Revised February 12, 2003
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 02-10768
Summary Calendar
FEDERAL INSURANCE CO.,
Plaintiff-Appellee,
versus
COMPUSA, INC. and JAMES F. HALPIN,
Defendants-Appellants.
--------------------
Appeals from the United States District Court
for the Northern District of Texas
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February 11, 2003
Before DAVIS, WIENER, and EMILIO M. GARZA, Circuit Judges.
PER CURIAM:
Defendants-Appellants CompUSA, Inc. (“CompUSA”) and its former
president and CEO, James F. Halpin (“Halpin”), appeal from the
district court’s grant of summary judgment in favor of Plaintiff-
Appellee Federal Insurance Company (“Federal”), declaring that
Federal is not obligated under its Executive Protection Policy No.
8146-12-81B (“Policy”) to indemnify CompUSA or Halpin for any
claims arising from the state court lawsuit brought against them by
COC Services, Ltd. (“COC”) early in 2000. For the same reasons
expressed by the district court in its Memorandum Opinion and Order
of June 4, 2002, we affirm.
I. Facts and Proceedings
Federal issued the Policy to CompUSA, insuring it and its
officers and directors against specified legal liabilities, for an
initial term of two years, beginning December 16, 1998 and ending
December 16, 2000. The Policy covered “claims made” during that
two-year policy period, and contained a provision allowing CompUSA
to extend the “reporting period” (but not the coverage period) for
any claims made within one year following the effective date of
termination of the Policy, but only as to claims based on acts
committed during the policy term, i.e., prior to the effective date
of termination of the Policy.
On January 3, 2000, just a little more than halfway through
the two-year term of the Policy, COC filed a suit in state court
against CompUSA. Approximately one month later, COC amended its
complaint to add Halpin and other individuals as defendants.
CompUSA evaluated the claims advanced by COC and judged them
to be frivolous. On the basis of that evaluation, CompUSA made the
conscious decision not to furnish written notice of COC’s claims to
Federal even though the claims were made during the term of the
Policy. This election was made despite, and in full knowledge of,
the following provision of the Policy:
2
The Insureds shall, as a condition precedent to
exercising their rights under this coverage
section, give to [Federal] written notice as soon
as practicable of any Claim made against any of
them for a Wrongful Act (emphasis added).
Indeed, without apprising Federal of the claims or of the lawsuit
and its progress, CompUSA and the other defendants in COC’s state
court suit handled that matter entirely on their own, from the time
the suit was filed in January, 2000 until the three-week jury trial
ended on February 8, 2001, with a multimillion dollar verdict in
favor of COC. In fact, it was not until a week after the jury
returned its verdict that CompUSA made an abrupt change of its
long-standing “no notice” position and purported to comply with the
Policy’s notice requirement by sending a letter via Federal Express
on February 15, 2001, which was received by Federal on February 16,
2001.1
Although the record reflects that Federal had no actual
knowledge of COC’s claims or of the state court lawsuit, there is
evidence that an employee in Federal’s underwriting department (not
in its claims department) acquired, via the Internet, a copy of
CompUSA’s 54-page quarterly 10-Q report for the period ending
December 25, 1999. This copy of CompUSA’s 10-Q was obtained in
1
CompUSA’s evaluation of COC’s claims as unmeritorious
appears to have been shared by the state trial court, at least as
to the liability of CompUSA and Halpin. The trial judge granted
their motions for judgment n.o.v., reversing the jury and ordering
that COC take nothing from CompUSA and Halpin. COC’s appeal of
that ruling is currently pending.
3
February, 2000, in connection with the anticipated March 1, 2000
early termination of the Policy. Early termination of the Policy
was occasioned by CompUSA’s being acquired by another organization.
