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PetroSantander (USA), Inc. v. HDI Global Ins. Co.

United States District Court, D. Kansas

April 9, 2018

PETROSANTANDER (USA), INC., Plaintiff,
v.
HDI GLOBAL INS. CO., as successor in interest to HDI-GERLING AMERICA INS. Co., Defendant.

          MEMORANDUM AND ORDER

          ERIC F. MELGREN UNITED STATES DISTRICT JUDGE.

         This case arose after Plaintiff PetroSantander (USA), Inc. sought coverage from its insurer following a saltwater spill in Meade County, Kansas. HDI-Gerling American Ins. Co. (“HDI-Gerling”) issued the insurance policy in question, and HDI Global Ins. Co. (“HDI”) is the successor in interest to HDI-Gerling. The matter is currently before the Court on the parties' cross-motions for partial summary judgment regarding whether the notice-prejudice rule applies to the current dispute. Specifically, the limited issue before the Court is whether Defendant must demonstrate that Plaintiff's alleged failure to provide notice as required by the pollution endorsement caused it prejudice before it may deny coverage based on Plaintiff's alleged failure to timely report the pollution incident. As detailed below, the Court grants Plaintiff's motion for partial summary judgment (Doc. 41) and denies Defendant's motion for partial summary judgment (Doc. 35). Plaintiff has also filed a motion for leave to amend to add a claim for reformation of the policy based on the arguments presented in its motion for partial summary judgment. Because the Court finds that Plaintiff need not assert a claim for reformation and Plaintiff has indicated it filed this motion out of an abundance of caution, the Court denies Plaintiff's motion for leave to amend (Doc. 42) as moot.

         I. Factual and Procedural Background[1]

         Plaintiff PetroSantander (USA), Inc. (“Plaintiff”) is an oil and gas company that operates a portion of its business in Kansas. At the time relevant to this dispute, Plaintiff was insured under an insurance policy issued by HDI-Gerling, identified as Policy No. GK091000081-01 (the “Policy”), with a policy period beginning on October 10, 2013, and ending October 10, 2014. The Policy was delivered to Plaintiff in Houston, Texas, and was reviewed by Plaintiff's Chief Financial Officer shortly after its receipt. After entering the Policy, HDI (“Defendant”) took assignment of HDI-Gerling's rights and obligations under the Policy, and is the successor in interest to HDI-Gerling.

         On the Common Policy Declarations Page, HDI-Gerling is listed under “Company Name” and IMA, Inc. (Wichita Division) (“IMA”) is listed under “Producer Name.” PetroSantander is listed as the “Named Insured” of the Policy. The Commercial General Liability Coverage Form (“CGL”) states that “the words ‘you' and ‘your' refer to the Named Insured shown in the Declarations, and any other person or organization qualifying as a Named Insured under this policy, ” and states that “[t]he words ‘we', ‘us' and ‘our' refer to the company providing this insurance.”

         The Insuring Agreement found in Section I, Coverage A of the CGL states, in relevant part, “[w]e will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury' or ‘property damage' to which this insurance applies.” The exclusions found in Section I, Coverage A of the CGL include an exclusion for pollution, exclusion (f), that states that the insurance coverage afforded under the Policy does not apply to “ ‘property damage' arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants' ” under a variety of circumstances. The Policy also includes an Energy Limited Pollution Liability Extension Endorsement, which modified the insurance provided under the CGL by deleting exclusion (f) and replacing it with the following:

This insurance does not apply to:

         f. Pollution

(1) “Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants”:
(2) Any loss, cost or expense arising out of [certain requests, demand, orders, requirements, claims, or suits]:
(3) Paragraphs (1) and (2) of this exclusion do not apply to that portion of any “occurrence” which is caused by a “pollution incident” which meets all of the following conditions:
(a) The “pollution incident” is a “sudden and accidental event” and also is neither expected or intended by any insured; and
(b) The “pollution incident” first commenced at a specific time and date during the policy period. Any “bodily injury” or “property damage” caused or contributed to by any “pollution incident” that commenced prior to the beginning of the policy period shown in the Declarations is excluded; and
(c) The “pollution incident” is first known within 60 days of its beginning by you or any of your employees, or your contractor, subcontractor, or any of their employees: and
(d) An attempt to end the “pollution incident” is made as soon as possible after it first becomes known to you or any of your employees, or your contractor, subcontractor, or any of their employees; and
(e) The “pollution incident” is reported to us within 120 days after it first becomes known to you or any of your employees, or your contractor, subcontractor, or any of their employees; and
(f) The “pollution incident” does not originate from an “underground storage tank”; and
(g) The “pollution incident” does not result from your willful or deliberate failure to comply with any government statute, rule, regulation, or order.

