California’s common law “notice-prejudice” rule is a fundamental public policy for purposes of choice of law analysis, and the rule applies to consent provisions in first-party insurance policies but not to consent provisions in third-party policies. (Pitzer College v. Indian Harbor Ins. Co. (2019) 33 Cal.App.5th 976)
Facts
Pitzer College (Pitzer) purchased an insurance policy from Indian Harbor Insurance Company (Indian Harbor) to cover Pitzer for legal and remediation expenses resulting from pollution conditions discovered during the policy period of July 23, 2010 to July 23, 2011. The policy contained a “notice” provision requiring Pitzer to provide oral or written notice of any pollution condition to Indian Harbor and, in the event of oral notice, to “furnish … a written report as soon as practicable.” The policy also contained a “consent” provision requiring Pitzer to obtain Indian Harbor’s written consent before incurring expenses or commencing remediation due to a pollution condition, except if done on an “emergency basis.” Last, the policy contained a “choice of law” provision stating that New York law would govern all matters under the policy.
On January 10, 2011, Pitzer discovered darkened soil at the construction site for a new dormitory on campus. By January 21, 2011, Pitzer determined that there was lead in the soil and that remediation was required. Under pressure to complete the dormitory, Pitzer conferred with environmental consultants and developed a remediation plan. In March 2011, the remediation work was started, and in April 2011, the remediation work was successfully completed at a cost of almost $2 million. Pitzer did not obtain Indian Harbor’s consent before commencing remediation or paying remediation costs.
In July 2011, Pitzer notified Indian Harbor of the remediation. Indian Harbor denied coverage based on Pitzer’s failure to give notice as soon as practicable and Pitzer’s failure to obtain Indian Harbor’s consent before commencing remediation.
Pitzer filed a breach of contract action against Indian Harbor in California state court. Indian Harbor removed the case to federal court and moved for summary judgment, claiming that it had no obligation to indemnify Pitzer for the remediation costs because Pitzer had violated the policy’s notice and consent provisions. The federal district judge concluded that: (1) New York law applied; (2) under New York law, the policy was subject to a strict “no-prejudice” rule which allowed Indian Harbor to deny coverage merely by showing that Pitzer failed to comply with the policy’s notice provision, without having to show that Indian Harbor suffered prejudice; and (3) Pitzer had also failed to comply with the policy’s consent provision. The district court thus granted Indian Harbor’s motion for summary judgment.
Pitzer appealed that ruling to the Ninth Circuit Court of Appeals. During the pendency of the appeal, the Ninth Circuit asked the California Supreme Court to review: (1) whether California’s “notice-prejudice” rule is a fundamental public policy for the purpose of choice of law analysis; and (2) if so, whether the notice-prejudice rule applies to the consent provision of the Indian Harbor policy. The California Supreme Court agreed to review those issues.
Holding
The California Supreme Court began by noting that California courts generally enforce a contractual choice of law provision unless the parties’ choice of law is contrary to a “fundamental public policy” of California and California has a “materially greater interest” than the chosen state in the determination of the issue. The Supreme Court then emphasized that under California’s notice-prejudice rule, an insurer cannot deny coverage based on an insured’s failure to comply with a notice provision unless the insurer was “substantially prejudiced” by the late notice. After examining the reasons for the notice-prejudice rule, the Supreme Court concluded that the notice-prejudice rule is indeed a fundamental public policy of California. The Supreme Court left it for the Ninth Circuit to decide whether California has a materially greater interest than New York in determining the coverage issue (such that the insurance policy’s choice of law provision would be unenforceable as contrary to California public policy).
The Supreme Court next held that the notice-prejudice rule that applies to notice provisions also applies to consent provisions in first-party policies but not to consent provisions in third-party policies. In so holding, the Supreme Court distinguished between a true first-party case (in which there is no claim of liability against the insured and hence no need for the insurer to have complete control of the claim handling) and a third-party case (in which there is a claim of liability against the insured and hence a need for the insurer to have unimpaired control of the claim handling). Here, Pitzer and Indian Harbor disputed whether the subject policy should be considered a first-party policy (to which the notice-prejudice rule would apply) or a third-party policy (to which the notice-prejudice rule would not apply). The Supreme Court concluded that the Ninth Circuit would have to decide that issue.
Comment
The genesis of this case was the insurance policy’s choice of law provision, which stated that New York law should govern all issues arising under the policy. The Supreme Court’s opinion provides a good summary of how California courts should determine whether to enforce a contractual choice of law provision that calls for application of another state’s law.
Beyond that, the opinion provides a good overview of California’s notice-prejudice rule, which requires an insurer to prove that the insured’s late notice of a claim has substantially prejudiced the insurer’s ability to investigate and resolve the insured’s claim. The upshot of this case is that, under California law, the notice-prejudice rule applies to: (1) notice provisions in general; and (2) consent provisions in first-party policies, but not consent provisions (aka “no voluntary payment” provisions) in third-party policies.