In its recent decision in Cox Operating, L.L.C. v. St. Paul Surplus Lines Ins. Co., 2015 U.S. App. LEXIS 13318 (5th Cir. July 30, 2015), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider the consequences of an insured’s failure to comply with a one-year reporting requirement in a pollution buy-back endorsement.
St. Paul insured Cox under a general liability policy and an umbrella liability policy, both of which provided the insured with coverage for pollution clean-up costs resulting from a sudden and accidental pollution incident. The policies defined the term “pollution clean-up costs” as those costs relating to “pollution work” that are “reported to us within one year of the ending date of that pollution work.”
In August 2005, Cox’s oil and gas production facilities in Louisiana were damaged as a result of Hurricane Katrina, resulting in a significant amount of pollution on neighboring properties. Cox gave notice to St. Paul in October 2005 of the need to incur cleanup costs. After making initial contact with Cox concerning the remediation, and agreeing to indemnify Cox’s remediation costs, St. Paul did not follow with Cox for cost information until July 2006. St. Paul subsequently paid over $1 million in remediation expenses before issuing a letter in August 2007 denying any further payment on the basis that the amounts submitted were not properly considered “pollution clean-up costs.” In February 2011, during the course of the litigation, Cox submitted invoices to St. Paul in the amount of nearly $11 million for the balance of its cleanup costs. Following a jury trial, Cox was awarded some $9.4 million in clean-up costs, along with nearly $15 million in interests and fees.
On appeal, St. Paul argued among other things, that $2 million of the costs awarded to Cox were improper since they were incurred after August 2007 and Cox had failed to report these costs to St. Paul within one year of that date on which they were incurred. Central to this appeal was whether the one-year reporting requirement stated in the policy was a condition precedent to coverage that could not be waived. Cox argued that St. Paul waived its right to enforce this provision by having denied coverage in August 2007. St. Paul, on the other hand, contended that as a condition precedent to coverage, the one-year reporting requirement could not be waived, regardless of its disclaimer of coverage.
In considering this question, the court looked to its prior decision in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999), a decision also involving a policy with a pollution buy-back endorsement. In contrast to the policy issued to Cox, however, the policy in Madator required that insured report the pollution incident to the insured within thirty days of its beginning. The Matador court held that this thirty-day reporting provision was unwaivable, as it defined the risk covered under the buy-back. As such, the court had held that allowing coverage in instances where an insured breached the provision “would materially change the scope of coverage, would be contrary to the plain language of the insurance policy, and would circumvent the objective intent of the parties to the contract.”
St. Paul relied on the Matador decision in support of its contention that Cox’s failure to have reported the $2 million clean-up costs within a year of these amounts having been incurred was determinative of Cox’s right to coverage. Specifically, St. Paul contended that Matador established a bright-line rule that a notice provision in an policy’s insuring language defines the scope of coverage and cannot be waived.
In revisiting its earlier decision, the Fifth Circuit observed that in Matador, it stressed the parties’ “objective intent” in determining whether a notice provision can be waived. In other words, there is no bright line rule that can be applied. With this in mind, the court carefully reviewed the St. Paul policies to determine whether such an objective intent could be determined. In doing so, it noticed a tension between the policies’ definition of clean-up costs, which required the amounts be reported within one year, and a subsequent reporting provision in the policy stating that coverage was available for costs when reported within one year of the ending date of the work. The court found this language ambiguous, stating:
To give effect to the former [i.e. the definition]as a definitional iteration of the reporting requirement would render the latter, conditional iteration of the reporting requirement meaningless: it makes no sense to say that the policy applies to pollution clean-up costs “only when such costs are reported . . . within one year” if costs have to be reported within one year to actually constitute “pollution clean-up costs” at all.
More significantly, the court found a distinction between the incident-reporting requirement in the Matador policy and the cost-reporting requirement in the Cox policy. The court likened the requirement in the Matador policy to a claims-made policy under which the reporting requirement is a benefit of the bargain. The court distinguished the Cox policy, explaining:
Here, by contrast, the one-year reporting requirement does not restrict St. Paul’s liability to an immediately ascertainable time frame. Instead, it requires only that Cox report its pollution clean-up costs within one year “of the ending date of that pollution work”—and as this case illustrates, pollution clean-up work can drag on for years. Accordingly, the cost-reporting requirement here, unlike the incident-reporting requirement at issue in Matador, does not necessarily demand the “strict[] interpret[ation]” afforded to notice provisions in claims-made policies.
The court further concluded that it would be counterintuitive to believe that the parties could have intended that the one-year reporting requirement could be non-waivable, even where St. Paul denied coverage.