United States: Pitzer College v. Indian Harbor Insurance Company

(September 2019) -  In Pitzer College v. Indian Harbor Ins. Co., ___ Cal 5th ______ (August 29, 2019), the California Supreme Court answered a certified question from the United States Ninth Circuit Court of Appeals relative to whether the "notice - prejudice rule" constitutes a fundamental public policy under California law, negating a choice of law provision in an insurance policy. In addition, the California Supreme Court held that the notice-prejudice rule applies to consent clauses in first party insurance policies.

The questions answered by the California Supreme Court relate to a coverage dispute between the Claremont University Consortium ("CUC") and Indian Harbor Insurance Company ("Indian Harbor") in connection with a claim for reimbursement of remediation and cleanup costs incurred with respect to the removal of pollutants from a construction site on the Pitzer College ("Pitzer") campus located within the CUC.

On January 10, 2011, Pitzer discovered darkened soils at the construction site for a new dormitory on campus. By January 21, 2011, Pitzer determined that remediation would be required. With pressure to complete the dormitory prior to the start of the 2012 – 2013 academic year, Pitzer conferred with environmental consultants who determined that the least expensive and most expeditious option was to remove lead from the soil on-site using a transportable treatment unit ("TTU "). Pitzer reserved one of the two TTUs that were licensed for use in Southern California and began the treatment process. Remediation work commenced on March 9, 2011 with the setup of the TTU and was completed one month later at a total cost of $2 million.

Pitzer did not obtain Indian Harbor's consent before commencing the remediation or paying remediation costs. Pitzer did not place Indian Harbor on notice of the remediation claim until July 11, 2011, approximately 3 months after it completed remediation and six months after it discovered the darkened soils.

The Indian Harbor policy contain three provisions at issue in connection with Pitzer's claim for reimbursement of remediation costs. The supreme court described these provisions as follows:

The Policy contains three provisions pertinent to our review. First, a notice provision requires 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." Second, a consent provision requires Pitzer to obtain Indian Harbor's written consent before incurring expenses, making payments, assuming obligations and/or commencing remediation due to a pollution condition. Pursuant to an emergency exception to this consent provision, however, if Pitzer incurs costs "on an emergency basis where any delay . . . would cause injury to persons or damage to property to any [pollution condition]", then Pitzer is not required to obtain Indian Harbor's prior written consent, but it is required to notify Indian Harbor "immediately thereafter". Third, a choice of law provision states that New York law governs all matters arising under the Policy.

Based on the above provisions, Indian Harbor declined coverage of Pitzer's claim for reimbursement of remediation costs. Thereafter, Pitzer sued Indian Harbor in Los Angeles County Superior Court. Such suit was removed by Indian Harbor to the United States District Court. Subsequently, the district court held that potential coverage was not afforded under the Indian Harbor policy for Pitzer's remediation claim. The district court based its decision on the choice of law provision in the policy requiring application of New York law. Such law includes a strict no-prejudice rule with respect to policies issued and delivered outside of New York. Applying the strict no-prejudice rule, the district court held that Pitzer's delay in notifying Indian Harbor of the remediation of the site until after it had been completed violated the notice provision in the Indian Harbor policy and also violated the consent provision in such policy.

Thereafter, Pitzer appealed the district court's decision to the Ninth Circuit Court of Appeals, which in turn, certified questions to the California Supreme Court addressing the notice-prejudice rule and application of the consent clause in the Indian Harbor policy.

The California Supreme Court held that the notice-prejudice rule constituted a fundamental public policy. As such, the choice of law clause in the Indian Harbor policy conflicted with the fundamental public policy of California. The California Supreme Court reasoned as follows in connection with determining that the notice-prejudice rule constituted a fundamental public policy:

The first reason for establishing the notice-prejudice rule as a fundamental policy of our state is that notice-prejudice rule cannot be contractually waived and, thus, restricts freedom of contract. When it applies, the rule prevents enforcement of a contractual term. It overrides the parties' express intentions for a defined notice term, preventing a technical forfeiture of insurance benefits unless the insurer can show it was prejudiced by the insured's late notice

. . .

Second, the notice-prejudice rule protects insureds against inequitable results that are generated by insurers' superior bargaining power. We have consistently recognized that insurance contracts typically are "inherently unbalanced" and "adhesive", which "places the insurer in a superior bargaining position." (Egan v. Mutual of Omaha Ins. Co., (1979) 24 Cal.3d 809, 820; see Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 930, 494 ["A fundamental disparity exists between the insured, which performs its basic duty of paying the policy premium at the outset, and the insurer, which, depending on a number of factors, may or may not have to perform its basic duties of defense and indemnification under the policy"].

. . .

The third criterion for establishing a fundamental policy is also satisfied in this case: The notice-prejudice rule promotes objectives that are in the general public's interest because it protects the public from bearing the costs of harm that an insurance policy purports to cover. (Campbell, supra, 60 Cal.2d at p. 306.) Where California has an important interest at stake, there is no reason why that interest is any less valid or worthy of consideration because it was developed in court decisions and not by legislative action.

. . .

Based on the foregoing reasoning, we conclude that California's notice-prejudice rule is a fundamental public policy of California. The rule is based on the rationale that the essential part of the contract is insurance coverage, not the procedure for determining liability, and that "'the notice requirement serves to protect insurers from prejudice,. . . not . . . to shield them from their contractual obligations' through "'a technical escape-hatch.'""

In addition, the California Supreme Court held that the notice - prejudice rule applies to consent provisions in first party policies. The supreme court declined to determine whether the Indian Harbor Policy constituted a first or third party policy. However, the supreme court reasoned as follows in connection with applying the notice-prejudice rule to first party policies:

No California court has addressed whether the notice-prejudice rule should be extended to a consent provision in the context of first party coverage. In a true first party context, there is no claim of liability for the insurer to defend and hence no logical need for it to retain unimpaired control over the claims handling. Thus, the reasons courts have refused to apply the notice-prejudice rule to consent provisions in third party policies generally do not apply to first party overage. Primarily, in a first party policy, the insurer's duty to defend and settle potential claims is not crucial to its coverage obligations. Compared with third party coverage, the insurer simply does not exercise the same contractual control over the potential loss or occurrence, which can happen long after the policy period has expired. (Montrose, supra, 10 Cal.4th at p.663)

For these reasons, failure to obtain consent in the first party context is not inherently prejudicial, and the usual logic of the notice-prejudice rule should control, in the absence of a coverage requirement for a third party claim or potential claim. Where the insurer owed no duty to defend against third party claims, the insured's failure to seek the insurer's consent to remediate a loss implicates risks that, while perhaps different in degree, are not so dissimilar to those in failing to provide notice of a loss to warrant departure from a case-by-case analysis of prejudice. For these reasons, we hold that California's notice-prejudice rule is applicable to a consent provision in a first party policy where coverage does not depend on the existence of a third party claim or potential claim.

While the California Supreme Court held that the notice - prejudice rule applied to consent provisions in first party policies, it specifically held that such rule does not apply to voluntary payments clauses in third-party policies.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Lewis Brisbois Bisgaard & Smith LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Lewis Brisbois Bisgaard & Smith LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions