Texas Supreme Court Provides Guidance on Claims-Made Policies

Fall 2009
In This Issue
<strong>Texas</strong> <strong>Supreme</strong> <strong>Court</strong>
<strong>Provides</strong> <strong>Guidance</strong> on
Claims-Made Policies
Recent <strong>Texas</strong> <strong>Supreme</strong>
<strong>Court</strong> Decisions Affirm
Enforceability of Forum
Selection Clauses
Mandatory Medicare
Reimbursement Statute
Changes, Claims Handling,
and Management
Jackson Walker Aviation
Partners
About the Authors
Upcoming Aviation Events
An Aviation Law Newsletter
<strong>Texas</strong> <strong>Supreme</strong> <strong>Court</strong> <strong>Provides</strong> <strong>Guidance</strong>
on Claims-Made Policies
by: Andrew D. Graham
Last year, the <strong>Texas</strong> <strong>Supreme</strong> <strong>Court</strong>
held that “an insured’s failure to timely
notify its insurer of a claim or suit does
not defeat coverage if the insurer was not
prejudiced by the delay.” PAJ, Inc. v. The
Hanover Ins. Co., 243 S.W.3d 630, 636-37
(Tex. 2008). In the words of the <strong>Court</strong>,
“an immaterial breach does not deprive
the insurer of the benefit of the bargain
and thus cannot relieve the
insurer of the contractual
coverage obligation.” Id.
at 631. As PAJ involved an
“occurrence-based” policy,
it was unclear whether the
<strong>Court</strong>’s holding also applied
“claims-made” policies.
The <strong>Texas</strong> <strong>Supreme</strong>
<strong>Court</strong> has now clarified that
point. On March 27, 2009,
the <strong>Court</strong> handed down two
decisions, both of which
were authored by Chief
Justice Jefferson, that make
plain that an insurer must demonstrate
prejudice in order to avoid coverage
under a claims-made policy on the basis
of untimely notice. Fin. Indus. Corp. v.
XL Specialty Ins., Co., No. 07-1059, __
S.W. 3d __, 2009 WL 795529 (Tex. Mar.
27, 2009); Prodigy Communications Corp.
v. Agricultural Excess & Surplus Ins. Co.,
No. 06-0598, __ S.W. 3d __, 2009 WL
www.jw.com
795530 (Tex. Mar. 27, 2009).
In Financial Industries, the United
States <strong>Court</strong> of Appeals for the Fifth
Circuit certified the following question
to the <strong>Texas</strong> <strong>Supreme</strong> <strong>Court</strong>: “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?” Fin. Indus. Corp.
v. XL Specialty Ins. Co., 259
Fed. Appx. 675, 678 (5th
Cir. 2007). The promptnotice
provision at issue
stated that “the Insured shall
give written notice to the
Insurer of any Claim as soon
as practicable after it is first
made.” Fin. Indus., 2009 WL
795529, at *1. The <strong>Court</strong>,
referring to its holding in
Prodigy Communications Corp.
v. Agricultural Excess & Surplus Insurance
Co., “answer[ed] the certified question in
the affirmative and h[e]ld that 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 given within the policy’s
coverage period.” Id. at *2.
Continued on Page 4
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www.jw.com. © 2009 Jackson Walker L.L.P.

Recent <strong>Texas</strong> <strong>Supreme</strong> <strong>Court</strong> Decisions Affirm Enforceability
of Forum Selection Clauses
by: Melanie A. Spriggs
2
The <strong>Texas</strong> <strong>Supreme</strong> <strong>Court</strong> recently affirmed its
commitment to enforcing contractual clauses in which
the parties choose the forum that may hear and determine
any dispute over their contract. Aviation manufacturers,
consultants, and insurers can rest assured that, at least
in <strong>Texas</strong>, courts will enforce forum selection clauses in
their contracts unless the party opposing enforcement
meets the “heavy burden” of showing (1) the clause
is invalid for fraud or overreaching; (2) enforcement
is unreasonable or unjust; (3) enforcement infringes
upon a strong public policy of the forum in which the
suit is brought; or (4) the selected forum is seriously
inconvenient for trial.
In January 2009, the court decided In re International
Profit Associates, Inc., 274 S.W.3d 672 (Tex. 2009) and
reiterated its position that “[f]orum-selection clauses
are generally enforceable, and a party attempting to
show that such a clause should not be enforced bears a
heavy burden.” In that case, McAllen Tropicpak, Inc.
