So, what’s the big deal if you’re a little “late” in giving your insurer notice of the claim or lawsuit against your company? That’s the question, albeit in essence, that the Ninth Circuit has posed to the California Supreme Court recently in an Order Certifying Questions, Pitzer College v. Indian Harbor Insurance Co.
Specifically, the Ninth Circuit is asking for legal insight as to the following:
1. Is California’s common law notice-prejudice rule a fundamental public policy for the purpose of choice-of-law analysis? May common law rules, other than unconscionability not enshrined in statute, regulation, or the constitution, be fundamental public policies for the purpose of choice-of-law analysis?
2. If the notice-prejudice rule is a fundamental public policy for the purpose of choice-of-law analysis, can a consent provision in a first-party claim insurance policy be interpreted as a notice provision such that the notice-prejudice rule applies?
What is important in this Ninth Circuit submission is whether an insured that delays in making a claim to its insurer will be barred from coverage by “late notice” or “voluntary payments” provisions if the law applicable to the policy is not California law, regardless of whether the insured and the project are in California. In the Pitzer matter the insured purchased a policy that contained a New York choice-of-law for disputes between the insurer and the insured, rather than California law where the insured and the project at issue are located.
During the course of construction in 2011 of a new dorm, “darkened soils” were discovered. Two weeks after that awareness, the insured determined that remediation would be necessary. The policy also contained what is known as a “voluntary payments” provision, which stated that the insurer would not cover any expenses of the insured without first obtaining the insurer’s consent, unless there was an emergency. Even in an emergency, however, the insured was to “immediately thereafter” notify the insurer. Despite this language, three months after remediation was complete, and six months after discovery of the problem, the insured notified the insurer. The insured did not obtain the insurer’s consent to remediate or payment of the costs. The insured urged the necessity to take action was an emergency due to the need to use certain remediation equipment. The insurer rejected that position.
The insurer thereafter denied the claim in 2012, and the insured sued. After removing the matter to federal court, the insurer filed a legal motion to dismiss the claim on the contract terms. That motion was granted and the insured appealed to the Ninth Circuit. Almost six years later, the certified questions now sit before the California Supreme Court waiting for direction and the insured, having no doubt incurred substantial legal fees during this time, awaits a determination of whether it can recover the remediation costs. Ironically, with regard to one of the key questions, while the “notice-prejudice rule” applies under New York law as it does under California common law, in New York it only applies to those policies that are “issued or delivered” in the state of New York. This California insured and project would not, therefore, receive the benefit of the “notice prejudice” rule and possible coverage under either New York or California law if the policy choice of New York law applies.
While these legal issues wait to be resolved, we raise a point that our clients have heard from us regarding notice: tender early and tender often, and do it in writing and keep the insurer updated. Why is this? In addition to avoiding a six-plus-year delay and litigation costs if you can help it, we recommend prompt notice because every insurance policy requires contractually that the insured provide timely “notice” of a claim or lawsuit (which includes costs, expenses, arbitration, demands, and other allegations of a possible impact on the policy). Additionally, early notice reduces the ability of the insurer to avoid even otherwise covered expenses through the “voluntary payments” provision, which excludes coverage for expenses incurred by the insured prior to a reasonable time within which to tender. By using a good broker, insurance risk manager, lawyer, or even a well-trained administrative assistant who has the insurance checklist at his/her fingertips, the insureds can minimize disputes with the insurers and obtain the coverage they purchased while hopefully avoiding their name being published in a case years after the expenses are incurred. While we lawyers are interested in the legal issues raised by this case, I have yet to meet a client that seeks this type of publicity or the answer to what is otherwise an esoteric but interesting legal issue.