Although California courts generally enforce an insurance policy’s choice of law provision, a long-recognized exception is when the other state’s law conflicts with California’s fundamental public policy. See, e.g. Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459 (1992). In a recent decision, Pitzer College v. Indian Harbor Insurance Company, S239510 (August 29, 2019), the California Supreme Court held that the notice-prejudice rule is a fundamental public policy that can override a conflicting choice of law provision.
California’s notice-prejudice rule generally allows an insurer to deny coverage based on late notice of the claim only if the insurer establishes substantial prejudice. Campbell v. Allstate Ins. Co. 60 Cal.2d 303, 307 (1963). In contrast, some states do not require a showing of prejudice. For instance, New York applies a notice-prejudice rule to policies issued or delivered in New York, but policies issued outside New York are subject to a no-prejudice rule. As a result, if New York law applies to a California-issued policy, the insurer would not be required to establish prejudice in order to deny a claim based on late notice. Because of issues like these, choice of law can sometimes be determinative of whether a claim is covered. In Pitzer, however, California’s high court has effectively ruled that a choice of law provision that conflicts with the notice-prejudice rule will likely not be enforceable.
In the Pitzer case, the insured, Pitzer College, had an insurance policy issued by Indian Harbor that covered legal and remediation expenses resulting from pollution conditions. Of relevance to this case, the policy required Pitzer to provide notice to Indian Harbor of any pollution condition. The policy also required Indian Harbor’s consent before incurring any expenses or beginning remediation. Additionally, the policy had a choice of law provision that provided that New York law would govern all matters arising under the policy.
In January 2011, Pitzer discovered a pollution condition that required remediation. It commenced remediation in March 2011, and it was completed one month later at a cost of $2 million.
Pitzer did not seek Indian Harbor’s consent before commencing remediation and, in fact, did not inform Indian Harbor of the claim or the remediation until July 2011. Indian Harbor denied coverage based on the delayed notice and the policy’s consent clause. Pitzer then sued Indian Harbor in state court, and Indian Harbor...