In turn, the anticipated termination of the Policy is apparently
what prompted CompUSA to apply for and eventually obtain a six-year
extension of the period in which claims relating to the pre-
termination policy period could be made, in lieu of the one-year
extension of the reporting period, to which CompUSA was entitled
under the Policy.2 CompUSA’s 10-Q, it later turned out, contained
a reference to, inter alia, the COC claim Uncontradicted record
testimony reflects, however, that no one at Federal was aware of
the reference to the COC claim in CompUSA’s 10-Q, or had even read
that part of the 10-Q, until a time in 2001 after CompUSA and
Halpin were cast in judgment and after Federal filed the instant
declaratory judgment action.
The district court granted Federal’s motion for summary
judgment in June, 2002, declaring that, as to the claims advanced
in COC’s suit, the failure of CompUSA and Halpin to furnish notice
to Federal “as soon as practicable” eliminated any indemnity
2
We speculate that CompUSA’s decision not to furnish notice
to Federal when COC’s claims were made, and instead to assume sole
responsibility for the claims, was influenced, if not directly
caused, by the fact that CompUSA, in full awareness of its
impending acquisition and the impending early termination of the
policy, was negotiating for the six-year reporting-period extension
at the same time, and likely viewed the COC claims as a potential
fly in the ointment. Some things are too much of a coincident to
be a coincident.
4
obligation of the insurer under the Policy. CompUSA and Halpin
timely filed a notice of appeal.
II. Analysis
A. Standard of Review
As this case is before us on appeal from the district court’s
grant of summary judgment, our review is plenary.
B. Bases of CompUSA’s and Halpin’s Appeals
CompUSA and Halpin do not —— because they cannot (at least not
with a straight face) —— contend that the letter sent to Federal on
February 15, 2001 (more than a year after the lawsuit was filed,
about a year after Halpin was impleaded, and a week after the jury
returned a $90 million verdict for COC against four individual
defendants, including Halpin) satisfied the Policy’s condition
precedent of furnishing written notice “as soon as practicable”
following the making of a claim. Instead, in this post-hoc attempt
to avoid the adverse results of the risk they had assumed more than
a year earlier when they decided not to furnish notice timely to
Federal and instead to handle the COC claims on their own, CompUSA
and Halpin advance alternative theories for why their failure to
satisfy that condition precedent does not preclude their recovering
from Federal under the Policy: (1) Extending the reporting period
beyond a “claims-made” policy’s termination date somehow converts
such a policy to an “occurrence” policy, thereby relieving the
insureds of strict, timely notice compliance and forcing the
5
insurer to demonstrate that actual prejudice resulted from tardy
notification by the insureds; and (2) the Policy’s formal notice
requirement was somehow satisfied when a member of Federal’s
underwriting staff acquired a copy of CompUSA’s 10-Q, which was
later found to contain a description of COC’s claims. Halpin
asserts an additional theory, contending that, despite having been
CompUSA’s President and CEO at the time, he was somehow prohibited
by the terms of the Policy from furnishing notice to Federal of
COC’s claims against him.
On the spectrum of disingenuous theories of defense, we view
those advanced by CompUSA and Halpin as lying somewhere between
wholly specious and downright frivolous. In contrast, we view the
clear and comprehensive opinion of the district court as more than
adequately explaining and supporting its grant of summary judgment
in favor of Federal. In the interest of judicial economy,
therefore, we shall not replicate the district court’s cogent
disposition of this matter by writing separately. Instead, we
adopt that court’s aforesaid Memorandum Opinion and Order in its
entirety, incorporating it herein by reference and appending a copy
for publication with this opinion.
AFFIRMED.
6
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
FEDERAL INSURANCE COMPANY, §
§
Plaintiff, §
§ Civil Action No. 3:01-CV-0593-D
VS. §
§
COMPUSA, INC., et al., §
§
Defendants. §
MEMORANDUM OPINION
AND ORDER
The court must decide in this declaratory judgment action involving a claims-made policy
whether the insureds’ failure to comply with a condition precedent that they give the insurer written
notice of their claim “as soon as practicable” precludes any right to indemnity arising from a county
court lawsuit. The court holds that the insureds failed to give such notice, that any actual notice that
the insurer had of the claim is immaterial, and that the insurer is not required to show that the lack of
the contractually-required notice caused it prejudice. The court therefore grants summary judgment
in favor of the insurer and declares that it is not obligated to indemnify the insureds in connection with
the claim at issue.
