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Texas Court of Appeals Rules Insurer Prejudiced as a Matter of Law by Insured’s Failure to Provide Prompt Notice of Suit
Insurance Law Update
February 2010
Texas Court of Appeals
In Washington Mut. Bank v. Commonwealth Land Title Ins. Co., ___ S.W.3d ___, 2010 WL 135685 (Tex. Ct. App. January 14, 2010), the Court of Appeals – Corpus Christi held that an insured was not entitled to coverage because it failed to provide prompt notice of the underlying lawsuit as required by the terms of the policy.
Plaintiff Washington Mutual (WAMU) made a mortgage loan to homeowners. Defendant Commonwealth Land Title Insurance Company issued WAMU a mortgage title insurance policy in connection with the loan. The policy obligated Commonwealth to indemnify WAMU for damage resulting from title defects, and it contained a provision requiring WAMU to give Commonwealth “prompt notice” of claims.
Less than two months after WAMU recorded a deed of trust, the homeowners filed for bankruptcy. The bankruptcy trustee brought an adversary action against WAMU alleging that the recordation of the deed was a preferential transfer. The trustee moved for summary judgment, which WAMU did not oppose, and an agreed judgment was entered against WAMU. The agreed judgment required WAMU to surrender its rights in the property and transfer its rights under the deed of trust to the bankruptcy estate, and gave WAMU an unsecured claim through which WAMU ultimately recovered only a fraction of the loan amount. After the entry of the agreed judgment, WAMU filed a claim on its Commonwealth title insurance policy. Commonwealth denied the claim because WAMU failed to give prompt notice of the adversary proceeding in time for Commonwealth to defend the validity of the insured deed of trust lien.
In WAMU’s ensuing coverage suit the trial court granted summary judgment in favor of Commonwealth on the grounds that WAMU failed to comply with the “prompt notice” provision, an express condition precedent to coverage. The Court of Appeals affirmed. The court relied on the longstanding principle that an insurer is prejudiced as a matter of law if the insured fails to notify the insurer until after a default judgment against the insured becomes final. The court concluded that WAMU’s failure to provide prompt notice of the underlying bankruptcy adversary proceeding prejudiced Commonwealth as a matter of law because Commonwealth was denied the opportunity to defend.
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