5th Circuit Holds Late Notice Bars Coverage Under Buy-Back Pollution Coverage

In its recent decision in Starr Indemnity & Liability Co. v. SGS Petroleum Service Corp., 2013 U.S. App. LEXIS 12425 (5th Cir. 2013), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider the effect of an insured’s failure to give notice of a pollution incident within the time specified in a supplementary pollution liability coverage endorsement.

Starr Indemnity issued an umbrella liability policy to SGS.  While the policy form originally contained an absolute pollution exclusion, the exclusion was deleted by endorsement and replaced by a limited pollution liability coverage “buy-back,” stating that the pollution exclusion would not apply to certain pollution events, assuming that certain conditions precedent were satisfied.  One such condition was that SGS was required to report the pollution incident to Starr, in writing, within thirty (30) days of it first becoming aware of the incident.  Following an accidental release of various chemicals, SGS sought coverage for cleanup costs from Starr.  SGS, however, failed to report the pollution incident to Starr within the thirty-day reporting period, but instead reported the release to Starr fifty-nine (59) days after it first learned of the release.  Starr sought a judicial declaration that it was not obligated to provide coverage to SGS for the incident as a result of SGS’ non-compliance with the reporting provision.

The lower court and the Fifth Circuit both agreed that the Fifth Circuit’s decision in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999) was determinative of the issue.  There, the Fifth Circuit, in considering a similar pollution liability buy-back, held that an insured’s eight-day delay in complying with the reporting provision was fatal to the insured’s right to coverage, regardless of whether the insurer was prejudiced by the delay. The Fifth Circuit concluded that because the policy language in the Starr policy was similar to the policy in Matador, its prior holding was determinative and as such, SGS’ failure to have reported the pollution incident within the time allotted barred its right to coverage, whether or not SGS’ delay resulted in prejudice to Starr.

SGS nevertheless argued that since the 1999 decision in Matador, the Texas Supreme Court heightened the notice-prejudice rule in its holdings in 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).  The Fifth Circuit rejected this contention, noting that the decisions in PAJ and Prodigy were premised on the fact that the notice provisions in the policies at issue were not an essential part of the “bargained for exchange.”  By contrast, the thirty-day notice provision in the pollution buy-back was “a specific endorsement, separately negotiated by the parties, and with a clear notice requirement.”  Thus, while the Fifth Circuit agreed that under ordinary circumstances, an insurer is required to demonstrate prejudice in order to disclaim coverage based on late notice, the court agreed that the notice provision in the buy-back was to be treated differently than the standard notice provisions.   As such, concluded the court, the holding in Matador was not disturbed by PAJ and Prodigy decisions, and Matador, therefore, was determinative of SGS’ right to coverage.