I
Plaintiff Federal Insurance Company (“Federal”) issued an Executive Protection Policy (“the
Policy”) to defendant CompUSA, Inc. (“CompUSA”) that insured its directors and officers, including
James F. Halpin (“Halpin”), CompUSA’s President and Chief Executive Officer (CompUSA and
Halpin are referred to collectively as the “Insureds”). The Policy covered the period December 16,
1998 through December 16, 2000. When CompUSA was acquired, the Policy was terminated
effective March 1, 2000. CompUSA paid Federal an additional premium in exchange for a six-year
extended reporting period.
In January 2000 COC Services, Ltd. (“COC”) sued CompUSA in county court (“the COC
suit”) alleging inter alia that it had breached an agreement to form a joint venture to expand
CompUSA’s personal computer business into Mexico. In February 2000 COC filed an amended
petition that added Halpin as a defendant and alleged claims against him for fraud, tortious
interference, conspiracy, and unjust enrichment. Halpin and CompUSA jointly answered in March
2000. COC again amended its petition in July 2000.
At least CompUSA viewed the lawsuit as frivolous, believed it would be dismissed as a matter
of law, and decided to defend itself without formally notifying Federal. The jury, however, did not
assess COC’s claims with the same incredulity. Following a trial of several weeks, the jury returned
a verdict in favor of COC on February 8, 2001, awarding it $90 million against Halpin and three other
defendants (assessing 65% of the damages against Halpin) for intentional interference with an existing
contract and awarding COC $175.5 million against Halpin in exemplary damages. Six days later—11
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months after COC effected service of process—Mark Walker, Esquire (“Walker”), CompUSA’s
Executive Vice President and General Counsel, notified Federal by February 14, 2001 letter of the
COC suit and the verdict. The evidence is undisputed that this letter is t he first formal notice that
Federal received from CompUSA or Halpin concerning the suit. Walker stated in his letter that
CompUSA and Halpin were providing notice of the claim and potential loss to Federal and requesting
that it acknowledge notice and confirm coverage under the Policy. The county court later resolved
the COC suit favorably to CompUSA and Halpin, ruling that COC would recover nothing from them.
The county court judgment is now on appeal.
In the instant action, Federal asks the court to declare that it is not obligated to indemnify the
Insureds for any loss arising from the COC suit because inter alia they failed to satisfy the condition
precedent that they provide Federal with written notice of the claim “as soon as practicable,” as
required by the Policy. Federal maintains that the lack of timely notice prejudiced it in its
investigation, defense, and potential settlement of the COC suit. It now moves for summary judgment
seeking entry of a declaratory judgment.
CompUSA opposes Federal’s motion. It concedes that, with hindsight, it should have
provided earlier formal notice of the claim. CompUSA maintains, however, that it did not notify
Federal, and it defended the COC suit at its own expense, because it viewed the case as frivolous and
believed it would be dismissed as a matter of law. CompUSA argues that Federal is not entitled to
summary judgment because there is a genuine issue of material fact whether on February 23,
2000—22 days after Halpin was served with the lawsuit—Federal received actual notice of the COC
suit in another form: via CompUSA’s January 21, 2000 Securities and Exchange Commission Form
10-Q. It argues that, under Texas law, actual notice is sufficient. CompUSA also asserts that Federal
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must prove that it suffered actual prejudice due to the late notice and that it has not done so, or that
there is a genuine issue of material fact whether it has been prejudiced. It contends that the Policy was
converted from a claims-made policy to an occurrence policy, which requires a showing of prejudice.
Halpin also opposes Federal’s motion. He does so on grounds similar to the ones CompUSA
advances—that there are fact issues whether Federal received actual knowledge of the COC suit via
the Form 10-Q and whether it suffered prejudice due to the late notice. He also advances the
independent contention that he was expressly prohibited under the Policy from giving Federal notice
of the claim.
