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

                                                                           FILED
                                                                       December 19, 2007

                                      No. 06-51683                   Charles R. Fulbruge III
                                                                             Clerk

XL SPECIALTY INSURANCE COMPANY,

                                                 Plaintiff–Appellee,
v.

FINANCIAL INDUSTRIES CORPORATION,

                                                 Defendant–Appellant.



                   Appeal from the United States District Court
                        for the Western District of Texas
                                No. 1:06-CV-356


Before DAVIS, STEWART, and OWEN, Circuit Judges.
PER CURIAM:*
       This diversity case raises an important and determinative question of
Texas law: whether an insurer must show prejudice to deny payment on a
claims-made policy, when the denial is based upon the insured’s breach of the
policy’s prompt-notice provision, but the notice is nevertheless given within the
policy’s coverage period.       Because this question is not answered by any
controlling Texas Supreme Court precedent, we certify it to the Supreme Court
of Texas.



       *
        Pursuant to 5th Cir. R. 47.5, the court has determined that this order should not be
published.
                                  No. 06-51683

CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS FOR
THE FIFTH CIRCUIT TO THE SUPREME COURT OF TEXAS, PURSUANT
TO ARTICLE 5, SECTION 3-C OF THE TEXAS CONSTITUTION AND RULE
58 OF THE TEXAS RULES OF APPELLATE PROCEDURE.
TO THE SUPREME COURT OF TEXAS AND THE HONORABLE JUSTICES
THEREOF:
                                         I
      The style of the case in which certification is made is XL Specialty
Insurance Company v. Financial Industries Corporation, No. 06-51683, in the
United States Court of Appeals for the Fifth Circuit, on appeal from the United
States District Court for the Western District of Texas, Austin Division. Federal
jurisdiction is based on diversity of citizenship.
                                        II
      XL Specialty Insurance Company (XL) issued a claims-made, management
liability policy to Financial Industries Corporation (FIC) for the policy period of
March 12, 2005 to March 12, 2006. The policy requires FIC to notify XL of any
claim “as soon as practicable after it is first made” “[a]s a condition precedent”
to payment. On June 5, 2005, two plaintiffs filed suit against FIC in Texas state
court for breach of contract and fraud. FIC notified XL seven months after the
suit was filed, but nonetheless within the policy’s coverage period. XL and FIC
stipulate that this notification breached the policy’s prompt-notice provision but
did not prejudice XL. XL subsequently sued FIC in federal district court,
seeking a declaratory judgment that the policy did not cover FIC for the lawsuit;
it also sent a letter to FIC denying coverage. The district court granted XL’s
summary judgment motion, holding that under Texas law, an insurer need not
demonstrate prejudice from late notice to avoid coverage on a claims-made
policy. FIC appealed.



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                                        No. 06-51683

                                            III
      Two Texas Supreme Court cases—Members Mutual Insurance Co. v.
Cutaia3 and Hernandez v. Gulf Group Lloyds4—appear relevant to the question
certified. In Cutaia, the Court held that Texas law does not require an insurer
to show prejudice before denying coverage based upon the breach of a prompt-
notice provision in an automobile policy. It stated that the State Board of
Insurance, rather than the Supreme Court, was the appropriate public body to
add a prejudice requirement.            Subsequent to Cutaia, the State Board of
Insurance issued an order requiring insurers to show prejudice before denying
payment based upon breach of a prompt-notice provision in bodily injury and
property damage cases.5 Without explicitly overruling Cutaia, the Court later
held in Hernandez that an insurer must show prejudice to deny coverage based
upon breach of settlement-without-consent provision in an automobile policy.6
Although Hernandez dealt specifically with the breach of a settlement-without-
consent clause, the Supreme Court’s reasoning is arguably broad enough to
encompass other clauses as well. The Court reasoned that “[i]nsurance policies
are contracts, and as such are subject to rules applicable to contracts generally.”7
Those rules direct that a breach must be material—i.e., must cause prejudice—to
excuse performance by the non-breaching party.8




      3
          476 S.W.2d 278 (Tex. 1972).
      4
          875 S.W.2d 691 (Tex. 1994).
      5
      See Coastal Ref. & Mktg., Inc. v. U.S. Fid. & Guar. Co., 218 S.W.3d 279, 285 (Tex.
App.—Houston [14th Dist.] 2007, pet. filed) (explaining the Board’s order).
      6
          Hernandez, 875 S.W.2d at 693.
      7
          Id. at 692.
      8
          Id. at 692-93.

