May 05, 2016 Practice Points

Hail No: Insurer Prejudiced by Insured’s Delay in Reporting Storm Damage Claim

The Fifth Circuit Court of Appeals, applying Texas law, recently affirmed summary judgment for an insurer in a case where the insured provided no explanation for its 19-month delay in reporting a hail damage claim, and the insurer disclaimed coverage for an inability to determine what damage occurred during its policy period

by Pierce T. Cox

The Fifth Circuit Court of Appeals, applying Texas law, recently affirmed summary judgment for an insurer in a case where the insured provided no explanation for its 19-month delay in reporting a hail damage claim, and the insurer disclaimed coverage for an inability to determine what damage occurred during its policy period (Hamilton Properties et al. v. American Insurance Company et al., Case No. 15-10382, -- Fed. Appx. -- (5th Cir. Apr. 14, 2016)). The court held, as a matter of law, the insured failed to satisfy the “prompt notice” provision of the policy, and that the delay prejudiced the insurer’s ability to investigate the claim to determine what damages might have occurred during its policy period. The court further stated that even if the delay did not prejudice the insurer, the insured’s claim that the insurer breached the policy by disclaiming coverage must fail because the insured provided no evidence segregating covered damages occurring within the policy period from non-covered damages occurring outside the policy period.  The court further held that because there was no breach of the policy, the insured’s extra-contractual claims also failed.

From February 16, 2009 until September 24, 2009, a hotel owned by Hamilton Properties was insured under an American Insurance Company (AIC) policy providing coverage for hail damage. On July 8, 2009, a hailstorm allegedly damaged the hotel. The hotel’s caretaker testified that on multiple occasions within two months of the storm he reported to Hamilton that the building was damaged. Hamilton took no action to address the storm damage until hiring an inspector in November 2010. Even later, in February 2011, Hamilton attempted to contact its AIC agent about the storm damage. The agent told Hamilton he could not accept or report the claim as he was no longer its broker of record. Ultimately Hamilton properly filed its claim for the alleged damage from the July 2009 storm in October 2011. After investigating the claim, AIC disclaimed coverage, indicating that several storms occurred before and after July 2009, and AIC could not determine the cause of the damage or whether it occurred during the AIC policy period.

Hamilton sued AIC for breach of contract, violation of the Texas Deceptive Trade Practices Act, violation of Texas Insurance Code §541 and § 542, and bad faith. The Northern District of Texas granted summary judgment in favor of AIC on the grounds that (1) Hamilton failed to give prompt notice of the alleged damage; (2) Hamilton did not state a claim for breach of contract because there was no evidence that Hamilton’s claimed damages were covered by the AIC policy; and (3) because AIC did not breach the policy, Hamilton’s extra-contractual claims also failed. Hamilton appealed, and the Fifth Circuit affirmed the district court.

The Fifth Circuit noted that under Texas law the “prompt notice” requirement in an insurance policy is a condition precedent to coverage.  Thus, if there is no prompt notice, coverage under the policy is void. However, the Court also noted that under Texas law an insured’s failure to provide prompt notice will not void coverage under the policy unless the insurer is prejudiced by the lack of notice.

The parties disputed the date AIC received notice of the claim, but the court indicated that even if it accepted February 2011—the earliest date urged—as the notice date for Hamilton’s claim, Hamilton provided no explanation as to why it took 19 months to give AIC notice of the July 2009 storm damage. Because Texas courts construe prompt notice to be notice given within a reasonable time after the occurrence, and Hamilton’s delay was without explanation, the Fifth Circuit affirmed that Hamilton’s notice to AIC was not prompt as a matter of law.

Evaluating whether Hamilton’s late notice prejudiced AIC, the Fifth Circuit noted that under Texas law, prejudice may arise if the insurer is unable to investigate the occurrence, or to prepare adequately to adjust or defend any claims. The Court was not swayed by Hamilton’s argument that AIC could not be prejudiced because it was able to investigate the claim sufficiently to determine there was no coverage under the policy. Rather, the Court indicated that the nineteen month delay caused AIC to lose important information about the condition of the hotel before the July 2009 storm, after the July 2009 storm, and through the end of the policy’s coverage period on September 24, 2009. The Fifth Circuit affirmed that AIC was prejudiced by the nineteen month delay as a matter of law.

As an additional reason that Hamilton’s breach of contract claim against AIC must fail, the Fifth Circuit indicated that Hamilton’s failure to segregate covered and non-covered damages was fatal to its claim. The court recognized that under Texas law, when covered and non-covered perils combine to create a loss, the insured can recover only for the covered peril. Further, Texas law places the burden of segregating the covered damages from the non-covered damages on the insured, and failure to present evidence which allows allocation between covered and non-covered damages is fatal to the insured’s claim.

Here, the court stated, Hamilton put on no evidence describing the extent of the damage attributable to the July 2009 hailstorm which occurred during the AIC policy period. In fact, Hamilton’s own hailstorm expert did not inspect the hotel until August 2013, and testified only that the damage he observed at that time could be linked to the July 2009 hailstorm. He further testified that the damage he observed could not have occurred between the July 2009 storm and the end of the AIC policy period in July 2009 because that kind of damage “takes time to develop.” The court stated that this was not sufficient evidence to support the allocation between damages which occurred during the AIC policy period and damages which occurred outside the AIC policy period. Therefore, Hamilton’s claim for breach of contract must fail even if there were no prejudice to AIC.

The Fifth Circuit also held that Hamilton could not prevail on its extra-contractual claims. The Fifth Circuit noted that under Texas Law, the alleged violations of the DTPA and the Insurance Code could be examined under the same framework as the common law bad faith claim. The court indicated that under Texas law, an insured does not have a bad faith claim if there is no breach of the policy by the insurer. The court noted two exceptions to this general rule: (1) when the insurer commits an act so extreme it causes an injury independent of the policy claim, or (2) when the insurer failed to timely investigate the insured’s claims. The court reasoned that because AIC did not breach the policy, and Hamilton presented no evidence of an independent injury or that AIC failed to timely investigate, Hamilton’s extra-contractual claims against AIC must fail.

 

Keywords: hail, late notice, prejudice, allocation, extra-contractual claims, burden of proof, Texas, property insurance

Pierce T. Cox is with Thompson, Coe, Cousins & Irons, Houston.


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