Texas Supreme Court Rules for Policyholders In Major Corporate Insurance Lawsuit

Prodigy v. Great American, case number 06-0598, in the Supreme Court of Texas

DALLAS (LAWFUEL) – In a major victory for insurance policyholders, Texas Supreme Court justices have made it more difficult for insurers to deny coverage to corporate customers who fail to timely report claims, as long as the delay does not prejudice the insurer.

The decision came March 27 in Prodigy v. Great American, which involved a “claims made” Great American Insurance Company insurance policy held by Prodigy, an AT&T, Inc. subsidiary.

Since most corporate policies covering liability for directors and officers (D&O) and for errors and omissions (E&O) are “claims made,” the outcome of this case will have substantial implications beyond Texas borders.

In a 6 to 3 decision, the court ruled a carrier under a “claims made” policy may not deny coverage based on late notice, absent a showing of prejudice, unless it came after a drop-dead date specified in the policy.

“I suspect there are dozens and dozens of pending cases in which insurers have wrongly denied coverage to deserving enterprises based on this late notice excuse,” said Werner Powers, Haynes and Boone, LLP attorney who represented Prodigy along with of counsel Charles Keeble, Jr. “It is extremely gratifying that our client had the courage to stick with our counsel in the face of losses in the trial court and in the court of appeals. Today, corporate policyholders everywhere owe Prodigy a debt of gratitude for carrying the banner.”

The case centered on a directors and officers liability policy purchase from Agricultural Excess & Surplus Insurance Company (AESIC) by Flashnet Communications, Inc., predecessor to Prodigy. In November 2001, a lawsuit was filed against Flashnet alleging violations of federal securities laws. But Flashnet did not give written notice of the lawsuit to AESIC until June 6, 2003, nearly one year later. AESIC denied the claim because Flashnet did not give timely notice under the policy. Prodigy then brought suit against AESIC, losing at the trial level and the Texas Court of Appeals before prevailing at the state’s highest court.

Haynes and Boone, LLP is an international corporate law firm with offices in Texas, New York, California, Washington, D.C., Mexico City and Moscow, providing a full spectrum of legal services. With almost 550 attorneys, Haynes and Boone is ranked among the largest law firms in the nation by The National Law Journal. The firm has been recognized as one of the “Best Corporate Law Firms in America” (Corporate Board Member Magazine, 2001-2008), as one of “The Best 20 Law Firms to Work For” (Vault.com, 2008), and as a Top 100 law firm for both diversity (MultiCultural Law Magazine, 2009) and women (Women 3.0, 2008).

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