Earl Warren State Building, Califorinia State Supreme Court. (Photo: Jason Doiy/The Recorder)

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The Supreme Court of California has unanimously ruled that the common law notice-prejudice rule is a "fundamental public policy" in the insurance context in California and generally applies to consent provisions in first party liability insurance policies – but not to consent provisions in third party liability insurance policies.

The Case

On January 10, 2011, Pitzer College discovered darkened soils at the construction site for a new dormitory on campus. Within a few days, it determined that remediation was necessary.

It began remediation work in March and concluded it a month later, at a cost of nearly $2 million.

Pitzer had not obtained the consent of its insurer, Indian Harbor Insurance Company, before beginning remediation or paying for it.

Thereafter, Indian Harbor refused to cover those costs based on Pitzer's failure to give notice as soon as practicable and its failure to obtain Indian Harbor's consent before commencing the remediation process. Pitzer sued the insurer in California.

Indian Harbor moved for summary judgment.

The Indian Harbor policy designated that New York law governed all matters arising under the policy, and the district court held that New York law applied. It reasoned that although a state's fundamental policy could override a choice of law provision, Pitzer had "failed to establish" that California's notice-prejudice rule was such a policy.

(The notice-prejudice rule generally allows insureds to proceed with their insurance policy claims even if they gave their insurer late notice of a claim, provided that the late notice did not substantially prejudice the insurer.)

Applying New York law pursuant to the policy's choice of law provision, the district court concluded that summary judgment was warranted because Pitzer had not provided timely notice, as required by the policy's notice provision. The district court noted, however, that Indian Harbor would not have prevailed at summary judgment on this ground if it had been required to show prejudice.

Additionally, the district court held that summary judgment was separately warranted because Pitzer had not complied with the policy's consent provision. It rejected Pitzer's argument that its remediation costs were incurred on an emergency basis and, therefore, that it had not been required to obtain prior written consent pursuant to the policy's emergency exception to the consent provision. Even if the emergency exception did apply, the district court explained, Pitzer had failed to notify Indian Harbor "immediately" after it incurred its costs.

Pitzer appealed to the U.S. Court of Appeals for the Ninth Circuit, which asked the Supreme Court of California to decide whether California's common law notice-prejudice rule was a fundamental public policy for the purpose of choice of law analysis and, if so, if it applied to the consent provision in Indian Harbor's insurance policy.

The Supreme Court of California's Decision

The court concluded that California's notice-prejudice rule was a fundamental public policy of California in the insurance context and that it generally applied to consent provisions in the context of first party liability policy coverage but not to consent provisions in third party liability insurance policies.

In its decision, the court first ruled that the notice-prejudice rule was a fundamental policy of California because, among other things, it could not be contractually waived; it protected insureds against inequitable results generated by insurers' superior bargaining power; and it protected the public from bearing the costs of harm that an insurance policy purported to cover.

Next, the court held that California's notice-prejudice rule was applicable to a consent provision in a first party insurance policy where coverage did not depend on the existence of a third party claim or potential claim. The notice-prejudice rule, it said, made "good sense for consent provisions in first party policies." In the court's view, it was appropriate to require first party insurers to show prejudice where an insured failed to comply with a consent provision in its insurance policy.

The court then pointed out that California appellate courts generally had refused to find the notice-prejudice rule applicable to consent provisions in third party policies. It decided that whether Indian Harbor policy's coverage should be considered first party or third party for purposes of the notice-prejudice rule was beyond the scope of the questions the Ninth Circuit had asked it to consider, and it concluded that the Ninth Circuit had to determine what type of policy was at issue and whether the notice-prejudice rule applied to the policy's consent provision.

The case is Pitzer College v. Indian Harbor Ins. Co., No. S239510 (Cal. Aug. 29, 2019). Attorneys involved include: Murtaugh Meyer Nelson & Treglia, Murtaugh Treglia Stern & Deily, Michael J. Murtaugh, Lawrence J. DiPinto and Thomas N. Fay for Plaintiff and Appellant. Polsinelli, Richard C. Giller and Michelle Buckley for United Policyholders as Amicus Curiae on behalf of Plaintiff and Appellant. Duane Morris, Max H. Stern, Jessica E. La Londe and Katherine Nichols for Defendant and Respondent. Crowell & Moring, Laura A. Foggan and Michael Lee Huggins for Complex Insurance Claims Litigation Association and American Insurance Association as Amici Curiae on behalf of Defendant and Respondent.

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Mr. Meyerowitz is the Director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He may be contacted at smeyerowitz@meyerowitzcommunications.com.