1) Public Policy Precludes Application of Notice Prejudice Rule; 2) Polluted State’s Law Applies

1. Public Policy Precludes Application of Notice Prejudice Rule – California Supreme Court

Responding to certified questions from the Ninth Circuit Federal Court of Appeals, the California Supreme court declared that California’s notice-prejudice rule is a fundamental public policy in relation to a choice-of-law analysis.  It also held that same approach generally applies to “consent” or “no voluntary payments” policy provisions in first-party insurance policies, but not to consent provisions in third-party liability policies.

The case involved soil contamination discovered during construction of a dormitory.   Pitzer College (“Pitzer”) remediated the contamination without first making a claim to its insurer, Indian Harbor Insurance Company (“Indian Harbor”), that provided it with pollution coverage.  The notice clause of the policy at issue required Pitzer to give notice of any pollution condition to Indian Harbor and, if the notice was provided verbally to “furnish … a written report as soon as practicable.”  A consent provision in the policy also required Pitzer to obtain the insurer’s written consent before incurring expenses related to remediation unless there were exigent circumstances.

The policy contained a choice-of-law provision stipulating New York law applied.  The California federal trial court found that notice was late under New York’s no-prejudice rule and entered summary judgment for the insurer.  It also held that the consent condition had been violated.  In dicta, the trial court stated that the insurer was not prejudiced by the late notice.

On appeal, the Ninth Circuit Court of Appeals certified a question to the California Supreme Court asking whether the notice-prejudice rule was a “fundamental public policy” of California that must be taken into consideration in determining whether to apply the New York choice of law provision.

Summarizing California’s choice-of-law approach, the California Supreme Court stated that it needed to determine whether California had a “materially greater interest” in the resolution of the issue.  If so, the choice of law provision should not be enforced.  The California Supreme Court reasoned that the “notice requirement serves to protect insurers from prejudice … not to shield (insurers) from their contractual obligations through ‘a technical escape-hatch.’’  Thus, it held that it was a fundamental public policy of California to not excuse insurers obligations based on late notice absent a showing of actual prejudice.

As to the applicability of the consent provision, the California Supreme Court made a distinction between first and third-party coverage.  It likened its ruling that insurers must demonstrate prejudice to successfully deny coverage based on a consent provision.  However, “no voluntary payment” provisions are crafted to “ensure that responsible insurers that promptly accept a defense tendered by their insureds thereby gain control over the defense and settlement of the claim … The insurer’s duties to defend and settle a lawsuit are crucial to its coverage obligations.”  As such, prejudice is not required under a third-party policy consent condition.  However, because there was a dispute as whether the policy provided first or third-party coverage, it returned the matter to the Ninth Circuit without opining as to the proper outcome.  Pitzer College v. Indian Harbor Ins. Co., No. S239510 (Cal. Aug. 29, 2019).

2. Polluted State’s Law Applies – 9^th

The Ninth Circuit reversed the District Court’s holding granting summary judgment in favor of insurers and remanded with instructions to apply Alabama law instead of California law.

The insurance coverage dispute arose from environmental contamination at Arrow Electronics, Inc.’s (“Arrow”) research facility located in Huntsville, Alabama (the “Huntsville Facility”).  The District Court applied substantive California law and granted summary judgment of Arrow’s insurers.  Arrow appealed.

As required, the Ninth Circuit looked to California’s choice-of-law rules to determine what state’s substantive law applied.  Under California law, a “contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate place of performance, according to the law and usage of the place where it is made.”  The intended place of performance for a commercial liability insurance policy covering operations at one or more fixed locations according to California law is generally the jurisdiction where the operations are located because that is where the insurer and insured expect a third-party to file a complaint against the insured.  Each of Arrow’s primary policies explicitly referred to the Huntsville Facility or Alabama, and each of the excess policies was drafted with reference to the primary policies.  Thus, Alabama was the intended place of performance within the meaning of California law for purposes of the case.   Arrow Electronics, Inc. v. Liberty Mut. Ins. Co., No. 18-55810 (9th Cir.  Aug. 13, 2019).