     Case: 12-20545        Document: 00512279083          Page: 1    Date Filed: 06/18/2013




           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                                              FILED
                                                                            June 18, 2013
                                        No. 12-20545
                                                                            Lyle W. Cayce
                                                                                 Clerk
STARR INDEMNITY & LIABILITY COMPANY,

                                     Plaintiff - Appellee

v.

SGS PETROLEUM SERVICE CORPORATION, now known as SGS North
America, Incorporated,

                                     Defendant - Appellant



                     Appeal from the United States District Court
                          for the Southern District of Texas


Before JONES and CLEMENT, Circuit Judges, and KAZEN*, District Judge.
KAZEN, District Judge:
      An insurer sought a declaratory judgment that it was not required to show
prejudice before denying coverage for liability arising out of a pollution
occurrence which the insured did not report within thirty days, as required by
a pollution buy-back clause in the policy. The district court granted the insurer’s
motion for judgment on the pleadings and denied the insured’s motion for
summary judgment. We AFFIRM.



      *
          District Judge of the Southern District of Texas, sitting by designation.

                                               1
    Case: 12-20545     Document: 00512279083     Page: 2   Date Filed: 06/18/2013




                                  No. 12-20545

                              I. BACKGROUND
      This diversity case involves a dispute over insurance coverage between
Plaintiff-Appellee Starr Indemnity & Liability Company (“Starr”), a Texas-based
insurance company, and Defendant-Appellant SGS Petroleum Service
Corporation (“SGS”), a Delaware corporation that provides services to the
petrochemical industry, including the transportation of toxic chemicals. Starr
issued SGS an insurance policy that covered the period from December 31, 2009
to December 31, 2010. This was a bumbershoot (umbrella) policy that provided
excess coverage beyond SGS’s primary insurance policy with Allianz Global
Risks US Insurance Co. (“Allianz”), which was limited to $2 million of coverage.
      Starr’s excess coverage policy contained an absolute pollution exclusion
clause, which freed the insurer of “liability or expense arising . . . directly or
indirectly in consequence of” the release or escape of pollutants and toxic
chemicals. However, Starr and SGS had added to the policy a provision,
commonly called a pollution “buy-back,” which deleted the pollution exclusion
and replaced it with the following:
            Notwithstanding anything to the contrary, this policy
            shall not apply to any claim arising directly or
            indirectly in consequence of the discharge, dispersal,
            release, or escape of smoke, vapors, soot, fumes, acids,
            alkalis, toxic chemicals, liquids or gases, waste
            materials, oil or other petroleum substance or
            derivative (including any oil refuse or oil mixed wastes)
            or other irritants, contaminants or pollutants into or
            upon land, the atmosphere, or any watercourse or body
            of water. This exclusion shall not apply, however,
            provided that the assured establishes that all of the



                                        2
    Case: 12-20545    Document: 00512279083     Page: 3   Date Filed: 06/18/2013




                                 No. 12-20545

            following conditions have been met:
            ...
             (4) the discharge, dispersal, release or escape was
            reported in writing to these underwriters within
            30 days after having become known to the assured.
            ...
            Nothing herein contained shall be held to vary, alter,
            waive or change any of the terms, limits or conditions
            of the policy except as hereinabove set forth.
(emphasis added).
      On November 7, 2010, an accidental release of the chemical meta-toluene
diamine occurred while an SGS employee was conducting unloading operations
at a Bayer chemical plant in Baytown, Texas. SGS learned of the release that
same day. Based on the initial report and information Bayer provided SGS, the
preliminary estimate for the clean-up costs was between $600,000 and $1
million. Because this was within the $2 million coverage limit of its primary
policy with Allianz, SGS did not inform Starr of the release. However, on
December 20, 2010, Bayer presented SGS with invoices reflecting clean-up costs
of over $4 million. Only in late December did SGS first realize the costs
exceeded $2 million and would trigger coverage beyond the limits of its policy
with Allianz. On January 5, 2011, fifty-nine days after SGS learned of the
chemical release, SGS sent an email reporting the release to Starr.
      On June 30, 2011, Starr sought a declaratory judgment that its insurance
policy did not cover SGS’s claim because SGS failed to notify Starr of the
chemical release within thirty days after learning of it. Starr also moved for a
judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c),
asserting that, as a matter of Texas law, its bumbershoot insurance policy did
not cover SGS’s claim because SGS failed to comply with the 30-day notice

