California's Insurance Notice - Prejudice Rule
In August 2019, the California Supreme Court gave further guidance on the insurance notice - prejudice rule in Pitzer College v. Indian River Insurance Co. (2019) 8 Cal.5th 93. California’s notice - prejudice rule generally allows insureds to proceed with their insurance policy claim even if they give their insured late notice of the claim, provided the late notice does not substantially prejudice the insurer. Pitzer had purchased an insurance policy from Indian Harbor that covered legal and remediation expenses resulting from pollution conditions discovered during the policy period. When Pitzer discovered darkened soils at the construction site for new dormitory on campus, Pitzer moved ahead with remediation without the consent of the insurer. Notice was given some six (6) months after the darkened soil was initially discovered and three (3) months after remediation was completed. The insurer contended it could have performed the remediation at a reduced cost using alternative methods.
The California Supreme Court concluded that the notice - prejudice rule is a fundamental public policy of California. Prejudice is a question of fact on which the insurer has the burden of proof. The insured’s delay does not itself satisfy that burden of proof. The insurer 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 to reduce or eliminate the insured’s liability. In the context of third party coverage, for example, the insurer must show the timely notice would have enabled it to achieve a better result in the underlying third party action.
The opinion also addressed the “consent” provision. In the first party context, the consent provision generally states that in the absence of an emergency, no costs, charges or expenses shall be incurred without the insurer’s written consent which shall not be unreasonably withheld. The Supreme Court held that the notice - prejudice rule is applicable to a consent provision in a first party policy where coverage does not depend on the existence of a third party claim or potential claim.
In third party policies, the consent provision is sometimes called the “no - voluntary - payment” provision, designed to ensure that responsible insurers promptly accept a defense tendered by their insureds so as to gain control over the defense and settlement of the claim. Because the insurer’s right to control the defense and settlement of the claim is paramount in the third party context, California appellate courts have generally refused to find the notice - prejudice rule applicable to consent provisions in third party policies.
In sum, for a first party claim the insurer must demonstrate actual and substantial prejudice when presented with late or delayed notice and/or if the insured fails to obtain the insured’s consent before incurring expenses. The notice - prejudice rule does apply to a third party claim but not to the consent provision since the insurer’s right to control the defense and settlement of claims is paramount in the third party context.
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