(“Tropicpak”) contracted with three related management
and tax consulting firms (“IPA”) that agreed to provide
services related to general business consulting, business
operations, financial assessment, and tax consulting.
The contracts provided that “[i]t is agreed that exclusive
jurisdiction and venue shall vest in the Nineteenth
Judicial District of Lake County, Illinois, Illinois law
applying.” Upon IPA’s recommendation, Tropicpak
hired an employee who embezzled money, prompting
Tropicpak to file suit against IPA in Hidalgo County,
<strong>Texas</strong> for negligence, fraud, fraudulent inducement, and
breach of the duty of good faith and fair dealing.
Based on the forum selection clause, IPA filed a motion
to dismiss, which was denied by both the trial court and
the court of appeals. On writ of mandamus to the <strong>Texas</strong>
<strong>Supreme</strong> <strong>Court</strong>, IPA again argued that the case should
be dismissed based on the forum selection clause, while
Tropicpak argued that (1) the clause was ambiguous; (2)
IPA procured the clause through overreaching or fraud;
(3) the interest of the public was served by litigating the
case in <strong>Texas</strong>; and (4) enforcement of the clause would
deprive Tropicpak of its day in court.
The <strong>Texas</strong> <strong>Supreme</strong> <strong>Court</strong> reiterated the holding of
In re A.I.U. Insurance Co., 148 S.W.3d 109, 113 (Tex.
2004), stating that “[a] trial court abuses its discretion
if it refuses to enforce a forum-selection clause unless
the party opposing enforcement clearly shows that (1)
the clause is invalid for reasons of fraud or overreaching;
(2) enforcement would be unreasonable or unjust; (3)
enforcement would contravene a strong public policy of
the forum where the suit was brought; or (4) the selected
forum would be seriously inconvenient for trial.”
The court first rejected Tropicpak’s ambiguity
argument, finding that the clause was not so ambiguous
that it was subject to more than one reasonable
interpretation. The court next rejected the overreaching
and fraud arguments, holding that because the parties
conducted businesses in an arms-length transaction, the
presumption arose that Tropicpak read and agreed to all
of the clauses contained in the contract.
The court also rejected Tropicpak’s argument that
litigating the case in <strong>Texas</strong> served the public interest
because Illinois was not a “remote alien forum” and
Tropicpak could have foreseen the need to litigate disputes
arising out of the IPA contracts in Illinois. Finally, the
court found that enforcement of the clause would not
deprive Tropicpak of its day in court because Tropicpak
failed to prove that “special and unusual circumstances
developed after the contracts were executed and that
litigation in Illinois would now be so gravely difficult
and inconvenient that Tropicpak would for all practical
purposes be deprived of its day in court.”
Similarly, in a later, unrelated case, the <strong>Texas</strong> <strong>Supreme</strong>
<strong>Court</strong> held that a party need not specifically point
out a forum selection clause to the other contracting
party because “parties to a contract have an obligation
to protect themselves by reading what they sign and,
absent a showing of fraud, cannot excuse themselves”
from the obligations of the contract. In re Int’l Profit
Assocs., Inc., 286 S.W.3d 921 (Tex. 2009). The court
again emphasized that a party seeking to avoid a forum
selection clause bears the burden to prove the clause is
invalid for one of the four reasons outlined above.
In its recent cases considering the matter, the <strong>Texas</strong>
<strong>Supreme</strong> <strong>Court</strong> consistently demonstrated that it is
deadly serious about enforcing parties’ agreements that
establish the jurisdiction of certain courts to hear disputes
arising from the contract. Parties negotiating such
provisions can be confident that, absent certain specific
circumstances, <strong>Texas</strong> courts will enforce unambiguous
forum selection clauses.

Mandatory Medicare Reimbursement Statute Changes,
Claims Handling, and Management
by: Katherine A. Staton
3
Anyone handling a matter involving a claimant who
is either a Medicare beneficiary or is Medicare eligible
needs to pay close attention to the Medicare, Medicaid,
and SCHIP Extension Act (MMSEA), Section 111
(codified at 42 USC 1395y) (“The MMSEA Act”).
The MMSEA Act dramatically effects how claims are
handled and managed and could lead to significant
penalties and fines if it is not followed. Under The
MMSEA Act, everyone (the insurer, claimant, claimant’s
attorney, defense attorney, and even the physician)
involved in the settlement process shares equally in the
responsibility to make sure that Medicare is paid or
reimbursed. See 42 CFR 411.24(g).