                                       3
    Case: 12-20545     Document: 00512279083     Page: 4     Date Filed: 06/18/2013




                                  No. 12-20545

provision. Around the same time, SGS moved for summary judgment, alleging
that (1) the 30-day requirement must be construed as a covenant and not as a
condition precedent; (2) failure to strictly comply with the 30-day requirement
did not excuse Starr’s performance absent prejudice; (3) Starr was not prejudiced
as a matter of law; and (4) in the alternative, the policy was ambiguous and the
Court must construe any ambiguity in favor of the insured.
      The district court granted Starr’s motion for judgment on the pleadings
and denied SGS’s motion for summary judgment.              Relying largely on our
decision in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d
653 (5th Cir. 1999), the court held that Starr did not need to show prejudice
before denying coverage to SGS for late notice under the pollution buy-back
provision.
                        II. STANDARD OF REVIEW
      We review a district court’s grant of a judgment on the pleadings de novo.
Doe v. MySpace, Inc., 528 F.3d 413, 418 (5th Cir. 2008). We also review a ruling
on a motion for summary judgment de novo. McKee v. Brimmer, 39 F.3d 94, 96
(5th Cir. 1994). The parties do not dispute that Texas law applies to the
interpretation of the insurance contract. In deciding an issue of Texas state law,
we rule as we believe the Texas Supreme Court would rule.                Interstate
Contracting Corp. v. City of Dallas, 407 F.3d 708, 712 (5th Cir. 2005).
                              III. DISCUSSION
                          A. Our Matador decision
      Matador Petroleum Corp. v. St. Paul Surplus Lines involved an insurance
coverage dispute quite similar to that in the instant case. In Matador, the
insurer, St. Paul, issued an insurance policy containing an absolute pollution


                                        4
    Case: 12-20545     Document: 00512279083    Page: 5   Date Filed: 06/18/2013




                                 No. 12-20545

exclusion clause that, among other things, specifically did not cover any injury
or damage from pollution resulting from several sources, including waste
pollution. 174 F.3d at 655. In addition to this basic policy, Matador, the
insured, purchased an endorsement that provided “a narrow exception to the
absolute pollution exclusion.” Id. One specific provision of that exception
required the insured to report any pollution incident “within 30 days of its
beginning.”   Id. at 656.   Subsequently, a drilling pit collapsed, causing a
discharge of pollutants which seeped into adjacent property and waterways. Id.
Matador reported the incident to the insurance company 38 days later and
requested coverage under the policy for resulting damages claimed by adjacent
landowners. Id. St. Paul declined the request because Matador had failed to
report the pollution incident within 30 days, as required by the endorsement.
The district court agreed and granted summary judgment to St. Paul. On
appeal, we affirmed.
      Matador’s key argument in that case was that St. Paul suffered no
prejudice from the delay of eight days in receiving notice of the incident and,
therefore, St. Paul should not have been relieved of its obligation to provide
coverage. Id. at 658. Matador explained that courts do not always require a
showing of prejudice in order for an insurance company to deny coverage for a
failure to comply with the notice provisions of the policy. Instead, the type of
policy can dictate the result. Id. Matador further explained the difference
between “occurrence” policies and “claims-made” policies. Id. at 658-59. We
noted that the basic insurance contract in Matador, which excluded pollution
coverage, was supplemented by the endorsement, constituting additional
coverage for which the parties had bargained. Id. at 659. To extend the 30-day


                                       5
    Case: 12-20545     Document: 00512279083       Page: 6   Date Filed: 06/18/2013




                                   No. 12-20545

notice period would have exposed the insurer “to a risk broader than the risk
expressly insured against in the policy.” Id. We observed that both the insured
and the insurer were sophisticated commercial parties with comparable
bargaining power, that the language of the endorsement was plain, and that
timely reporting of the claim was one of the events necessary to trigger coverage.
Id. at 659-60. We concluded that whether the insurance company suffered
prejudice as a result of the late notice was irrelevant because the insurance
policy was being enforced according to its terms.
      In the instant case, the pertinent provisions of the insurance policy are
virtually identical to those in Matador. Starr’s excess coverage policy contained
an absolute pollution exclusion clause, with no liability for the consequences of
the release or escape of toxic chemicals or pollutants. However, SGS and Starr
then negotiated a buy-back provision which deleted the exclusion and replaced
it with a new provision providing coverage under certain specific conditions.
One was that any discharge or escape of pollutants must be reported “within 30
days after having been known to the assured.” The “assured,” SGS, did not
report the triggering incident to Starr until fifty-nine days after it learned of the
chemical release. The holding in Matador clearly dictates that Starr was
justified in denying coverage under the specific terms of the buy-back provision
which the parties had negotiated to replace the original pollution exclusion. As
in Matador, the plain language of the endorsement should be respected
regardless of any prejudice suffered by Starr as a result of the late notice.
                           B. Matador still tenable?
      SGS apparently acknowledges the precedential impact of Matador, but
argues that the opinion is "no longer tenable" and its reasoning is "deeply


