Every business operates by using contracts or agreements to sell or purchase goods and services. When the business wants to know the terms of the deal with a vendor or professional, the business looks to the agreement between the two parties. Insurance policies are contracts. The policy describes the deal between the insurer and the insured. Just like other contracts, insurance policies often have endorsements which change and modify the original policy. The insurer and the insured will be bound by those changes just as if those changes were a part of the original policy.
SGS Petroleum Service Corporation (SGS) purchased an excess umbrella insurance policy from Starr Indemnity & Liability Company (Starr). This Starr policy provided excess umbrella coverage over SGS’s primary policy for two million dollars. The Starr excess policy had an absolute pollution exclusion which relieved Starr from any liability or expense for the release or escape of pollutants and toxic chemicals. SGS and Starr made a change to the policy which changed the policy and provided for pollution coverage if certain conditions were met. The change to the policy provided that the pollution exclusion would not apply if among other conditions, SGS reported the discharge, dispersal, release or escape in writing to Starr within 30 days after it became known to SGS. After SGS learned about a release involving one of their employees, SGS did not report the loss to Starr for 59 days. Starr denied coverage stating that SGS failed to give notice of the loss as required under the change to the policy.
The Fifth Circuit agreed with Starr in Starr Indemnity & Liability company v. SGS Petroleum Service Corporation, slip opinion, no. 12-20545 (Fifth Cir., June 18, 2013). The court held that in accordance with precedence, the bargained for notice provision is essential to trigger coverage. SGS argued to the court that the Texas Supreme court has ruled that an insurer must show prejudice in order to deny coverage based on a notice provision. However, the Fifth Circuit noted that the original policy excluded coverage for pollution. When SGS and Starr negotiated a provision to provide coverage, part of the bargain was a 30 day notice requirement. Therefore whether or not Starr was prejudiced, the court held the notice requirement must be respected and SGS ended up with no pollution coverage.
Ouch – a very expensive delay for SGS. A business tip – Insurance policies often find their way to a file without a review of the key provisions. If it was important enough for SGS to bargain for pollution coverage, then someone should have had the responsibility to look at the policy to determine what to do if there was a pollution incident. There should be a simple procedure set up which is followed whenever there is a loss or a potential loss which may be covered by insurance. The first step should be notify the insurer(s) in writing. Keep a record of the date of notice and the date the incident occurred. Take this information and place it with the policy and create a claim file for the company. If SGS had a procedure in place for notice and followed it, perhaps SGS would not have had to pay the loss themselves.