Pitzer College v. Indian Harbor Insurance Company, 8 Cal.5th 93 (Cal. Sup. Ct. 2019)
Issue Discussed: Notice
Submitted by Michele L. Jacobson, Beth K. Clark
Date Promulgated: August 29, 2019
Pitzer College v. Indian Harbor Insurance Company, 8 Cal.5th 93 (Cal. Sup. Ct. 2019)
Court: Supreme Court of California
Date Decided: August 29, 2019
Issues Decided: Whether California’s common law notice-prejudice rule is a fundamental public policy of the State of California such that a choice of law provision in an insurance policy which does not conform to that rule may be overridden?
If so, does the notice-prejudice rule apply to the consent provision of the insurance policy at issue?
Submitted by: Michele L. Jacobson Esq.[1] and Beth K. Clark Esq.[2]
In Pitzer College v. Indian Harbor Insurance Company, the California Supreme Court, held that (1) California’s notice-prejudice rule is a fundamental public policy of the state and, therefore, in coverage disputes in California regarding late notice, the choice-of- law provision in an insurance contract may be disregarded to ensure the rule is applied, and (2) the notice-prejudice rule generally applies to consent provisions in the context of first party liability coverage, but not to consent provisions in third party liability insurance contracts.
Effective July 23, 2019, Indian Harbor Insurance Company (“Indian Harbor”) issued an insurance policy (the “Policy”) which provided coverage to Pitzer College (“Pitzer”) for, inter alia, legal and remediation expenses resulting from pollution. Among the terms and conditions in the Policy was a notice provision which required Pitzer to provide Indian Harbor with oral or written notice of any pollution condition and, in the event of oral notice, “to furnish … a written report as soon as practicable”. The Policy also contained a consent provision, which required Pitzer to obtain Indian Harbor’s written consent before incurring expenses, making payments, assuming obligations and/or commencing remediation due to pollution. The Policy, however, also included an “emergency exception” to the consent provision, which authorized Pitzer to incur costs if a delay would cause injury to persons or damage to property or significantly increase the cost of responding to a pollution condition, without first obtaining Indian Harbor’s written consent. The Policy’s emergency exception required Pitzer to notify Indian Harbor “immediately” after incurring any such cost. Pitzer College, 8 Cal.5th at 98.
In March 2011, Pitzer incurred approximately $2 million in costs remediating darkened soil at a construction site for a new dormitory on its campus. Pitzer did not notify Indian Harbor regarding the remediation until July 11, 2011, approximately three months after performing the work and six months after discovering the darkened soil. Id. at 99.
On March 16, 2012, Indian Harbor denied coverage based on Pitzer’s failure to comply with the Policy’s notice and consent provisions. Pitzer thereafter sued Indian Harbor in Los Angeles County Superior Court for declaratory relief and breach of contract. Indian Harbor removed the case to federal court and moved for summary judgment on the grounds that it lacked a contractual obligation to indemnify Pitzer for the remediation costs based on Pitzer’s failure to provide timely notice and obtain consent before remediating. Id.
The United States District Court for the Central District of California granted Indian Harbor’s summary judgment motion. In so doing, the district court held that New York law applied pursuant to the Policy’s choice of law provision and, although fundamental public policy of the state can override a choice of law provision, Pitzer had not established that California’s notice-prejudice rule was such a policy. Applying New York law – which imposes a strict no-prejudice rule on policies delivered outside of New York – the district court ruled in Indian Harbor’s favor, ruling that Pitzer had failed to provide the contractually required notice. The district court also noted that, had New York law been different, Indian Harbor would have lost its motion because it could not establish prejudice. The district court also held that Pitzer had failed to comply with the Policy’s consent provision, rejecting Pitzer’s attempt to invoke the emergency exception to that provision. Notably, while Pitzer had separately argued that the notice-prejudice rule should apply to the consent provision, the district court did not address this argument. Id. at 99-100.
