endorsements as well. Matador, Starr, Settoon and Venoco did not hinge their analysis on the type of exclusion at issue. Instead, great weight was placed on the facts: that the parties specifically negotiated for the endorsement and the notice provisions contained therein; that the conditions imposed by notice requirement operated as a condition precedent to coverage that would otherwise be excluded; and, that the insured was a sophisticated entity capable of not only negotiating for, but also of understanding the terms of the endorsements and the requirements imposed by the buyback provisions. Therefore, there is a possibility that, under appropriate circumstances, the logic and reasoning relied upon by the Fifth Circuit could apply to other contexts as well.

C. Austin Holliday is an associate and Seth A. Schmeeckle is a shareholder with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard, which has offices in New Orleans, Baton Rouge, and Houston. The views presented in this article are not necessarily those of the firm or any of its clients.

The vast majority of jurisdictions do not enforce strict compliance with a policy's notice provisions unless the insurer was prejudiced by the insured's failure to timely report a covered event. That general rule is not without exception, however. A pair of recent decisions by the U.S. Court of Appeals for the Fifth Circuit shows that an exception to this general rule in the context of notice provisions located in pollution buyback clauses is slowly gaining momentum, even in jurisdictions that traditionally require an insurer to show it was prejudiced by the insured's delay. Both recent decisions, Starr Indem. & Liab. Co. v. SGS Petroleum Serv. Corp. , 719 F.3d 700 (5th Cir. 2013), and In re Matter of Complaint of Settoon Towing, L.L.C. , 720 F.3d 268 (5th Cir. 2013), draw heavily on the Fifth Circuit's earlier decision in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co. , 174 F.3d 653 (5th Cir. 1999).

In Matador, the Fifth Circuit, without regard to whether the insurer suffered any prejudice, applied Texas law to enforce strict compliance with a notice requirement contained in an exception to the policy's pollution exclusion. In Starr, the Fifth Circuit reaffirmed that Matador remained good law despite some potentially adverse post-Matador decisions by the Texas Supreme Court. And in Settoon, the Fifth Circuit went a step further. It applied the Matador logic and reasoning to a case involving Louisiana law, and concluded that the insurer was not required to show prejudice as a predicate to strict enforcement of the notice provision, even though Louisiana is traditionally a notice-prejudice jurisdiction.

These cases show that, where a policy contains a pollution exclusion buyback clause, the insurer will not have to prove prejudice before it is entitled to strict enforcement of the buyback's notice provision. More importantly, the logic and reasoning applied by the Fifth Circuit in deciding Matador and its progeny may not be limited to just those cases involving pollution exclusion buyback clauses. Further, and more importantly, there is a possibility that the rationale could extend to any case where the insurer and insured have specifically negotiated for a notice provision, or where a notice provision is phrased as a “condition precedent” to coverage.

Requirement to Show Prejudice

Matador was the first case in which the Fifth Circuit considered whether to require the insurer to show prejudice before enforcing strict compliance with a pollution exclusion notice requirement. St. Paul issued a CGL policy to Matador Petroleum Corporation that contained an absolute pollution exclusion. The exclusion also contained an exception that provided coverage for “covered pollution incident[s]” so long as the insured satisfied several conditions. One of the requirements imposed by the exception was that the pollution event be “ reported to the [insurer] within 30 days of its beginning.”

On March 29, 1994, a drilling pit collapsed in one of Matador's wells. On May 6, 1994, 38 days after the incident, Matador notified St. Paul and requested coverage for damages claimed by landowners who were affected by the pit's collapse. St. Paul denied coverage on the basis that Matador failed to give notice within 30 days of the incident, as required by the pollution exclusion's notice provision. Matador subsequently filed suit against St. Paul and the latter obtained summary judgment on the grounds that the insured had not complied with the terms of the pollution exclusion's notice provision.

Matador appealed the district court's ruling and argued, among other things, that St. Paul was required to show prejudice as a result of its receipt of untimely notice. In analyzing Matador's arguments, the court recognized the distinction between claims-made and “occurrence”-based policies and observed that, unlike occurrence-based policies, courts typically do not require a showing of prejudice prior to enforcement of notice provisions contained in claims-made policies.

According to the Fifth Circuit, the occurrence of a covered event is of primary importance in an occurrence-based policy. Although these policies contain notice requirements, the court observed that they are merely included to assist the insurer in administering coverage of the claim.

By contrast, in a claims-made policy, the giving of notice by the insured is the event that actually triggers coverage. As a result, courts strictly interpret notice provisions in claims-made policies and do not require that the insurer show prejudice. One important reason for this distinction, the Fifth Circuit observed, is that unlike an occurrence-based policy, the notice provisions of claims-made policies are specifically negotiated for, and anything other than strict adherence to those provisions would result in an expansion of coverage not bargained for by the insurer.