II
Insuring clause 1 of the Policy states:
The Company shall pay on behalf of each of the Insured Persons all
Loss for which the Insured Person is not indemnified by the Insured
Organization and which the Insured Person becomes legally obligated
to pay on account of any Claim first made against him, individually or
otherwise, during the Policy Period or, if exercised, during the
Extended Reporting Period, for a Wrongful Act committed, attempted,
or allegedly committed or attempted by such Insured Person before or
during the Policy Period.
P. App. 14 (emphasis deleted). Insuring clause 2 provides coverage for similar “Loss for which the
Insured Organization grants indemnification to each Insured Person.” Id. (emphasis deleted). Of
significance to the instant case, the Policy also contains a “Reporting and Notice” clause that states,
in pertinent part:
The Insureds shall, as a condition precedent to exercising their rights
under this coverage section, give to the Company written notice as
soon as practicable of any Claim made against any of them for a
Wrongful Act.
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Id. at 18 (emphasis deleted). The Policy’s notice clause specifies that “Notice to the Company under
this policy shall be given in writing addressed to” a location in Warren, New Jersey. Id. at 2.
“Contractual language requiring notice ‘as soon as practicable’ has been construed by Texas
courts as equivalent to ‘within a reasonable time.’” Chicago Ins. Co. v. W. World Ins. Co., 1998 WL
51363, at *2 (N.D. Tex. Jan. 23, 1998) (Buchmeyer, C.J.). When the relevant facts are undisputed,
the question whether notice was given “as soon as practicable” or “within a reaso nable time” is a
question of law for the court. Id. Here, the parties dispute neither the history of the COC litigation
as recited herein nor the fact that the first formal notification given to Federal was the February 14,
2001 letter from Walker, CompUSA’s Executive Vice President and General Counsel. Because this
formal notification did not occur until 11 months after Halpin had been served, and not until six days
after a jury verdict had been rendered against the Insureds in a trial in which they actively participated,
the court concludes as a matter of law that the February 14, 2001 letter did not give Federal notice
“as soon as practicable.” “There is ample Texas authority that taking 11 months to notify an insurer
is not ‘as soon as practicable.’” Id. at *3 (citing, e.g., Allen v. W. Alliance Ins. Co., 162 Tex. 572,
349 S.W.2d 590, 594 (1961) (107 days after occurrence); Klein v. Century Lloyd’s, 154 Tex. 160,
275 S.W.2d 95, 97 (1955) (32 days after occurrence)).
In view of the foregoing, the court now addresses the following questions to resolve Federal’s
motion: (1) Is actual notice to Federal sufficient? (2) Must Federal prove that it suffered actual
prejudice from a lack of the contractually-specified written notice? (3) Was Halpin contractually
precluded from giving Federal the required notice?
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III
The Insureds contend that Federal received actual notice of the COC suit during March 2000,
when a Federal underwriter obtained from the Internet a copy of CompUSA’s Form 10-Q for the
fourth quarter of 1999 in connection with the underwriting of the extended reporting period ultimately
granted to the Insureds under the Policy. They maintain that such actual notice is sufficient to satisfy
the Policy’s notice provision. The court disagrees.
Even if Federal obtained actual notice of the COC suit in March 2000 via the Form 10-Q, this
did not relieve the Insureds of their obligation to comply with the notice condition precedent of the
Policy. As the Fifth Circuit has held regarding an analogous policy that Federal issued:
The policy unambiguously limits Federal’s liability to losses for
wrongful acts reported to Federal in accordance with section 4.
Specifically, the directors themselves had to provide written notice of
any wrongful acts giving rise to an actual or potential claim, and such
notice had to be mailed to Federal’s New Jersey office. . . . [A]llowing
constructive notice to satisfy the reporting requirements of section 4
would effectively “read-out” these unambiguous provisions. . . . Here,
the D & O policy is a “claims-made” policy. Because notice of a claim
or potential claim defines coverage under a claims-made policy, we
think that the notice provisions of such a policy should be strictly
construed.