Pitzer appealed the district court’s decision to the United States Court of Appeals for the Ninth Circuit. After oral argument, the Ninth Circuit certified questions of California law to the California Supreme Court, stating that “[r]esolution of this appeal turns on whether California’s notice-prejudice rule is a fundamental public policy for the purpose of choice-of-law analysis. If the California Supreme Court determines that the notice-prejudice rule is fundamental, the appeal then turns on whether, in a first party policy like Pitzer’s, a consent provision operates as a notice requirement subject to the notice-prejudice rule.” Id. at 100.
The California Supreme Court held that the “crux of this case lies in the choice of law provision designating that New York law should govern all matters arising under the Policy.” Id. The Court explained that, under California law, the parties’ choice of law governs unless (1) it conflicts with the state’s fundamental public policy; and (2) the state has a materially greater interest in the determination of the issue than the contractually chosen state. Here, the California Supreme Court held that the notice-prejudice rule is a fundamental public policy of the state of California. The Court arrived at this conclusion because the notice-prejudice rule (i) cannot be contractually waived and therefore restricts the freedom of contract; (ii) protects insureds against inequitable results caused by an insurer’s superior bargaining power; and (iii) increases the likelihood that an insurer, rather than the public, will pay costs of harm, which is in the general public interest. Id. at 100-105.
After holding that the notice-prejudice rule was fundamental public policy in California, the California Supreme Court stated that it would not decide whether California has a materially greater interest than New York in determining coverage; that would be left to the Ninth Circuit. Id. at 105.
The Court then turned to whether the Policy’s consent provision was subject to the notice-prejudice rule. The Court ruled that the purposes of the consent provision – preventing an insured from making unnecessary expenditures, allowing the insurer to approve and control costs, and protecting an insurer’s subrogation rights – were akin to the purposes of a notice provision. Both provisions were included in insurance contracts to assist the insurer in performing its primary contractual obligations, but they did not constitute primary contractual obligations. Therefore, the Court held, “the notice-prejudice rule makes good sense for consent provisions in the first party policies just as it does for notice provisions.” The Court, however, ruled that a consent provision or “no voluntary payment provision” in a third party policy serves a different purpose (i.e., protection of the insurer’s right to control the defense and settlement of claims, which is fundamental to the insurer’s primary contractual obligations) and, therefore, is not subject to the notice-prejudice rule. Moreover, the Court held that the notice-prejudice rule would only apply in the first party context where coverage does not depend on the existence of a third party claim or potential claim. Id. at 106-109.
Finally, vis-à-vis the Policy, the Court held that it could not decide whether the notice-prejudice rule applied to the Policy’s consent provision because a dispute existed as to whether the Policy provided first or third party coverage. The court concluded that deciding that dispute was beyond the scope of the Ninth Circuit’s certified questions. Therefore, it left that decision to the Ninth Circuit. Id. at 109-110.
[1] Michele L. Jacobson is a partner in the litigation department and member of the Executive Committee of Stroock & Stroock & Lavan, L.L.P. concentrating her practice on complex insurance and reinsurance matters in the property, casualty and life insurance fields. She has represented clients in a wide array of disputes involving issues of misrepresentation, coverage, standard-of-conduct, broker negligence, underwriting and claims handling, YRT rate increases and insurance regulatory issues. Ms. Jacobson regularly appears in state and federal courts, as well as before arbitration Panels throughout the country.
[2] Beth K. Clark is Special Counsel in the litigation department of Stroock & Stroock & Lavan, L.L.P., concentrating her practice on insurance and reinsurance litigation and arbitration. Ms. Clark has represented ceding companies, reinsurers, retrocessionaires, intermediaries and liquidators in a wide variety of matters in federal and state court and before arbitration panels. These disputes have involved, inter alia, property, casualty and life insurance issues such as YRT rate increases, allocation of loss, broker negligence, misrepresentation, coverage, underwriting and claims handling, as well as insurance regulatory issues.