The Matador Case

The difficulty presented by the policy before the Matador court was that it “share[d] characteristics in common with both an occurrence and a claims-made policy.” To determine how to properly interpret and apply the notice provision, the court analyzed the nature of the agreement between St. Paul and Matador. The pollution exclusion and the exceptions thereto had been added to the policy by way of endorsement. The court characterized the endorsement as one that supplemented the basic agreement and constituted additional bargained for coverage. An extension of the notice period under the endorsement would expand this coverage and would expose St. Paul to a risk broader than the risk expressly insured against in the policy.

Further, both St. Paul and Matador were sophisticated businesses capable of adequately negotiating the terms and conditions of the policy and any endorsements thereto. Based on the foregoing, the court concluded that the nature of the agreement between St. Paul and Matador was more akin to the bargain underlying a claims-made policy, rather than an occurrence-based one. In so ruling, the court held that St. Paul was not required to show prejudice as a predicate to enforcement of the pollution exclusion endorsement's notice provision.

Starr Indem. & Liab. Co.

Thereafter, in Starr Indem. & Liab. Co. v. SGS Petroleum Serv. Corp. , 719 F.3d 700 (5th Cir. 2013), the Fifth Circuit was once more called upon to consider a notice provision contained in a pollution exclusion endorsement under Texas law. Starr Indemnity & Liability Company issued an excess bumbershoot policy to SGS Petroleum Service Corporation. The policy contained an absolute pollution exclusion that excluded coverage for “'liability or expense arising ' directly or indirectly in consequence of' the release or escape of pollutants and toxic chemicals.” The policy also contained a pollution buyback provision, which stated that the pollution exclusion would not apply as long as several conditions were met. One condition imposed by the buyback was that “the discharge, dispersal, release or escape [be] reported in writing to these underwriters within 30 days after having become known to the assured.”

On Nov. 7, 2010, an accidental release of hazardous chemicals occurred while an SGS employee conducted testing operations at a chemical plant in Baytown, TX. SGS, not realizing that the amount of damages would exceed the limits of its primary policy, did not notify Starr of the release until 59 days after the incident. Starr filed a declaratory judgment arguing that the absolute pollution exclusion barred coverage and that the buyback's requirements were not met because SGS failed to give notice within 30 days of the release. SGS argued, among other things, that Starr was required to show it was prejudiced by SGS' failure to provide timely notice.

The Fifth Circuit first noted that the language of the pollution exclusion in Starr's policy was “virtually identical” to that of the St. Paul policy in Matador. Nonetheless, SGS argued that subsequent Texas jurisprudence had overruled Matador. In support of its argument, SGS relied on two post- Matador decisions by the Texas Supreme Court: PAJ, Inc. v. Hanover Ins. Co. , 243 S.W.3d 630 (Tex.2008) and Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co. , 288 S.W.3d 374 (Tex.2009), which SGS argued changed Texas law with respect to notice provisions. In PAJ, the Texas Supreme Court affirmatively declared that Texas was a notice-prejudice jurisdiction and required that the insurer prove prejudice before it would enforce the notice requirements of an occurrence-based policy.

In Prodigy, the Texas Supreme Court went a step further and declined to enforce the notice requirement of a claims-made policy when the insurer was not prejudiced by the delay. The Fifth Circuit analyzed both decisions and held that neither case disturbed its previous holding in Matador. In both PAJ and Prodigy, the Texas Supreme Court specifically found that the notice provisions of the policies were not specifically negotiated for by the insurer and the insured. Further, as observed by the Fifth Circuit, neither case involved notice provisions that were an “essential part of the bargained-for coverage.”

By contrast, both Starr and SGS had specifically negotiated for the buyback provision contained in the policy. Thus, the Fifth Circuit held that it was bound by Matador's precedent, which clearly required a finding that Starr's denial of coverage was justified. In so ruling, the Fifth Circuit upheld the district court's grant of summary judgment in Starr's favor, and cast aside any doubts as to the continuing relevance of Matador.

Settoon

In In re Matter of Complaint of Settoon Towing, L.L.C., 720 F.3d 268 (5th Cir. 2013), an opinion issued the same day as Starr, the Fifth Circuit held that the Matador rationale also applied to a case decided under Louisiana law. The M/V Cathy M. Settoon, a vessel owned by Settoon Towing, struck an oil well in Bayou Perot, LA, on Jan. 20, 2007. The captain of the Cathy did not report the collision to the Coast Guard or Settoon. The next day, the captain of another of Settoon's vessels noticed an oil spill at the well, which he reported to both the Coast Guard and Settoon. The captain of the Cathy denied involvement until some 34 days after the incident, and confessed only after the Coast Guard showed him a reconstruction of the accident using information gained from the Cathy's tracking system.

