California Supreme Court and the Notice-Prejudice Rule
On August 29, 2019 the California Supreme Court, in Pitzer College v. Indian Harbor Ins. Co., S239510 ruled, in a case where the US Court of Appeals, 9th Circuit, requested an advisory opinion, that in a First Party coverage policy: (1) the Notice-Prejudice Rule is a “fundamental public policy of California” and (2) the Notice-Prejudice Rule applies to the Consent Provisions of a First Party policy.
The Supreme Court defined the Notice-Prejudice Rule as follows:
“California’s notice-prejudice rule generally allows insureds to proceed with their insurance policy claims even if they give their insurer late notice of a claim, provided that the late notice does not substantially prejudice the insurer.” (Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303, 307 (Campbell).)
In this case, the Insurance Contract provided for the application of NY law. Critical factual issues in the case involved the insured failing to give prompt notice of a pollution problem on the insured’s property and the failure to give notice of the insured’s actions in cleaning up the issues, then requesting reimbursement of the costs. NY law does not contain a Notice-Prejudice Rule for policies sold outside of NY, so failure to give notice by the insured was a winning argument for the insurer. However, if the NP Rule was a fundamental public policy of California, the Conflict of Law rules required that the Court determine that “California has a materially greater interest in the determination of the issue than the contractually chosen state.” Restatement Second of Conflict of Laws (sec. 187); Nedlloyd Lines B.V. v. Superior Court (1992) 3 C. 4th 459, 464-466.
Since the California Supreme Court determined that the Notice-Prejudice Rule was a fundamental public policy of California, the Court left it up to the 9th Circuit to decide whether California has a materially greater interest in the determination of the issue than NY. Washington Mutual Bank v. Superior Court, (2001) 24 C. 4th 906. As a matter of observation, one of the factors involved in determining whether the NP Rule is fundamental policy of California is whether is serves to protect the state’s public and consumers. The insured in this case is a local California educational college, the pollution issue that needed cleaning was in California, and the economic impact of failure to clean it up would be felt in California, not NY. This issue will be decided by the 9th Circuit Court of Appeals.
Court’s ruling on the second issue
The Court’s ruling on the second issue involving the consent clause was a matter that had not been decided before in California. The Consent clause in a policy basically requires the insured to get the consent of the insurer before any costs, charges or expenses are incurred with respect to the matter involving the insurance. The court’s analysis basically indicated that the issues involving giving Notice of the Claim, in the First Party context, required that delayed notice be prejudicial to the insurer before the insurer could refuse coverage based on delay in presenting notice. It then went on to hold that the same issues dictated that the same rule should apply to the Consent Clause in a First Party policy. However, it distinguished the Third Party Policy (Liability type policy) and noted that the Notice-Prejudice Rule did not apply to the Consent provisions of such policies, relying on the difference in duties of defense and control the Insurer asserts over the third party claims, and how an insured trying to, or settling, a third party claim without notifying the insurer would be destructive of the claims process and interfere with the Insured’s duties under the policy. The court clearly indicated there was a substantive reason for the distinction.
Thus, if the Policy in this case was a Third Party Policy, California would have no conflict with NY law since neither California or NY (in this context) applied a Notice-Prejudice Rule to the Consent clause. Only if the Policy was a First Party Policy would a conflict arise.
California Supreme Court
This distinction really became critical to the case when the court then looked at the policy language in the case and said it was for the 9th Circuit to decide whether this policy was a First Party policy or a Third Party policy. The Court’s opinion set forth the insuring language which read as follows:
“The Policy’s insuring provisions are written in two parts: Section I.B. of the Policy describes the Insuring Agreement with respect to remediation liability, reads as follows: ‘The Company will pay on behalf of the INSURED for REMEDIATION EXPENSE and related LEGAL EXPENSE resulting from any POLLUTION CONDITION on, at, under or migrating from any COVERED LOCATION:
- for a CLAIM first made against the INSURED during the POLICY PERIOD which the insured has or will become legally obligated to pay; or
- that is first discovered during the POLICY PERIOD, provided that the INSURED reports such CLAIM or POLLUTION CONDITION to the Company, in writing, during the POLICY PERIOD or, where applicable, the EXTENDED REPORTING PERIOD.’ “
It then set forth the arguments of the parties:
“Pitzer argues that section 1.B.2 provides first party liability coverage. Pitzer points out that the insurer in part 1.B.2 is arguably promising to pay money to the insured upon the happening of an event that the insured itself discovers—and the typical claims-made third party policy does not have a ‘discovery requirement as a prerequisite of triggering coverage‘. (Montrose, supra, 10 Cal.4th at p. 664.) Indian Harbor asserts, to the contrary, that sections 1.B.1 and 1.B.2 do not provide coverage for true first party remediation, in part because the policy defines ‘Remediation Expense’ as an ‘expense incurred to abate a pollution condition to the extent required by federal, state, or local laws’ or by ‘a legally executed state voluntary program’ for cleaning up a pollution condition’.”
The terminology of section 1.B.1 does not seem to be in dispute in that it clearly references third party claims against the insured. Section 1.B.2, however, is not so clear. Does the fact that a governmental agency or law requires a condition on one’s own property be cleaned up in order to get a permit to build, or defines “Remediation” without a requirement that third party property is damaged, make it a Third Party policy? Section 1.B.2 seems to be a bit of a hybrid with respect to the First Party/Third Party concepts. Perhaps the way to resolve it is to apply the test the court used in deciding whether the failure to enforce the Consent Clause would interfere with the duties, obligations and responsibilities of the insurance carrier in the context of a coverage claim under Section 1.B.2. If ignoring the Consent Clause under the NP Rule would cause problems with respect to the insurer’s duties and obligations as described, Section 1.B.2 is more like a Third Party policy. If not, it is more like a First Party Policy. However, the entire Policy should be examined to properly analyze the issue. Or, if that does not resolve the matter, perhaps this is a situation where the issue, if not resolved by testimony, public policy analysis, or other rules of construction, will be decided by construing the ambiguity against the party that drafted the language.
Application of the Notice-Prejudice Rule
The application of the Notice-Prejudice Rule to the Consent Clause in First Party cases is potentially monumental now that the NP rule is declared a favored public policy of the state. Consider the fire cases that are pending in the State of California as a result of the last several years of horrific fires in Northern and Southern California and owners/insureds eager to rebuild. What about health insurance policies and the patient seeking treatment without early consent. The concept of prejudice will be the subject of substantial litigation in the future.