Insurer Has Duty To Defend Even Though Insured Did Not Immediately Notify Insurer Of Underlying Lawsuit
The United States sued Company A for discharging pollutants from an offshore platform in the Gulf of Mexico in February 2013 after giving notice to Company A of the alleged violations in March 2012. Company A failed to give notice to its insurer of the potential violations until September 2013 despite an insurance policy that required “immediate notice” of any occurrence that gave rise to a claim under the policy.
In determining whether to enforce the notice provision, the U.S. Bankruptcy Court for the Southern District of Texas had to determine whether to apply the policy’s choice of law provision (New York law) or Texas law. If New York law controlled, as the policy provided, then the notice requirement would be valid and the insurer would prevail. If Texas law controlled, as the home state of the insured, the notice requirement would be invalid because the lack of notice was not prejudicial to the insured, and Company A would prevail.
The court determined that Texas law governed the policy, rendering the notice requirement ineffective. The court reached its conclusion first by acknowledging that the terms of the policy clearly included a New York choice of law provision and that such notice requirement was valid under New York law. The agreement, however, also “necessarily” incorporated the Texas insurance law that limited notice requirements because, the court explained, insurance policies always incorporate applicable state insurance requirements. The court found that this conflict created an “ambiguity” in the policy. Reasoning that ambiguities must be resolved against the insurer, the Texas law trumped the parties’ attempt to contract around it.
In extensive dicta, the court also analyzed the issue under the multi-factor Restatement of Conflicts test, which appeals to the needs of commercial systems, relevant policies of the forum, relevant policies of other interested states, the protection of justified interests, basic policies underlying the field of law, certainty and uniformity, and ease of determination. Analyzing those factors, the court arrived at the same conclusion. The court reasoned that because Texas had a greater interest than New York in having its insurance laws applied to protect its citizens, Texas law would also trump the policy language under the Restatement test.
Accordingly, the insurer had to reimburse Company A for Company A’s defense costs and expenses incurred in defending the suit against the government, even though the underlying lawsuit primarily concerned allegations of willful misconduct, which likely would be excluded from coverage under the policy (the lawsuit, however, alleged some negligent acts that would not be excluded).
