This case was previously highlighted as being before the California Supreme Court on two questions of state insurance law certified by the Ninth Circuit: (1) is the notice-prejudice rule a fundamental public policy for purposes of choice of law analysis; and (2) if so, does the rule apply to the consent provision of the insurance policy at issue in this case.
In the Pitzer College case, the insured identified environmental contamination and undertook remediation efforts before giving notice of the contamination to the insurer as required under the insurance policy and without obtaining the required consent of the insurer before commencing remediation.
In an opinion issued today, the Supreme Court concluded that the notice-prejudice rule is a fundamental public policy in California in line with the strong preference to avoid technical forfeitures of insurance policy coverage. However, the Court held that this rule applies generally only to consent provisions in first party insurance policies, but not to consent provisions in third party policies.
In its Opinion, the Supreme Court reiterated that the notice-prejudice rule is alive and well in California. Late notice will not be grounds for denying coverage for a claim unless the insurer suffers actual prejudice and the prejudice is substantial. The Court elevated the rule to a “fundamental” public policy because the rule (i) cannot be contractually waived, (ii) protects against otherwise inequitable results, and (iii) promotes the public interest.
Consistent with long existing California law, the Court held that the burden of proof to prove substantial prejudice is on the insurer; mere delay will not establish prejudice. Rather, the insurer must show a substantial likelihood that, with timely notice, the insured would have settled the claim for less or otherwise been able to reduce or eliminate the insured’s liability. In the context of a third party policy, the insurer needs to demonstrate that it would have obtained a better result in the underlying third party action.
With respect to first party insurance policies, the Court held in this case of first impression that imposing the notice-prejudice rule to a consent provision makes sense because if there is no harm to the interests of the insurer, then there is no justification for excusing the insurer from its coverage obligation under the policy to pay the insured’s loss.
In a contrary conclusion as to third party insurance policies which usually contain a “no voluntary payment” condition, the Court confirmed that the right of the insurer to control the defense and settlement of claims is a paramount right of the insurer which it is entitled to protect. Thus, the Court saw no reason to depart from the line of appellate cases holding that the notice-prejudice rule does not apply to third party policies.
Ultimately, the Court made no determination as to the outcome of the case before it. Because the parties disputed whether the policy at issue was a first party or third party policy, and because that issue was not presented to the Supreme Court, the Supreme Court left that issue for determination by the Ninth Circuit.