         On or about August 10, 2014, Plaintiff spilled salt water (the “Spill”) over land in rural Meade County, Kansas (the “Subject Property”), resulting in property damage to the Subject Property. The Spill constitutes an “occurrence, ” defined in the Policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The Spill also constitutes a “pollution incident, ” defined in the Policy as:

an “occurrence” consisting of any actual or alleged emission, discharge, release or escape of “pollutants” into or upon land, the atmosphere, or body of water provided that such emission, discharge, release or escape results in “environmental damage”. The entirety of any such actual or alleged emission discharge, release or escape shall be deemed to be a single “pollution incident”.

         Plaintiff discovered the Spill on August 14, 2014. Plaintiff provided notice to IMA on September 19, 40 days after Plaintiff discovered the Spill. Defendant, however, did not receive notice of the Spill until December 29, 141 days after Plaintiff discovered the Spill. Defendant did not suffer actual prejudice in the investigation of the claim related to the Spill due to Plaintiff's failure to notify Defendant within 120 days after discovering the Spill.

         Both parties have moved for partial summary judgment on the narrow issue of whether Defendant must demonstrate that it suffered prejudice as a result of Plaintiff's alleged failure to provide Defendant with timely notice of the Spill to deny coverage under the Policy on that basis. The parties also dispute whether providing notice to IMA satisfied Plaintiff's 120-day notice obligation, but this dispute is not currently before the Court.

         II. Legal Standard

         Summary judgment is proper if the moving party demonstrates that there is no genuine issue as to any material fact, and the movant is entitled to judgment as a matter of law.[2] A fact is “material” when it is essential to the claim, and issues of fact are “genuine” if the proffered evidence permits a reasonable jury to decide the issue in either party's favor.[3] The movant bears the initial burden of proof and must show the lack of evidence on an essential element of the claim.[4]If the movant carries his initial burden, the nonmoving party may not simply rest on its pleading, but must instead “set forth specific facts” that would be admissible in evidence in the event of trial from which a rational trier of fact could find for the nonmovant.[5] These facts must be clearly identified through affidavits, deposition transcripts, or incorporated exhibits-conclusory allegations alone cannot survive a motion for summary judgment.[6] The Court views all evidence and reasonable inferences in the light most favorable to the non-moving party.[7]

         Though the parties in this case filed cross-motions for summary judgment, the legal standard remains the same.[8] Each party retains the burden of establishing the lack of a genuine issue of material fact and entitlement to judgment as a matter of law.[9] While the Court generally considers each motion separately, [10] if the cross-motions overlap the Court may address the legal arguments together.[11]

         III. Analysis

         A. Choice of Law

         A federal court sitting in diversity must apply the choice of law rules of the state in which it sits.[12] Accordingly, the Court applies Kansas choice of law rules. The parties agree that Kansas follows the lex loci contractus rule and that the law of the state where the insurance contract is made controls.[13] They further agree that Kansas courts generally find that the contract is made in the state where the policy is delivered, and in this case, the Policy was delivered to Plaintiff in Texas. Plaintiff, however, argues that if the Court finds that the notice-prejudice rule does not apply in this case under Texas law, then the Court should apply Kansas law to this dispute because applying Texas law would violate Kansas public policy.

         Because the parties initially agree that Texas law applies to the Policy, the Court will proceed to analyze the dispute under Texas law. If the Court determines that Texas law does not require Defendant to demonstrate prejudice from an untimely notice, it will address Plaintiff's argument that Texas law violates Kansas public policy and the Court should apply Kansas law to the dispute.

         B. The Notice-Prejudice Rule

         When the notice-prejudice rule applies, it prohibits an insurer from denying coverage when the insured fails to comply with a notice requirement unless the insurer demonstrates that it suffered prejudice as a result of the untimely notification. While the parties agree that Texas courts apply this rule in some circumstances, the parties disagree as to whether Texas courts would apply the notice-prejudice rule in the current dispute. The Texas Supreme Court has not addressed the notice-prejudice rule in the context presented here, involving a CGL policy with a limited pollution liability extension endorsement that deletes and replaces the pollution exclusion from the CGL and provides for limited coverage of pollution incidents. In deciding this issue, the Court must rule in the manner it believes the Texas Supreme Court would rule.[14]

         Plaintiff argues that Texas law requires application of the notice-prejudice rule to the current dispute, primarily relying upon an order issued by the Texas Board of Insurance adopting a mandatory notice-prejudice requirement for all CGL policies.[15] Defendant claims that the notice-prejudice rule does not apply to the pollution endorsement and urges the Court to follow the Fifth Circuit's holding in two cases involving similar pollution endorsements.

