August 30, 2019

Pitzer College v. Indian Harbor Insurance Co.
(Aug. 29, 2019, S239510) Cal.5th

California courts may refuse to enforce a contractual choice-of-law provision when enforcement would defeat a “fundamental public policy” of this state. Responding to a question certified by the Ninth Circuit Court of Appeals, the California Supreme Court explained that fundamental public policies may be found not only in legislative enactments but also in judicial decisions. The Court unanimously held the judicially created “notice-prejudice rule”—under which an insurer cannot avoid its coverage obligations based on late notice of a claim unless it demonstrates actual prejudice—is a fundamental public policy of California for purposes of choice-of-law analysis.

In addition, the Court held the notice-prejudice rule also applies to a provision in a first party policy requiring the insured to obtain the insurer’s consent before incurring expenses to remediate a loss. To avoid its obligation to pay a first party claim based on the insured’s failure to obtain its consent, the insurer must show actual prejudice. The Court distinguished consent provisions in third party policies, to which California appellate courts have generally refused to apply the notice-prejudice rule in light of the insurer’s paramount right to control defense and settlement of third party claims.