HNRK Coverage Corner

On August 29, 2019, the California Supreme Court issued a decision in Pitzer College v. Indian Harbor Ins. Co., Case No. S239510, ruling (in response to a certified question from the Ninth Circuit) that New York’s no-prejudice rule—under which a first-party insurer can avoid coverage based on delayed notice without showing prejudice—is contrary to a “fundamental public policy” of California.

Unlike the majority of states, New York common law does not require an insurer to demonstrate prejudice to disclaim coverage based on late notice by the insured. As previously discussed on this blog, for liability policies “issued or delivered” in New York, after January 17, 2009, a statute (Insurance Law § 3420(a)(5)) imposes a “notice prejudice” rule. However the common law no-prejudice rule still applies with regard to first-party insurance coverage

Pitzer College involved an insurance policy issued to a California college, which had a New York choice of law provision. As the policy was not “issued or delivered” in New York, the statutory “notice prejudice” rule did not apply. The insured filed a declaratory judgment action for declaratory relief and breach of contract. Following removal to federal court, the district court granted summary judgment to Indian Harbor on a late notice defense, ruling that the insured failed to establish that California’s notice prejudice rule was a “fundamental policy” that could override a contractual choice of law provision.

Addressing a certified question from the Ninth Circuit, the California Supreme Court held that the district court was incorrect, explaining:

[W]e conclude that California’s notice-prejudice rule is a fundamental public policy of California. The rule is based on the rationale that the essential part of the contract is insurance coverage, not the procedure for determining liability, and that the notice requirement serves to protect insurers from prejudice, not to shield them from their contractual obligations through a technical escape-hatch. Prejudice is a question of fact on which the insurer has the burden of proof. The insured’s delay does not itself satisfy the burden of proof. The insurer establishes 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.

This decision underscores the importance of notice requirements under New York insurance law. It goes without saying that you can’t get coverage if you don’t ask for it. Although a statutory notice-prejudice requirement now applies in some cases, delayed notice can still present traps for the unwary.