California Supreme Court Unanimously Rules Late Notice Not a Bar to Insurance Claim

Continuing a trend towards “pro-policyholder” decisions, the California Supreme Court unanimously ruled on August 29th that it is a fundamental policy in the State that California policyholders may proceed with an insurance claim even if they give late notice, unless their insurer can prove substantial prejudice; a very high bar.

The California high court also held in Pitzer College v. Indian Harbor Insurance Co. that the late notice provision applies to policy provisions requiring written consent before incurring expenses. It is applicable only to first-party coverages.

The case involves a coverage dispute between Indian Harbor Insurance and Pitzer College in Claremont, California. Pitzer had purchased an insurance policy from Indian Harbor that covered the college for legal and remediation expenses resulting from pollution conditions discovered during the July 2010-July 2013 policy period. The policy provided that New York law applied—a common legal clause in many insurance contracts.

In January 2012, Pitzer discovered potentially contaminated soils at a construction site for a new campus dormitory and determined remediation would be required. Pitzer failed to place its insurance company on notice.

Pitzer’s environmental consultants said the cheapest and quickest option was to conduct lead removal on-site using a transportable treatment unit. They proceeded, at a total cost of $2 million. Again, without getting permission from Indian Harbor. Indian Harbor later claimed the remediation work could have been done at a cheaper cost.

Pitzer did not inform Indian Harbor of the remediation work until three months after it was completed and six months after it discovered the contaminated soil.

Indian Harbor denied coverage based on the college’s failure to give notice as required under the policy and its failure to obtain consent before beginning the remediation work. Pitzer filed suit against Indian Harbor, and the U.S. District Court in Los Angeles granted Indian Harbor’s motion for summary judgment on timing grounds.

The District Court held that New York law, which does not have a late notice provision, applied. It said, although a state’s “fundamental policy” can override a choice of law provision, Pitzer had failed to establish California’s notice-prejudice rule was such a policy. It also held summary judgment was warranted because Pitzer did not comply with the policy’s consent provision.

The case was appealed to the 9th U.S. Circuit Court of Appeals in San Francisco, which asked the California Supreme Court to decide whether the state’s notice-prejudice law is a fundamental policy. It also asked the Court to decide whether, if this is the case, the notice-prejudice rule applied to the consent provision.

The Supreme Court held that the policy is fundamental. The rule “protects insureds against inequitable results that are generated by insurers’ superior bargaining power,” said the decision. It said it also “protects the public from bearing the costs of harm that an insurance policy purports to cover.” It did not explicitly rule whether the notice-prejudice rule is applicable in this case.

The court said also said the notice-prejudice rule is applicable to the consent provision, but only applicable to first-party coverages.

There is a dispute in this case this case as to whether Indian Harbor’s policy provides first-party or third-party coverage. The court said it would leave it to the 9th Circuit to determine that issue.