FDIC v. Barham, 995 F.2d 600, 604 n.9 (5th Cir. 1993) (applying Louisiana law) (citations omitted
and emphasis deleted).3 Concluding that the notice provisions of such a policy should be strictly
construed, the Fifth Circuit in Barham reasoned that while Louisiana courts “have not yet determined
whether construct ive notice may satisfy the reporting requirements of a claims-made policy,”
3
The court recognizes that there are distinctions between the
policy at issue in Barham and the one in the instant case, and that the court is quoting
dicta from Barham. Nevertheless, the reasoning of Barham, coupled with settled principles of Texas
law, appropriately guides the court in deciding the present case.
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Louisiana law provides that “[a]bsent conflict with statute or public policy, insurers may by
unambiguous and clearly noticeable provisions limit liability and impose such reasonable conditions
as they wish upon the obligations they assume by contract.” Id. (quoting Breaux v. St. Paul Fire &
Marine Ins. Co., 326 So.2d 891, 892-93 (La. App. 1976)).
Texas law is in accord. “Undoubtedly the parties to an insurance contract may make it in any
legal form they desire and, in the absence of statutory prohibitions, insurers may limit their liability
and impose whatever conditions they please upon their obligations not inconsistent with public
policy.” Locomotive Eng’rs & Conductors Mut. Protective Ass’n v. Bush, 576 S.W.2d 887, 890
(Tex. Civ. App. 1979, no writ) (quoting Hatch v. Turner, 145 Tex. 17, 193 S.W.2d 668, 669 (1946));
Republic Nat’l Life Ins. Co. v. Spillars, 368 S.W.2d 92, 94 (Tex. 1963) (“[W]here the language of
an insurance contract is plain, it must be enforced as made.”). “Courts strictly interpret notice
provisions in a ‘claims-made’ policy.” Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co.,
174 F.3d 653, 659 (5th Cir. 1999) (interpreting Texas law). Accordingly, the court holds concerning
this claims-made policy4 that Federal and CompUSA contractually agreed, as a condition precedent,
that written notice of a claim would be made as soon as practicable. Because there is no indication
that such a limit on liability violates a Texas statutory prohibition or public policy, the notice provision
must be enforced as written. The court therefore rejects defendants’ reliance on actual notice not
given in the manner the Policy required.
4
The court concludes that the Policy at issue is a “claims-
made” policy rather than an “occurrence” policy. See infra § IV.
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IV
The court considers next whether Federal must demonstrate actual prejudice from the absence
of the notice that the Policy requires. The court holds that it need not.
Under Texas law, the effect of the Insureds’ noncompliance with the notice provisions
contained in an insurance policy depends on whether it is a “claims-made” or an “occurrence” policy.
“An ‘occurrence’ policy covers all claims based on an event occurring during the policy period,
regardless of whether the claim or occurrence itself is brought to the attention of the insured or made
known to the insurer during the policy period.” Yancey v. Floyd West & Co., 755 S.W.2d 914, 918
(Tex. App. 1988, writ denied). In contrast, “[a] ‘claims-made’ policy covers occurrences which may
give rise to a claim that comes to the attention of the insured and is made known to the insurer during
the policy period.” Id.
As the Fifth Circuit observed regarding Texas insurance law:
Contrary to Matador’s apparent position, courts do not always require
a showing of prejudice in order for an insurance company legitimately
to deny coverage where the insured fails to comply with an insurance
policy’s notice provisions. Instead, the impact that untimely notice has
on coverage depends on the type of insurance policy. For example,
courts traditionally distinguish between two types of insurance
policies: “occurrence” policies and “claims-made” policies. In the case
of an “occurrence” policy, any notice requirement is subsidiary to the
event that triggers coverage. Courts have not permitted insurance
companies to deny coverage on the basis of untimely notice under an
“occurrence” policy unless the company shows actual prejudice from
the delay. In the case of a “claims-made” policy, however, notice itself
constitutes the event that triggers coverage. Courts strictly interpret
notice provisions in a “claims-made” policy. Thus, an insurance
company may deny coverage under a “claims-made” policy without a
showing of prejudice.