A little history is helpful in understanding The
MMSEA Act. Medicare was originally passed in
1965 to provide federally-funded health insurance
for individuals over age 65, the
disabled, and people suffering
from end-stage renal disease.
In 1981, Congress enacted the
Medicare Secondary Payer Act
(the “MSP”), which established
Medicare as the “secondary payer”
for services provided to a Medicare
or a Medicare-eligible claimant if
there was a “primary payer” such
as a group health insurance plan,
worker’s compensation insurance, or other insurance
or entity that provided insurance or coverage for the
claimant. This was Congress’s first attempt to provide
Medicare with reimbursement for services and care
provided by another primary payer. Until the passage
of The MMSEA Act in 2007, enforcement of the MSP
was not effective. The passage of The MMSEA Act
provides fines and penalties, putting real teeth into
Congress’s intent to have Medicare reimbursed when
there is a primary payer responsible for any care of health
care payments made to Medicare-eligible claimants.
A few key concepts are important to understand
The MMSEA Act. First of all, The MMSEA Act does
not apply to Medicaid claimants (although Medicaid
is encompassed within the title of The MMSEA Act).
Second, The MMSEA Act is a Medicare enforcement
collection act and affects any claimant who is Medicare
eligible. Medicare is to be notified any time its secondary
status comes into play, and the Centers for Medicare/
Medicaid Services (“CMS”) provide the recording and
collection process. Medicare has a statutory claim as
opposed to a lien, and Medicare is not required to give
any individual or entity in the claims or settlement
process notice before the fines and penalties apply.
In effect, The MMSEA Act insures that Medicare’s
interests are protected when a settlement is agreed to
or a judgment is obtained, and The MMSEA Act will
significantly slow down the settlement process and
could create future liability for non-compliance against
all parties in the litigation of the claim.
Who is Medicare eligible?
Eligible individuals include (1)
those 65 years or older; (2) those
on Social Security Disability
for 24 months or longer; and
(3) those individuals suffering
from end-stage renal disease.
Discovery, whether informally or
formally, is absolutely necessary
to determine if the claimant is
Medicare eligible. If the claimant
is not Medicare eligible, but there
is evidence that a claimant might become Medicare
eligible, monthly CMS queries will need to be run to
determine a claimant’s eligibility status. If a claimant
is Medicare eligible and a claim needs to be reported,
CMS will provide a health ID number to be used on
future electronic reporting.
An insurance liability plan or self-insurer is a
“primary payer” under The MMSEA Act if it has or
had a responsibility to make a payment to a Medicareeligible
claimant with respect to all or part of the
medical care or service at issue in the litigation or claim.
A primary payer’s responsibility for such a payment
might be evidenced by a settlement, a judgment, or a
conditional payment. Responsible reporting entities
(“RREs”), which include liability insurance plans, group
health plans, no-fault insurance plans, and worker’s
compensation plans, will be required to report directly
Continued on Page 4
See more Aviation articles at www.jw.com/publications.

Claims-Made Policies Continued 4
In Prodigy Communications, the <strong>Court</strong> held that “[i]n a claims-made policy, when an insured notifies its insurer
of a claim within the policy term or other reporting period that the policy specifies, the insured’s failure to provide
notice ‘as soon as practicable’ will not defeat coverage in the absence of prejudice to the insurer.” 2009 WL 795530,
at *7. Prodigy involved a claims-made policy with a notice provision requiring that the insured “as a condition
precedent” to its rights under the policy, give notice of a claim to its insurer “as soon as practicable..., but in no
event later than ninety (90) days after the expiration of the...Discovery Period.” Id. at *1, 3. Prodigy gave notice
of its claim before the ninety-day reporting deadline, but the insurer denied the claim alleging that the notice was
not given “as soon as practicable.” Id. at *1. The insurer admitted it was not prejudiced by the delayed notice. Id.
The <strong>Court</strong> concluded that Prodigy’s alleged failure to give notice “as soon as practicable” was immaterial because
it did not interfere with the inherent benefit of a claims-made policy of allowing an insurer “to close its books on a
policy at its expiration and thus to attain a level of predictability unattainable under standard occurrence policies.”
Id. at *6.