         1. Texas Law

         a. Order 23080

         In 1973, the Texas State Board of Insurance (“Board”) issued Order No. 23080 (“Order 23080” or “Order”). The Board “considered and approved a filing by the Insurance Services Office proposing an Amendatory Endorsement to be attached to all General Liability policies, providing Bodily Injury Liability coverage and Property Damage Liability coverage, effective on or after May 1, 1973.”[16] The Board's Order directs that the Amendatory Endorsement “must be attached to all General Liability policies issued or delivered in Texas, ” and the endorsement states:

As respects bodily injury liability coverage and property damage liability coverage, unless the company is prejudiced by the insured's failure to comply with the requirement, any provision of this policy requiring the insured to give notice of action, occurrence or loss, or requiring the insured to forward demands, notices, summons or other legal process, shall not bar liability under this policy.[17]

         The Board issued this Order in response to the Texas Supreme Court's decision in Members Mutual Insurance Co. v. Cutaia, [18] where the Texas Supreme Court seemingly invited the Board to do so. The Fifth Circuit has summarized the Texas Supreme Court's Cutaia decision and the resulting enactment of Order 23080 as follows:

There [in Cutaia], the court addressed “[o]nly the condition regarding the forwarding of suit papers, ” and concluded that in light of the plain wording of the contract, as well as the prior holdings of the court, the notice-of-suit requirement contained in the automobile liability policy at issue was a condition precedent such that noncompliance yielded forfeiture of coverage. Id. at 278-81. In reaching this conclusion, however, the court acknowledged “the apparent injustice which result[ed] in this particular case, ” stating further that it “share[d] some of the impatience which naturally arises when a reasonable provision or condition in an insurance policy is used by the insurance company to defeat what appears to be a valid claim.” Id. at 281.
Nevertheless, the Cutaia court asserted that it would not rewrite insurance contracts in order to remedy this apparent injustice, noting rather that it was up to the State Board of Insurance or the legislature to “insert a provision that violations of conditions precedent will be excused if no harm results from their violation.” Id. The next year, by issuing Board Order 23080, the State Board of Insurance did just that.[19]

         The Texas Supreme Court has recognized the “mandatory” nature of this endorsement, including its applicability “to all Texas CGL policies.”[20] In construing Order 23080, Texas courts have recognized that the mandatory nature of the endorsement requires a showing of prejudice even where the insurance contract at issue does not require prejudice.[21] Indeed, as one court has noted, the “Order significantly changed the law, ” and “[w]ith respect to coverage for bodily injury and property damage, ” the Order “essentially eliminates an insurer's ability to treat a notice requirement as a condition precedent to such coverage.”[22]

         b. Texas Caselaw

         Texas courts have not addressed whether the notice-prejudice rule applies in circumstances similar to those presented here. The Texas Supreme Court, however, has issued several opinions regarding the applicability of the notice-prejudice rule in Texas, and since Cutaia, has in every instance applied the rule.[23] Although not directly on point, for context, the Court provides a brief summary of the Texas Supreme Court's decisions since Cutaia regarding notice-prejudice.

         In Hernandez v. Gulf Group Lloyds, [24] the Texas Supreme Court held that an insurer may only escape liability on the basis of a settlement-without-consent exclusion if the insurer is prejudiced by the insured's settlement. In arriving at this conclusion, the Court applied the “fundamental principle of contract law . . . that when one party to a contract commits a material breach . . . the other party is discharged or excused from any obligation to perform.”[25] “In determining the materiality of a breach, ” it stated, “courts will consider, among other things, the extent to which the nonbreaching party will be deprived of the benefit that it could have reasonably anticipated from full performance.”[26] The Court noted that “there may be instances when an insured's settlement without the insurer's consent prevents the insurer from receiving the anticipated benefit from the insurance contract, ” but noted that when the insurer is not “deprived of the contract's expected benefit” and the insurer is not prejudiced by the settlement, “the insured's breach is not material.”[27] Although Hernandez involved a settlement without consent, many courts have applied the reasoning in Hernandez in other notice-prejudice situations more similar to the notice issues presented here.

         In Harwell v. State Farm Mutual Automobile Insurance Co., [28] the Texas Supreme Court reiterated that an “insured's failure to notify the insurer of a suit against her does not relieve the insurer from liability for the underlying judgment unless the lack of notice prejudices the insurer.”[29] The Court concluded that the insured's failure to notify the insurer of the suit prejudiced the insurer as a matter of law.[30]

         In PAJ, Inc. v. Hanover Insurance Co., [31] the Texas Supreme Court found that the insured's failure to timely notify the insurer of a lawsuit “as soon as practicable” did not defeat coverage for an “advertising injury” under the CGL absent a showing of prejudice to the insurer. The Court held that “an immaterial breach does not deprive the insurer of the benefit of the bargain and thus cannot relieve the insurer of the contractual coverage obligation.”[32] The Court recognized Order 23080, and noted that when the Board issued this Order “there was no standard coverage for advertising injury.”[33] It also noted differences between occurrence and claims-made policies and noted that “the timely notice provision ...


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