California Supreme Court Issues Landmark Insurance Decision on Consent Conditions
On August 29, 2019, the California Supreme Court issued a decision on an issue critical in many insurance coverage disputes. In Pitzer College v. Indian Harbor Insurance Co.,2019 WL 4065521 (Cal. 2019), the Court addressed California’s so-called “notice- prejudice” rule. Under this rule, as the Court explained, an insurer must prove that “the insured’s late notice of a claim has substantially prejudiced its ability to investigate and negotiate payment for the insured’s claim. A finding of substantial prejudice will generally excuse the insurer from its contractual obligations under the insurance policy, unless the insurer had actual or constructive knowledge of the claim.” As the Court emphasized, “‘California law is settled that a defense based on an insured’s failure to give timely notice requires the insurer to prove that it suffered substantial prejudice. The insurer must show actual prejudice, not the mere possibility of prejudice’” (citations omitted).
However, California courts have held that this notice-prejudice standard does not apply to one condition in insurance policies—a common condition that the insured not incur expense or settle a suit without the insurer’s consent. In other words, courts have held that barring exigent circumstances, if an insured incurs expense without its insurer’s consent, those expenses are not insured even if the insurer has suffered no prejudice.
The Pitzer court addressed whether the notice-prejudice rule applies to consent conditions in first-party insurance policies. It recognized that “No California court has addressed whether the notice-prejudice rule should be extended to a consent provision in the context of first party coverage.” It then held that the notice-prejudice rule applies to consent conditions, at least in first-party policies. It stated, “the notice-prejudice rule makes good sense for consent provisions in first party policies just as it does for notice provisions.”
In so holding, it rejected the notion that a choice-of-law clause stating that a policy is governed by a law other than California law automatically applies. Instead, it recognized that under California’s choice-of-law principles, a court would need to determine which jurisdiction has a greater interest in having its law apply. It set a high burden on the insurer to prove that another jurisdiction has a greater interest because it declared that the notice- prejudice rule is a “fundamental public policy.”
The court also emphasized that under its holding, an insurer no longer could simply avoid coverage by claiming that its insured failed to obtain its consent. It emphasized that “Prejudice is a question of fact on which the insurer has the burden of proof,” and that an insurer’s delay “delay does not itself satisfy the burden of proof.” Instead, as the Court stated, the insurer must show actual and substantial prejudice “by proving more than delayed or late notice. It must show a substantial likelihood that, with timely notice, and notwithstanding a denial of coverage or reservation of rights, it would have settled the claim for less or taken steps that would have reduced or eliminated the insured’s liability. In the context of third party coverage, for example, the insurer must show that timely notice would have enabled it to achieve a better result in the underlying third party action” (citation and internal quotation marks omitted).
The Court’s decision makes important changes in California law. An insurer no longer can argue that a choice-of-law clause automatically precludes the application of California’s notice-prejudice rule. Nor can an insurer any longer rely on a consent condition in a first- party policy to preclude coverage without proving that it was actually and substantially prejudiced by its insured’s failure to obtain its consent.
PDF of full article at LEX.Pitzer.1909