United States: Pitzer College v. Indian Harbor Insurance Company

In Pitzer College v. Indian Harbor Ins. Co., 845 F.3d 993 (9th Cir. January 13, 2017), the United States Ninth Circuit Court of Appeals certified the following questions to the California Supreme Court:

  1. Is California's common law notice-prejudice rule a fundamental public policy for the purpose of choice-of-law analysis? May common law rules other than unconscionability not enshrined in statute, regulation, or the constitution, be fundamental public policies for the purpose of choice-of-law analysis?
  2. If the notice-prejudice rule is a fundamental public policy for the purpose of choice-of-law analysis, can a consent provision in a first-party claim insurance policy be interpreted as a notice provision such that the notice-prejudice rule applies?

The above questions arose out of a coverage dispute under a first party property policy affording coverage for remediation expenses caused by pollution–related damage. The policy provided that New York law governed any issues with respect to interpretation of the policy.

On January 10, 2011, Pitzer College became aware of darkened soils at the construction site for a new dormitory. By January 21, 2011, Pitzer determined that remediation would be required. After assessing its options, Pitzer secured one of two Transportable Treatment Units ("TTU") located in Southern California to remediate the soils. The remediation treatment was successful and Pitzer completed the dormitory a few days before the students' move-in date. Pitzer submitted a claim for reimbursement of the remediation costs to Indian Harbor Insurance Company ("Indian Harbor") under the first party pollution coverage. The Indian Harbor policy contained a notice provision requiring Pitzer to provide Indian Harbor with notice of any condition requiring remediation. In the section describing reporting, this policy contained a consent provision stating that Indian Harbor would not cover any expenses Pitzer incurred for remediation without first obtaining Indian Harbor's consent. The consent provision included an exception for emergencies, but required Pitzer to notify Indian Harbor "immediately thereafter" it incurred any emergency expenses.

Notwithstanding that Pitzer had cleaned up the dormitory site in January, 2011, it did not inform Indian Harbor of the remediation until July 11, 2011, approximately three months after it completed remediation and six months after it discovered the darkened soils. In addition, Pitzer failed to secure Indian Harbor's consent before commencing remediation or paying remediation costs. On August 10, 2011, Indian Harbor acknowledged receipt of Pitzer's notice of remediation. On March 16, 2012, Indian Harbor denied coverage on the basis of Pitzer's late notice and its failure to obtain Indian Harbor's consent. Thereafter, Pitzer filed a declaratory relief and bad faith action against Indian Harbor in Los Angeles County Superior Court which was subsequently removed to federal court by Indian Harbor.

Subsequently, Indian Harbor filed a motion for summary judgment arguing that coverage was not afforded under its policy based on Pitzer's failure to notify it of the soil contamination and failure to secure consent before remediating the soil at the site. In response, the District Court entered summary judgment in favor of Indian Harbor. In particular, the District Court held that Pitzer's failure to secure Indian Harbor's consent for remediating the soil barred coverage under the policy. Thereafter, Pitzer filed an appeal in the United States Ninth Circuit Court of Appeals.

In certifying the questions regarding the notice-prejudice rule to the California Supreme Court, the Ninth Circuit reasoned as follows:

These questions involve issues of significant importance to the state. Kremen v. Cohen, 325 F.3d 1035, 1037 (9th Cir. 2003). In an amicus brief to the United States Supreme Court, the Council of State Governments emphasized the "integral" policy behind California's notice-prejudice rule. Br. for Council of State Governments, et al. as Amici Curiae Supporting Respondents, UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358 (1999) (No. 97-1868), 1999 WL 9773, at *3. Moreover, numerous California insurance contracts contain choice-of-law decisions and the resolution of these questions will apply to insureds throughout the state.

The following is a summary of the relevant case law and the parties' arguments with respect to these questions.

