Insurance Company Delay In Payment

Fort Worth insurance lawyers need to read this 5th Circuit opinion. The case is styled, Cox Operating, L.L.C. v. St. Paul Surplus Lines Insurance Co.
In this Katrina pollution clean-up coverage case, the 5th Circuit sheds a bit more light on the proper method for calculating an insurer’s delay penalty under Texas’ Prompt
Payment of Claims Act (the “Act”). Along the way, the court also determines whether a one-year cost-reporting requirement was an absolute, unwaivable condition precedent under a policy, or whether the insurer could, and did, waive it by anticipatorily denying the claim. The principal issue regarding the Act is whether, under a first-party property-damage policy, the 18% penalty begins to accrue multiple times as each new cost invoice is submitted to the insurer, as is probably the case with defense invoices under a liability policy, or whether the insurer’s first violation of a deadline under the Act starts the clock for the total amount of the claim ultimately determined. As discussed below, the insurer lost on all issues.
Cox operated oil and gas production facilities in the Gulf that were severely damaged by Hurricane Katrina. Most of the damages were pollution clean-up costs covered under primary and excess policies issued by St. Paul. Cox notified St. Paul of the claims on October 17, 2005. Although St. Paul hired an adjusting firm on October 27, neither it nor St. Paul requested from Cox any invoices or other documents substantiating the claim until July 24, 2006. Cox’s investigation continued before and after the adjuster became involved. However, on August 30, 2007, after exhausting the $1 million primary policy limit and $480,395 of the $20 million excess policy, St. Paul denied responsibility for any further damages and brought a coverage action against Cox.
In a counterclaim, Cox sought, in addition to over $10 million in clean-up damages, delay penalties under the Act, alleging that the 18% per annum penalty began to accrue in November 2005 after St. Paul had failed to commence an investigation or request documents within thirty days of receiving notice of the claim. Based on a jury verdict, the lower court awarded Cox $9,465,103.22 in contract damages and $13,064,948.28 in delay penalties under the Act. St. Paul appealed.
St. Paul argued first that Cox should not have recovered approximately $2 million of clean-up costs first reported to the insurer after a one-year deadline from the completion
of the work. Cox countered that the insurer waived the notice condition when it denied all coverage before work was completed. The court noted that, although the one-year limitation appears to be a condition precedent that ordinarily voids coverage unless the insured complies with the condition, notice provisions are not invariably treated as such.
The court’s analysis principally focused on Matador Petroleum Corp. v . St. Paul Surplus Lines Ins. Co., which involved a provision in a CGL policy that afforded coverage for pollution incidents reported to the insured within thirty days of inception, a condition that the Matador court held defined the scope of coverage and was not waivable.
The Cox court, however, distinguished Matador from the facts here on two grounds. First, the notice condition in the Cox policy is mentioned twice in circumstances that
render the condition at least ambiguous as to “whether the reporting requirement is actually a nonwaivable part of the definition of the scope of coverage or whether it is
intended to be read as a waivable condition precedent . . . .” Second, in Matador the limitation was “an incident-reporting requirement,” not, as in the Cox case, a “cost-reporting requirement. The Matador court characterized the incident-reporting requirement at issue there as similar to a “claims-made” insuring provision in which the limitation is part of the bargain of the agreement, not an ancillary term or condition. The
Cox court observed that pollution clean-up work can drag on for years, such that:
only at the edges of imagination would one conclude that the parties could have intended the one-year reporting requirement to be nonwaivable, given the consequences that would result.
Thus, the court held that the insurer waived the condition when it denied coverage. Regarding prompt-payment penalties, Cox asserted that the insurer failed to commence its investigation of the claim within thirty days of notice of claim, as required by section 542.055 of the Act, and so owed 18% per annum on the entire amount of the claim, over $13 million. On appeal, the insurer disputes the accrual date, asserting two arguments. First, despite several deadlines specified in the Act, St. Paul asserts that only one of them explicitly imposes the 18% penalty: the one triggering the penalty at sixty days after the insurer receives all items, statements, and forms reasonably requested, which means either (1) that the penalty starts sixty days after all requested information has
been received (in February 2011), or alternatively, (2) sixty days after each cost invoice is received, on an invoice-by-invoice basis.
Noting that the Texas Supreme Court has never explained “whether, and when” a violation triggers the accrual of penalty interest under the Act, the Cox court resolves the
issue by distinguishing a key case relied on by St. Paul, Lamar Homes, Inc. v. Mid-Continent Casualty Co., which held that an insurer may be liable for the Act’s delay-
penalties for refusing to defend under a liability policy. St. Paul asserts that under
Lamar Homes, interest does not begin to accrue until the insurer receives the first defense-fee invoice, and accrues thereafter invoice-by-invoice. Not so, holds the court. The basic difference between Lamar Homes and this case is that, under a liability policy, an insured’s right to receive reimbursement of defense costs does not accrue until legal services have been rendered and invoiced. By contrast, under a property policy, the damage occurs when the property is damaged, and the insurer’s obligations under the Act begin when the claim is reported. Nothing in Lamar Homes or in the Act, holds the court, supports an invoice-by-invoice accrual method for calculating penalties for missed deadlines once a claim for damage has been submitted to the insurer.
The Cox decision may resolve some of the open questions over the how and when of accrual of delay penalties under the Act. After Cox, policyholders arguably have a stronger argument that penalty-interest accrues on the entire amount of the claim, without regard to which deadline was missed, even if the final amount of the claim is not determined until very late in the investigation or even at trial, an amount that can be, as here, greater than the damage claim itself. Also, courts are now less likely to consider applying invoice-by-invoice accrual in a property-damage case. Nevertheless, Texas courts will likely continue to disagree over accrual issues under the Act until the Texas Supreme Court provides guidance.