Three days after the captain's confession, and 37 days after the incident, Settoon reported the claim to its insurers. The insurers sought a declaratory judgment that the policies' pollution exclusions precluded coverage for the damage caused by the collision.

New York Marine and General Insurance Company (NYMAGIC) issued an excess bumbershoot policy to Settoon, which contained an absolute pollution exclusion endorsement. The endorsement provided “that this policy shall not apply to any liability for ' 'property damage' ' arising out of the ' 'release' of 'pollutants' into ' any watercourse, water supply, reservoir or body of water.” Like the policy at issue in Starr, the endorsement contained a “Sudden and Accidental Buyback,” which provided that the pollution exclusion would not apply if, among other things, the occurrence was “reported in writing to those underwriters within 30 days after having become known to the assured.” Another excess policy insured by NYMAGIC, St. Paul, and Federal Insurance Company also contained the exact same Absolute Pollution Exclusion and Sudden and Accidental Buyback.

The insurers moved for summary judgment, arguing that by giving notice 37 days after the occurrence, Settoon failed to comply with the excess policies' buyback provisions. The district court granted the insurers' motion. On appeal, Settoon argued that the insurers must show they were prejudiced by Settoon's failure to provide notice within the time limit imposed by the buyback's notice provision. As noted by the Fifth Circuit, no Louisiana court had fully considered whether to enforce strict compliance with the notice provisions of a buyback endorsement. In addressing that issue, the Fifth Circuit observed that Louisiana courts enforce strict compliance with notice provisions found in claims-made policies, and that Louisiana courts have enforced notice provisions where notice was a “condition precedent” to recovery.

According to the court, the buyback clauses' notice provisions clearly indicated that notice was a condition precedent to coverage because the Absolute Pollution Exclusion “delete[s] from any and all coverage's [sic] ' any ' claim ' in any way arising out of [pollution].” The buyback provision thereafter states that “[i]t is hereby agreed that the above Absolute Exclusion shall not apply provided that the Named Assured established that all of the following conditions have been met.'”

According to the Fifth Circuit, “there is almost no stronger language that could establish a 'condition precedent' to recovery.” The 30-day notice provision in the exception to the exclusion “determines the scope of coverage bargained for,” and to hold “the umbrella insurers liable where the conditions of the buyback were not met would alter the terms of the parties' bargain.” Most importantly, the notice requirement did not serve to strip away liability for pollution; rather, failure to comply with the notice provision “prevents the exception of the exclusion from taking effect in the first instance.”

In other words, the buyback notice requirement created coverage where it would not have otherwise existed. Thus, the court held that the insurers could deny coverage on the basis of Settoon's failure to comply with the provision. The buyback's notice requirement, as bargained for, was a condition precedent to coverage, and anything less than strict adherence to the provisions thereof would not trigger the coverage afforded by the buyback requirement, regardless of whether the insurer was prejudiced by the delay.

A Strong Precedent

As these cases show, the Fifth Circuit has established a strong precedent that, even in traditional notice-prejudice jurisdictions, an insurer may deny coverage on the basis of the insured's failure to strictly comply with the notice requirements in a pollution exclusion endorsement buyback clause. At least one other court has followed the Fifth Circuit's lead.

In Venoco, Inc. v. Gulf Underwriters Ins. Co. , 96 Cal. Rptr. 3d 409 (Cal. Ct. App. 2 Dist. 2009), a California Court of Appeal relied on Matador to require strict compliance with the terms of a notice requirement in a pollution exclusion buyback endorsement similar to the ones at issue in Matador, Starr and Settoon. The California court, like the Fifth Circuit, concluded that the insurer did not have to show it was prejudiced by the insured's failure to comply. Although few jurisdictions have confronted the issue, there is well-reasoned precedent to expect other notice-prejudice jurisdictions will require strict compliance with the notice requirements of pollution exclusion buyback provisions.

Furthermore, there is no reason that the logic and reasoning relied upon by the Fifth Circuit and the California Court of Appeal should not extend to allow enforcement of notice provisions contained in other endorsements as well. Matador, Starr, Settoon and Venoco did not hinge their analysis on the type of exclusion at issue. Instead, great weight was placed on the facts: that the parties specifically negotiated for the endorsement and the notice provisions contained therein; that the conditions imposed by notice requirement operated as a condition precedent to coverage that would otherwise be excluded; and, that the insured was a sophisticated entity capable of not only negotiating for, but also of understanding the terms of the endorsements and the requirements imposed by the buyback provisions. Therefore, there is a possibility that, under appropriate circumstances, the logic and reasoning relied upon by the Fifth Circuit could apply to other contexts as well.

C. Austin Holliday is an associate and Seth A. Schmeeckle is a shareholder with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard, which has offices in New Orleans, Baton Rouge, and Houston. The views presented in this article are not necessarily those of the firm or any of its clients.