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                                           No. 06-51683

          Texas Courts of Appeals currently appear to take different positions on the
prejudice requirement. The Fourteenth District has required prejudice for an
occurrence policy with a breached prompt-notice provision,9 and a claims-made
policy with a breached consent-to-settle provision.10 In its Coastal decision from
2007, that court explained in great detail a legal trend moving away from
Cutaia’s no-prejudice rule towards a prejudice requirement, and characterized
as “unsettled” the contexts in which the prejudice requirement applies.11 The
Fifth District has held that prejudice is unnecessary for occurrence12 and claims-
made13 policies with breached prompt-notice provisions.
          The federal Fifth Circuit Court of Appeals has also interpreted Texas law
on when insurers must show prejudice: it has concluded that prejudice is
required in all occurrence policies, but that insurers need not prove prejudice in
claims-made policies.14 We hesitate to follow this Fifth Circuit precedent in light
of four related cases now pending before the Supreme Court of Texas. The Court



          9
        Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651 (Tex. App.—Houston [14th Dist.]
2006, pet. filed).
          10
       Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181 (Tex.
App.—Houston [14th Dist.] 2003, pet. denied).
          11
               Coastal, 218 S.W.3d 279, 285-87 & n.6 (Tex. App.—Houston [14th Dist.] 2007, pet.
filed).
          12
         PAJ, Inc. v. Hanover Ins. Co., 170 S.W.3d 258 (Tex. App.—Dallas 2005, pet. granted)
(No. 05-0849 in the Supreme Court of Texas).
          13
       Prodigy Commc’ns Corp. v. Agric. Excess & Surplus Ins. Co., 195 S.W.3d 764 (Tex.
App.—Dallas 2006, pet. filed).
          14
           See Federal Ins. Co. v. CompUSA, 319 F.3d 746, 755 (5th Cir. 2003) (“[C]ourts
traditionally distinguish between two types of insurances policies: ‘occurrence’ policies and
‘claims-made’ policies. . . . 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. . . . [A]n insurance company may deny coverage under a ‘claims-made’
policy without a showing of prejudice.”); Matador Petroleum Corp. v. St. Paul Surplus Lines
Ins. Co., 174 F.3d 653, 658-59 (5th Cir. 1999) (same).

                                                 4
                                           No. 06-51683
has granted a petition for review and heard oral arguments in PAJ, Inc. v.
Hanover Insurance Co.15 PAJ involves an occurrence policy and raises the
question “[w]hether an insurer must establish that it was prejudiced by an
insured’s delay in notice of a claim or suit in order to rely on an untimely notice
defense under the advertising injury portion of a commercial general liability
insurance policy.”16 The Court also has pending before it petitions for review in
Lennar Corp. v. Great American Insurance Co.,17 Prodigy Communications Corp.
v. Agricultural Excess & Surplus Insurance Co.,18 and Coastal Refining &
Marketing, Inc. v. U.S. Fidelity and Guarantee Co.19 Each petition raises as an
issue whether an insurer may deny coverage on a policy without proving
prejudice. Lennar and Coastal concern occurrence policies, while Prodigy deals
with a claims-made policy. Further, the Texas courts have not appeared to draw
a distinction between occurrence and claims-made policies as current Fifth
Circuit precedent interpreting Texas law has done.
                                                 IV
         We certify the following determinative question of law to the Supreme
Court of Texas: Must an insurer show prejudice to deny payment on a claims-
made policy, when the denial is based upon the insured’s breach of the policy’s
prompt-notice provision, but the notice is nevertheless given within the policy’s
coverage period?



         15
         170 S.W.3d 258 (Tex. App.—Dallas 2005, pet. granted) (No. 05-0849 in the Supreme
Court of Texas).
         16
              Petition for Review at ix, PAJ, Inc. v. Hanover Ins. Co., No. 05-0849 (Tex. Oct. 7,
2005).
         17
              200 S.W.3d 651 (Tex. App.—Houston [14th Dist.] 2006, pet. filed).
         18
              195 S.W.3d 764 (Tex. App.—Dallas 2006, pet. filed).
         19
              218 S.W.3d 279 (Tex. App.—Houston [14th Dist.] 2007, pet. filed).

                                                  5
                                    No. 06-51683
      We disclaim any intention or desire that the Supreme Court of Texas
confine its reply to the precise form or scope of the question certified. The
answer provided by the Supreme Court of Texas will determine the issue on
appeal in this case. The record of this case, together with copies of the parties’
briefs, is transmitted herewith.
                                *        *         *
      QUESTION CERTIFIED




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