Under California common law, the notice-prejudice rule provides that an insurer must show that it was prejudiced by late notice in order for a notice clause in the policy to bar coverage. Clemmer v. Hartford Ins. Co., 587 P.2d 1098, 1106 (Cal. 1978). Under California choice-of-law analysis, the parties' contractual choice of law governs unless it conflicts with a fundamental public policy of California, and California has a greater interest than the chosen state in the determination of the particular issue. Nedlloyd Lines B.V. v. Super. Ct., 834 P.2d 1148, 1151, 1155 (Cal. 1992) (citing Restatement (Second) of Conflict of Laws § 187 (Am. Law Inst. 1971)). The California Supreme Court has not yet stated whether the notice-prejudice rule is a fundamental public policy.

Pitzer argues that the notice-prejudice rule is a fundamental public policy. California and federal courts have generally recognized the importance of the notice-prejudice rule. See, e.g., Ward, 526 U.S. at 372; Campbell v. Allstate Ins. Co., 384 P.2d 155, 157 (Cal. 1963). But none have done so in the choice of law context.

Indian Harbor argues that the notice-prejudice rule is not a fundamental public policy of California. First, citing Nedlloyd, Indian Harbor argues that a rule cannot be fundamental public policy unless established by the constitution, a statute, or it is related to a "principle of contractual unconscionability." 834 P.2d at 1153, 1155. It is unclear whether California law requires that a rule be statutory, constitutional, or related to unconcsionability in order to constitute a fundamental public policy. See, e.g, Clemmer, 587 P.2d at 1106; Restatement (Second) of Conflicts of Law § 187 cmt. g.

Indian Harbor also argues that the notice-prejudice rule cannot be fundamental because California law recognizes exceptions for claims-made policies, time-limited reporting policies, policies with statutes of limitations, and policies with consent provisions. See Burns v. Int'l Ins. Co., 929 F.2d 1422, 1425 (9th Cir. 1991) (explaining that California's notice-prejudice rule does not apply to claims-made policies which "reduce[ ] the potential exposure of the insurer and [are] therefore less expensive to the insured"); Venoco, Inc. v. Gulf Underwriters Ins. Co., 96 Cal. Rptr. 3d 409, 417 (Ct. App. 2009) (explaining that the notice-prejudice rule does not apply to time-limited reporting requirements because the rule "would expose [the insurer] to a risk broader than the risk expressly insured against in the policy" (emphasis omitted)); State Farm Fire & Cas. Co. v. Super. Ct., 258 Cal. Rptr. 413, 418 (Ct. App. 1989) (explaining the purposes behind statutes of limitations); Insua v. Scottsdale Ins. Co., 129 Cal. Rptr. 2d 138, 141 (Ct. App. 2002) (explaining that the notice-prejudice rule does not apply to consent provisions as their purpose is to provide the insurer the opportunity to control expenses).

With respect to the consent provision, Pitzer argues that its remediation fell under the emergency exception because it operated on a tight schedule and had a time-limited opportunity to utilize the only available TTU machine. Pitzer also argues that the consent provision should be interpreted as a notice provision because the Policy covers first-party claims. See Howard v. Am. Nat'l Fire Ins. Co., 115 Cal. Rptr. 3d 42, 70 (Ct. App. 2010) (explaining that first-party policies "obligate the insurer to pay damages claimed by the insured itself," while third-party policies "obligate the insurer to defend, settle, and pay damages claimed by a third party against the insured").

According to Indian Harbor, Pitzer's actions did not fall under the emergency exception to the consent provision, and even if they did, Pitzer failed to "immediately" notify the insurer of any emergency. In Jamestown Builders, Inc. v. General Star Indemnity Co., the California Court of Appeal held that the notice-prejudice rule does not apply to consent provisions. 91 Cal. Rptr. 2d 514, 519 (Ct. App. 1999). The Jamestown court, however, did not consider whether a consent provision in a first-party policy is analogous to a notice provision in a third-party policy, and therefore subject to the notice-prejudice rule.

Finally, Indian Harbor argues that the consent provision should not be interpreted as a notice provision because such an interpretation would render the provision redundant in violation of contract interpretation principles.

As of the date of publication of our newsletter, the California Supreme Court has yet to respond to the Ninth Circuit Court of Appeals request for certification of questions related to California's notice-prejudice rule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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