Matador, 174 F.3d at 658-59 (citations omitted).
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The Policy states on its first page that
THE EXECUTIVE LIABILITY AND INDEMNIFICATION,
FIDUCIARY LIABILITY, OUTSIDE DIRECTORSHIP LIABILITY
AND EMPLOYMENT PRACTICES LIABILITY COVERAGE
SECTIONS (WHICHEVER ARE APPLICABLE) ARE ALL
WRITTEN ON A CLAIMS MADE BASIS. EXCEPT AS
OTHERWISE PROVIDED, THESE COVERAGE SECTIONS
COVER ONLY CLAIMS FIRST MADE AGAINST THE INSURED
DURING THE POLICY PERIOD. PLEASE READ CAREFULLY.
D. App. 1. See Yancey, 755 S.W.2d at 918-21 (holding that policy at issue that inter alia stated in
block letters “THIS IS A ‘CLAIMS MADE’ POLICY READ CAREFULLY” was a claims-made
policy). Despite this language, the Insureds contend that the grant of an extended reporting period
under Endorsement No. 9 requires the court to treat the Policy as having been written on an
“occurrence” basis. The court disagrees. Insuring clauses 1 and 2 provide that Federal shall pay all
loss incurred on account of any claim first made during the policy period. The Policy also provides
that “[a]ny Claim made during the extended reporting perio d shall be deemed to have been made
during the immediately preceding Policy Period.” Id. at 14 (emphasis deleted). Thus the effect of the
extended reporting period is to allow certain claims made after the policy period has concluded to be
treated as claims made within the policy period. Such an arrangement is fully consistent with the
Policy’s express language declaring it to have been written on a “claims made” basis. Moreover, in
Barham, which involved a Federal directors and officers liability policy that contained an extended
reporting period, the Fifth Circuit has held that the policy was “a claims made policy.” See Barham,
995 F.2d at 602.
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V
Halpin advances individually the contention that he was prohibited from providing notice to
Federal. The court disagrees.
The Reporting and Notice provision of the Policy states:
The Insureds shall, as a condition precedent to exercising their rights
under this coverage section, give to the Company written notice as
soon as practicable of any Claim made against any of them for a
Wrongful Act.
P. App. 18 (emphasis deleted). The Policy separately provides:
By acceptance of this policy, [CompUSA] agrees to act on behalf of
all Insureds with respect to the giving and receiving notice of claim[.]
Id. at 3. In this second provision, CompUSA and Federal agreed that CompUSA would act on behalf
of all insureds concerning giving and receiving notice of claims. The clause neither prohibited Halpin
from giving notice nor excused him from the consequences o f failing to comply with the Policy’s
notice provision. The clause placed an obligation on CompUSA, it did not erect a prohibition against
Halpin.5 Accordingly, this contention is insufficient to preclude Federal from obtaining a declaratory
judgment based on the notice condition precedent in the Policy.
* * *
Because the court concludes as a matter of law that the Insureds’ breach of the notice
obligation constitutes a failure of a condition precedent to Federal’s duty to provide indemnification
under the Policy, the court grants Federal’s February 13, 2002 motion for summary judgment and
5
Even assuming arguendo that the Policy did prohibit Halpin from giving notice, the evidence
indicates that it was within Halpin’s power as CompUSA’s President and CEO to cause CompUSA
to give timely notice, as the Policy required.
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declares that Federal is not obligated to indemnify CompUSA and Halpin in connection with the COC
suit.
SO ORDERED.
June 4, 2002
___________________________________
SIDNEY A. FITZWATER
UNITED STATES DISTRICT JUDGE
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