Thursday, February 7, 2008

Cancer Insurance: Late notice of claim did not defeat coverage

Applying fresh Texas Supreme Court precedent, Houston Court of Appeals holds that late notice did not prejudice insurance company in case where elderly wife did not know husband had cancer insurance and found out years after he had died, and thus did not release insurer from contractual obligation. Automatic premium payments kept going to insurer after insured's death until policy was discovered.

National Family Life Ins. Co. v. Vann No. 01-06-00245-CV (Tex.App.- Houston [1st Dist.] Feb. 7, 2008)(Alcala) (insurance litigation, sicko law, timeliness of notice of claim, prejudice criterion, test) Opinion by Justice Elsa Alcala
Before Chief Justice Radack, Justices Alcala and Bland
Full style of case: National Family Care Life Insurance Company v. Lelia E. Vann
Trial court: 239th District Court of Brazoria County (Judge Patrick Edward Sebesta)
Disposition: Trial court's judgment against insurer affirmed
Attorney for insurance company, Appellant: Anthony Icenogle, Benjamin S. De Leon
Attorney for Plaintiff-Appellee: Thomas Watson


This is an insurance policy dispute over the timeliness of the notice of the occurrence. Appellant, National Family Care Life Insurance Company (“National”), appeals from the trial court’s final judgment granting appellee, Lella E. Vann, $26,250 plus interest and attorneys fees. In three issues, National challenges the trial court’s finding that the notice of claim was filed within a reasonable time. Vann asserts that the notice was timely, but also contends that National must show that it was prejudiced by the delay in receiving notice before being excused from its contractual obligation. Assuming that National is correct in its three issues that assert the notice was untimely, we conclude that no evidence shows that it was prejudiced by the delay. We affirm.


Leila’s husband, Thomas, purchased a heart attack and cancer supplemental policy from National on March 25, 1988. The policy paid certain amounts for each day of hospitalization for cancer, upon notification and proof of the illness. Thomas did not tell anyone that he had purchased the policy, and National did not send any statements about the policy, so Leila was unaware of its existence.

Leila and Thomas ran a coffee shop at the Brazoria County Courthouse and the commissary of the Brazoria County jail. Thomas alone handled the financial affairs for the businesses until 1995 or 1996, when an employee took over that responsibility. Thomas, and later the employee, wrote checks and paid bills out of the business bank account, which was a bank account that was separate from the Vanns’ personal account. The automatic bank drafts for the insurance policy were taken from the business bank account. Thomas stopped running these businesses when he was hospitalized.

While hospitalized, Thomas was diagnosed with cancer on November 19, 1998. During his hospitalization, Thomas was unable to communicate verbally with his wife due to a tracheotomy and unable to write due the effects of his medication. He remained hospitalized until his death from cancer on April 16, 1999, leaving behind his wife Leila, who was nearly 80 years of age.
After Thomas’s death, the employee at the coffee shop continued to handle the financial responsibilities for the business until the shop was shut down in late 1999. When the coffee shop shut down, the business records were shipped to Leila’s residence at the end of 1999, but she did nothing with them or the bank statements she received for the business. Leila only used a personal bank account.

In late 2001 or early 2002, Leila’s daughters began, for the first time, to help her with Thomas’s estate, over which Leila was the executor. While one of Leila’s daughters was reviewing the bank statements for the shop, the daughter noticed the automatic monthly drafts taken by National, which had continued to be drafted after Thomas’s death. A search for the insurance policy by Leila’s family resulted in its discovery among the business records for the coffee shop. Leila’s family contacted National about the policy in January 2002, which was almost three years after Thomas died. In response to the call, the insurance company immediately ceased the automatic bank withdrawals. Leila’s family filed a claim form in February 2002. The next month, Leila wrote letters to obtain medical records required by the policy. The official claim form was filed on May 15, 2002 and National denied the claim two weeks later. Leila filed this suit alleging “a violation of the terms of the insurance policy.”

Requirement of Prejudice

The Supreme Court of Texas recently held that “an insured’s failure to timely notify its insurer of a claim or suit does not defeat coverage if the insurer was not prejudiced by the delay.” PAJ, Inc. v. Hanover Ins. Co., 51 Tex. Sup. Ct. J. 302, 2008 WL 109071, at *5 ( Tex. Jan. 11, 2008). The supreme court determined “that only a material breach of the timely notice provision will excuse [the insurer’s] performance under the policy.” Id. at *1. “[A]n immaterial breach does not deprive the insurer of the benefit of the bargain and thus cannot relieve the insurer of the contractual coverage obligation.” Id. A breach of the timely notice provision is not material when the insurer suffers no prejudice from the delay. See id.

The type of the insurance policy—whether occurrence or claims-made—is important in determining whether prejudice must be shown to deny a claim due to untimely notice. See id. at *5 (“The dissent, by focusing on the type of coverage rather than the type of policy, entirely disregards this important distinction.”). The supreme court explains that the Fifth Circuit, in applying Texas insurance law, “aptly describes the critical distinction between ‘occurrence’ policies and ‘claims-made’ policies” as follows:

In the case of an “occurrence” policy, any notice requirement is subsidiary to the event that triggers coverage. Courts have not permitted insurance companies to deny coverage on the basis of untimely notice under an “occurrence” policy unless the company shows actual prejudice from the delay. Id. (citing Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653, 658 (5th Cir. 1999)). In deciding whether prejudice must be shown, a court may also examine whether the notice of the claim was an essential part of the bargained-for exchange. See id.

Whether the notice is a covenant or condition, or exclusion or provision, does not resolve the matter of whether prejudice from lack of timely notice is required. Id. at *2 (describing court’s holding in Hernandez by stating, “Without distinguishing between covenants and conditions or classifying the exclusion as one or the other, we concluded that the insured’s breach of the settlement-without-consent provision was immaterial and thus the insurer could not avoid liability under the policy.”).

Thomas’s policy shows that the notice requirements appear under the section that purports to be requirements of the law. The insurance policy specifically stated,
. . . .
Notice of Claim: Written notice of claim must be given to [National] within 30 days after the occurrence or commencement of any loss covered by the policy, or as soon thereafter as is reasonably possible. Notice given by or on behalf of the Insured to [National], or to any authorized agent of [National] with information sufficient to identify the Insured, shall be deemed notice to [National] . . . .
. . . .
Proofs of Loss: Written proof of loss must be furnished to [National] within 90 days after the date of such loss. Failure to furnish such proof within the time required shall not invalidate or reduce any claim if it was not reasonably possible to give proof within such time, provided such proof is furnished as soon as reasonably possible and in no event, except in the absence of legal capacity, later than one year from the time proof is otherwise required.

By requiring notification of the claim upon the occurrence of hospitalization for cancer, this is an occurrence policy. See id. at *5. Because the notice section appears under the section purporting to be matters required by law, nothing in the policy suggests that the notice provision was an essential part of the bargained-for exchange. See id. Although National disputes that it is required to show prejudice, it does not claim that it suffered prejudice from the delayed claim, and the record undisputedly shows that it continued to take automatic premium deductions from Thomas’s bank account until it received notice of the claim.

We hold that the trial court did not err by concluding that Leila was entitled to payment under the policy, even assuming that notice of the claim was late under the policy, because National did not present any evidence of prejudice due to the late notice. Conclusion
We affirm the trial court’s judgment.

Elsa Alcala
Panel consists of Chief Justice Radack and Justices Alcala and Bland.

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