In Pair of Cases, 5th Circuit Enforces 30-Day Notice Requirement in Pollution Exclusion Buy-Back Clauses; No Prejudice Need be Shown

In two separate cases – one under Texas law and one under Louisiana law – the Fifth Circuit has reinforced the principle that a 30-day notice provision in a pollution exclusion buy-back clause is strictly enforceable, and an insurer does not need to demonstrate prejudice to deny coverage. In these cases, the Court found that this outcome was consistent with the Court’s prior decision in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999), and the Court found that this principle of enforceability was not changed by subsequent notice-prejudice cases.

In Starr Indemnity & Liability Company v. SGS Petroleum Service Corporation, 719 F.3d 700 (5th Cir. 2013), Starr issued to SGS an umbrella policy that provided excess coverage over $2 million in primary limits. The insurance policy originally included an absolute pollution exclusion that was deleted and replaced by a pollution exclusion with a buy-back clause. The buy-back clause provided that the pollution exclusion would not apply if certain conditions were met, including that “the discharge, dispersal, release or escape was reported in writing to these underwriters within 30 days after having become known to the assured.”

The same day it occurred, SGS learned of a release of the chemical meta-toluene diamine while an employee was conducting unloading operations. The preliminary estimate for the clean-up costs was between $600,000 and $1 million. SGS claimed that it did not inform Starr because this estimate was below the $2 million primary limits. The cost for clean-up was ultimately $4 million, but SGS did not learn of the cost increase until more than 30 days after the release occurred. SGS ultimately reported the release to Starr fifty-nine days after SGS first learned of the release.

The Fifth Circuit agreed with Starr that SGS’s failure to notify Starr within 30 days was fatal to SGS’s coverage claim. In doing so, the Fifth Circuit declined to overturn its prior ruling in Matador Petroleum Corp., finding that subsequent Texas cases that have required the insurer to demonstrate prejudice to deny coverage based on an insured’s failure to provide notice “as soon as practicable” were distinguishable because they did not involve the buy-back clause. The court also explicitly rejected SGS’s argument that a different rule should apply to excess carriers and rejected an argument that the policy was ambiguous.

Similarly, in In re: Settoon Towing, LLC, 720 F.3d 268 (5th Cir. 2013), the Fifth Circuit (applying Louisiana law), held that an insured’s notice to certain umbrella liability insurers thirty-seven days after an oil discharge barred coverage when there was a 30-day notice requirement in the pollution exclusion buy-back, regardless of prejudice to the insurers. The Court reasoned: “Pollution liability is not stripped away because of a violation of the notice provision; rather, non-compliance prevents the exception to the exclusion from taking effect in the first instance, meaning the pollution exclusion remains in effect.” Id. at *19. In so holding, the Fifth Circuit rejected the insured’s argument that a provision in the policy that the insured’s failure to provide notice “as soon as practicable” will not bar coverage if there is no prejudice did not render the policy ambiguous.

These recent Fifth Circuit cases follow the overwhelming majority of courts around the nation that have found that timing requirements in pollution exclusion buy-back provisions are enforceable, and that noncompliance with such provisions will bar coverage, regardless of prejudice to the insurer.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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