In conclusion, PAJ, Financial Industries, and Prodigy Communications all demonstrate the <strong>Texas</strong> <strong>Supreme</strong> <strong>Court</strong>’s
seemingly pro-insured trend.
to CMS as to potentially eligible Medicare claimants and any related settlement, judgment, award, or payment to
a Medicare beneficiary.
Key timelines for The MMSEA Act are as follows:
• May 1, 2009 to September 30, 2009 – RREs electronically register with CMS
• July 1, 2009 – RREs must track claims involving ongoing medical payments
• January 1, 2010 – Reporting Claims
If a settlement, payment, or judgment is below $5,000 for 2010, $2,000 for 2011, or $600 for 2012, no RRE
reporting to CMS is necessary. RREs are required to report settlements, awards, and judgments within a sevenday
quarterly-assigned period; failure to report during this window could result in a $1,000 per day fine. Failure
to timely pay Medicare may result in double recovery of the amount of Medicare primary damages as the statute
requires reimbursement within 60 days of the primary payment. 42 CFR § 411.24(h). Lastly, The MMSEA Act
creates a private cause of action for the government or the claimant and double recovery as damages if CMS is not
properly reimbursed or the claimant’s benefits are improperly affected.
Summary:
Statute Changes Continued
The practical effects of The MMSEA Act may mean that nuisance value personal injury lawsuits are a thing of
the past. Additionally, The MMSEA Act might require insurance representatives and attorneys to work with pro se
Medicare-eligible claimants to resolve the claim and insure that Medicare is reimbursed. Hardship petitions may
be asserted for unrelated medical-expense challenges or procurement costs (attorney fees) to reduce the amount
owed to Medicare.
This article is a very brief overview of The MMSEA Act. Jackson Walker has made presentations to various
clients addressing The MMSEA Act’s requirements and the related claims handling issues. If you are interested in
having Jackson Walker’s Aviation Team address any of these issues, please contact us.

Jackson Walker Aviation Partners
5
Brad Brown
bbrown@jw.com
214.953.5819
Leonard Hoffman
lhoffman@jw.com
214.953.5823
David Moran
dmoran@jw.com
214.953.6051
Bob Ruckman
rruckman@jw.com
214.953.6024
Katherine Staton
kstaton@jw.com
214.953.6015
Jim Struble
jstruble@jw.com
214.953.5670
About the Authors
Andrew D. Graham
901 Main Street . Suite 6000 . Dallas . 214.953.5949 . agraham@jw.com
Andrew D. Graham is an associate in the Litigation section of Jackson Walker. Mr. Graham’s practice
principally focuses on complex litigation in both trial and appellate courts. He was named by <strong>Texas</strong>
Monthly magazine as a “Rising Star” in the <strong>Texas</strong> legal community in 2007-2009.
Mr. Graham received his B.A. degree, summa cum laude, from Southern Methodist University, where
he was inducted into Phi Beta Kappa and the Hyer Society. He received his M.A. degree from the
University of Chicago, M.St. from Oxford (Oriel College), and his J.D. degree from The University of
<strong>Texas</strong> School of Law.
Melanie A. Spriggs
901 Main Street . Suite 6000 . Dallas . 214.953.6053 . mspriggs@jw.com
Melanie A. Spriggs is an associate in the Litigation section of Jackson Walker.
Ms. Spriggs received her A.B. degree, magna cum laude, from Bowdoin College and her M.S.W. degree,
with honors, from The University of <strong>Texas</strong> at Austin. She received her J.D. degree, magna cum laude,
from Southern Methodist University Dedman School of Law, where she was Order of the Coif, worked
for the SMU Law Review, and was Managing Editor of the Journal of Air Law and Commerce.
Katherine A. Staton
901 Main Street . Suite 6000 . Dallas . 214.953.6015 . kstaton@jw.com
Katherine A. Staton’s concentration in aviation law has afforded her the opportunity to work on
numerous aviation cases, including cases involving major air carriers, general aviation aircraft, military
accidents, pilot-error accidents, mid-air collisions, air traffic controller cases, class actions, and products
liability cases. Ms. Staton is included in the Aviation chapter of Who’s Who Legal: <strong>Texas</strong> 2007.
Ms. Staton received her B.B.A. degree, graduating cum laude, in Accounting from St. Mary’s University
of San Antonio and her J.D. degree from Southern Methodist University. During her tenure at S.M.U.,
Ms. Staton was a staff member and Citations Editor of the Journal of Air Law & Commerce.
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