                                         6
    Case: 12-20545     Document: 00512279083      Page: 7    Date Filed: 06/18/2013




                                  No. 12-20545

flawed." It maintains that the Texas Supreme Court has now changed the law
pertaining to notice requirements in insurance contracts, citing PAJ, Inc. v.
Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008) and Prodigy Communications
Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex. 2009). We
disagree.
      Neither PAJ nor Prodigy involved a specifically negotiated buy-back
provision, such as the one involved in this case and in Matador. PAJ involved
a commercial general liability policy that, among other things, required the
insured to notify the insurance company of any claim brought against it “as soon
as practicable.” 243 S.W.3d at 631. While PAJ stated that Texas was beginning
to follow a modern trend towards requiring proof of prejudice to the insurer
before enforcing a notice provision in an insurance policy, the key finding in PAJ
was that “the timely notice provision was not an essential part of the bargained-
for exchange under [the insured’s] occurrence-based policy.” Id. at 636. As
discussed above, Matador found that the notice provision in that case was an
essential part of the bargained-for exchange because it was a specific provision
negotiated by two sophisticated commercial parties in order to supplement the
main insurance policy. See 174 F.3d at 659.
      Prodigy extended this application of “fundamental principles of contract
law” to claims-made policies. 288 S.W.3d at 378 (quoting PAJ, 243 S.W.3d at
633) (internal quotation marks omitted). There, a directors’ and officers’ liability
insurance policy contained a provision that the insurer be given notice “as soon
as practicable” of any claim made against the insured during the policy period,
but in no event later than ninety days after the expiration of the policy. See
Prodigy, 288 S.W.3d at 376. The insured failed to give notice of the claim “as


                                         7
    Case: 12-20545     Document: 00512279083     Page: 8   Date Filed: 06/18/2013




                                  No. 12-20545

soon as practicable,” but did give notice within ninety days of the policy’s
expiration date. See id. at 376-77. Following PAJ, Prodigy held that the failure
to give timely notice did not defeat coverage so long as there was no prejudice to
the insurer. Id. at 375. This holding was again based on an inquiry into
whether the “as soon as practicable” language was “an essential part of the
bargained-for exchange” under the policy. Id. The court concluded that it was
not. Id.
      It is clear then that PAJ and Prodigy do not disturb the holding in
Matador since neither one reached any conclusion regarding notice requirements
for this type of supplemental coverage. In fact, PAJ cited Matador approvingly
to explain why a general notice requirement in an occurrence-based policy is not
an essential part of the bargained-for exchange. See 243 S.W.3d at 636. In the
instant case, as in Matador, we are dealing with a specific endorsement,
separately negotiated by the parties, and with a clear notice requirement.
Following an inquiry similar to the one outlined in PAJ and Prodigy, Matador
concluded that a notice requirement in this type of supplemental pollution
endorsement is essential to the bargained-for coverage. We remain bound by
that precedent.
                      C. SGS’s remaining arguments
      SGS seeks to distinguish Matador because: (1) Matador involved a
primary insurance policy, while Starr provided SGS with a bumbershoot policy;
(2) the main policy in this case included a notice provision, Condition C, which
provided that although notice of an occurrence likely to cause liability should be
given “as soon as practicable,” a failure to timely notify the insurer because the
occurrence did not initially appear to involve the policy would not prejudice the


                                        8
    Case: 12-20545    Document: 00512279083      Page: 9   Date Filed: 06/18/2013




                                 No. 12-20545

insured’s claim; (3) Condition D of the policy, which did not require Starr to
assume charge of the settlement or defense of any claim, indicated that the
30-day notice requirement at issue had no material purpose; and (4) the
combination of Condition C and the pollution buy-back reporting requirement
created an ambiguity regarding notice requirements, which must be resolved in
favor of the insured. We find these arguments unpersuasive.
      We find no basis for applying a different rule to excess carriers when
interpreting the meaning of a contractual provision and SGS cites no authority
for that argument. See Berkley Reg'l Ins. Co. v. Phil. Indem. Ins. Co., 690 F.3d
342, 349 (5th Cir. 2012) (finding no basis for applying the notice-prejudice rule
differently for excess carriers). While Condition C was obviously considered an
appropriate notice provision for the main policy, that policy excluded pollution
coverage. When the pollution endorsement was added, the parties specifically
inserted a 30-day reporting requirement, which would necessarily trump the
notice provision of the main policy. Such an interpretation is consistent with
Texas law. See Mesa Operating Co. v. Cal. Union Ins. Co., 986 S.W.2d 749, 754
(Tex. App. 1999) (“Endorsements to a policy generally supersede and control over
conflicting printed terms within the main policy.”). Next, we find nothing in
Condition D that diminishes or even affects the materiality of the 30-day notice
requirement in the pollution buy-back provision. Finally, an ambiguity only
exists if the contractual language is susceptible to more than one reasonable
interpretation. See Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 157
(Tex. 2003). We see no ambiguity as to which notice requirement applies to the
pollution liability claims: the 30-day reporting requirement provided in the
specifically negotiated pollution endorsement.


                                       9
Case: 12-20545   Document: 00512279083    Page: 10   Date Filed: 06/18/2013




                           No. 12-20545

                       IV. CONCLUSION
  For all the foregoing reasons, we AFFIRM.




                                10
