On June 18, 2013, the United States Fifth Circuit Court of Appeals issued its decision in the case captioned In re Matter of Complaint of Settoon Towing, L.L.C., — F.3d —, 2012 WL 3013868 (5th Cir. 2013). The case arose out of a vessel’s allision with an oil well which the vessel’s captain failed to report to both his employer and the United States Coast Guard. The Coast Guard eventually tracked down and confronted the captain who admitted his involvement. Importantly, this admission was thirty-four days after the incident. Settoon notified its insurers thirty-seven days after the incident.
One of the many issues the Fifth Circuit addressed on appeal was the district court’s ruling that two of Settoon’s umbrella insurers were not liable under the terms their respective bumbershoot policies. The two policies at issue both contained pollution exclusions making the insurance inapplicable to claims arising out of pollution-related damages. Both policies also contained endorsements further explaining the pollution exclusions and providing for buybacks where the insured could establish that “[t]he occurrence became known to the assured within 72 hours after its commencement” and that “[t]he occurrence was reported in writing to those underwriters within 30 days after having become known to the assured.”
Among other things, Settoon appealed the district court’s ruling that these two insurers were not liable on their bumbershoot policies because Settoon failed to comply with the 72-hour knowledge and 30-day notice provisions in the buybacks. One of the arguments advanced by Settoon was that the insurers were unable to show the required prejudice necessary to escape liability. The court explained that the Fifth Circuit previously held that where immediate notice was an express condition precedent to coverage in the main body of the policy, failure to comply precluded coverage even in the absence of prejudice. However, where notice was not a condition precedent, an insurer must show prejudice in addition to failure to give notice in accordance with the policy.
The court concluded that these particular insurers were not liable because the notice provision at issue was a condition precedent. Here, the pollution exclusions removed coverage for claims arising from pollution. The buyback provisions withdrew application of the pollution exclusions provided that the insured could establish that it met the necessary conditions. Because Settoon failed to notify the insurers within thirty days of the incident, the court held that insurers were not liable. To hold otherwise would alter the terms of the parties’ bargain.