Late Notice:  No Coverage Where Policyholder Failed To “Immediately Notify” Insurer Of Arbitration Claim.

A Texas appeals court, applying Texas law, held Lexington Insurance Co. (“Lexington”) had no duty to cover a $5 million arbitration award obtained by a former employee of its insured who was stabbed in the neck during a workplace scuffle, because Lexington received late notice of the suit.

Gregory Morris, a truck driver employed by C.L. Thomas, Inc. and Thomas Fuels Lubricants & Chemicals, Inc. (collectively “Thomas”), suffered stab wounds to his neck during a physical altercation with a fellow Thomas truck driver in December 2006.  The dispute apparently arose when the other driver learned that both he and Morris were assigned to drive the same truck.  Thomas fired both employees.  Morris filed an arbitration claim against Thomas for wrongful termination and defamation, resulting in a $5 million arbitration award in favor of Morris in 2008.

Thomas sued Lexington, seeking to recoup the $5 million it paid Morris.  Lexington issued umbrella coverage for the relevant time period, which required Thomas to “immediately notify” Lexington of any claim to which the policy applies “which may exceed 25% of the applicable amount set forth in the Schedule of Underlying Insurance.”  There was no policy listed in the schedule of underlying insurance.  Thomas notified Lexington of the claim six days after the arbitration award was entered.

Lexington argued that the arbitration claim triggered the notice requirement and that Thomas failed to provide timely notice.  The appellate court agreed in both respects.  First, because no policy was listed in the schedule of underlying insurance, the court held Morris’s claim “may exceed 25% of the applicable amount set forth” in that schedule, thereby triggering Thomas’s requirement to provide “immediate” notice of the claim.  Second, by waiting until after the arbitration award was entered, the court held Thomas failed to provide adequate notice.

The appellate court rejected Thomas’s argument that Lexington failed to establish that the lack of notice prejudiced Lexington.  “Notice that comes after judgment defeats all of the recognized purposes of the notice requirements, because it renders the insurer unable to investigate the claim, defend the claim, or negotiate in an attempt to settle the claim.”  C.L. Thomas, Inc. v. Lexington Ins. Co., No. 13-13-00566-CV (Tex. Ct. App. September 11, 2014).

Late notice continues to be a heavily litigated issue, and underscores the need for policyholders to be familiar with, and in compliance with, all policy-specific notice requirements.