January 18, 2008
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Texas Supreme Court Saves Insured From Coverage Waiver of Copyright Infringement Claim
By:
Jeremy Brown and Carl Butzer
In an opinion delivered on January 11, 2008, the Texas Supreme Court, in PAJ, Inc. v. The Hanover Insurance Company, saved an insured from waiving coverage under an insurance policy after it had failed to give timely notice of a copyright infringement claim. The Court held that the notice failure does not defeat coverage if the insurer is not prejudiced by the delay. PAJ, Inc. was a jewelry manufacturer whose standard CGL policy covered “advertising injury,” including injuries arising out of copyright infringement. The policy required PAJ to notify Hanover of any claim or suit brought against it “as soon as practicable.” After the policy was issued, another jewelry manufacturer sued PAJ for copyright infringement based on PAJ’s marketing of a particular jewelry line. Not initially realizing that this claim was covered under the policy, PAJ did not notify Hanover of the suit until four to six months after litigation commenced. PAJ subsequently brought suit against Hanover seeking a declaration that Hanover was contractually obligated to defend and indemnify PAJ in the copyright suit. PAJ and Hanover stipulated that PAJ failed to notify Hanover of the claim “as soon as practicable” and that Hanover was not prejudiced by the untimely notice.
Only Material Breaches Will Excuse Coverage
Thus, the sole issue before the Texas Supreme Court was whether an insured’s failure to timely notify its insurer of a claim defeats coverage under the policy if the insurer was not prejudiced by the delay. Hanover contended the policy language created a condition precedent, the failure of which defeats coverage under the policy irrespective of prejudice to the insurer. PAJ, on the other hand, contended the prompt-notice language creates a covenant, the breach of which excuses performance only if the breach is “material.” The Court concluded that, where the insurer was not prejudiced by the delay in providing notice about the copyright infringement claim and the timely notice is not an essential part of the bargained-for exchange under the occurrence-based insurance policy, the delay is not a material breach of the insurance contract. Thus, the Court held, Hanover could not deny coverage.
Copyright Infringement Claims Are Covered Under Standard CGL Insurance Policies
PAJ should be a reminder to all insureds that copyright infringement claims may be a part of the standard CGL policy covering advertising injury. Although the PAJ decision may give an insured the ability to argue that a failure to give timely notice does not waive coverage because the insurer suffered no prejudice, the better practice is that the insured should promptly check its insurance policy when it becomes aware of a copyright infringement claim and to notify all of its insurance carriers.
If you have any questions about this e-Alert, please contact Jeremy Brown at 214.953.5960 or jtbrown@jw.com.
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