Pollution – Contractual Choice of Law Clauses May be Rendered Unenforceable in CA

9th Cir. asks CA Supreme Court if public policy should override when outcome-dispositive in excluding coverage.

The Ninth Circuit has asked the California Supreme Court if public policy encompasses California’s notice-prejudice rule, thereby overriding a New York choice-of-law provision in a policy that would have barred coverage for a pollution claim where the policyholder failed to provide timely notice and incurred expenses without the consent of the insurer.

Pitzer College (“Pitzer”) is one of the Claremont Colleges in Southern California.  The Claremont University Consortium enters into insurance contracts on behalf of the Claremont Colleges.  The consortium purchased an insurance policy from Indian Harbor Insurance Company (“Indian Harbor”) that covered Pitzer for remediation expenses caused by pollution.  The policy contained a New York choice-of-law provision.  The notice provision in the policy required Pitzer to timely advise Indian Harbor of any claim and required Pitzer to obtain Indian Head’s consent before incurring any expenses.

In January 2011, Pitzer discovered contamination at the construction site for a new dormitory.  Pitzer subsequently remediated the property and built the dormitory.  Pitzer did not inform Indian Harbor of the contamination or the remediation until July 2011, after Pitzer had remediated the site.  Indian Head denied the claim, asserting that Pitzer had breached the notice and consent provisions.

Pitzer filed suit.  In the district court, Pitzer argued that California’s notice-prejudice rule applied to both the notice and consent provisions, because the rule is encompassed in California public policy, thereby overriding the New York choice-of-law provision.  The district court disagreed and applied the New York choice-of-law provision.  Under New York law, Pitzer’s failure to timely notify Indian Head and obtain its consent prior to incurring costs barred coverage under the policy.

On appeal, the Ninth Circuit determined that the California Supreme Court has never decided whether the notice-prejudice rule is fundamental under California public policy.  Likewise, the California Supreme Court has never determined whether the notice-prejudice rule applies to a consent provision in an insurance policy.  Consequently, the Ninth Circuit has presented those questions to California’s high court.  The California Supreme Court’s decision will have far reaching implications for both policyholders and insurers, if the choice-of-law provision is unenforceable.  It could result in the filing of additional coverage actions by policyholders in California seeking application of the notice-prejudice rule.  In addition, it could complicate insurers’ ability to underwrite policies based on choice-of-law provisions.  Pitzer College v. Indian Harbor Ins. Co., No. 14-56017 (Jan. 13, 2017).