The Supreme Court of California emphasized that the rule of notice for prejudice in first-party insurance contracts is a basic public order that may, in certain circumstances, override a choice of law.
In Pitzer College v. Indian Harbor Insurance Company Pitzer sought coverage under the Environmental Pollution Policy and took action to remedy the damage before notifying Indian Harbor. 1 Pitzer also did not obtain Indian Harbor's consent under the terms and conditions. of the policy before decontamination and commencement of decontamination costs for nearly $ 2 million. The policy also provided for an emergency exemption from the consent provision that allows Pitzer to carry out decontamination "in an emergency." But Pitzer was still required to notify Indian Harbor "immediately thereafter." Pitzer did not inform Indian Harbor about the decontamination until about three months after it completed the decontamination and six months after it discovered the condition. The choice of statutory provision designated New York for all issues that arise within the framework of the policy.
Indian Harbor refused coverage due to Pitzer's violation of the notice and failure to obtain consent before decontamination began. Pitzer sued Indian Harbor in the California state court and the case was taken to federal court. The district court that applies New York law ruled in favor of Indian Harbor to issue its summary judgment based on Pitzer's late announcement. Pitzer appealed the district court's decision.
The Ninth Circuit Court of Appeals certified two questions to the California Supreme Court: (1
The California Supreme Court held that “California's rule on prejudice is a fundamental general policy of California. . . . based on the justification that the essential part of the contract is insurance cover, not the procedure for determining liability, and that "the termination requirement serves to protect insurers from prejudice, … not … to protect them from their contractual obligations" by ”A technical escape hatch. The Court stated that (1) the rule of notice for prejudice cannot be waived in accordance with the contract; bear the cost of damages that an insurance company claims to cover.
Subsequently, the Court considered whether the rule of notice for prejudice should be extended to include a consent clause in connection with first party coverage. It argued that "California's rule of notice for prejudice applies 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 the case of third-party coverage, which usually includes a "no voluntary payment term", the Supreme Court reiterated the right to control the defense and the settlement of claims is an ultimate right of the insurer entitled to protection.
As Pitzer and Indian Harbor did not agree on whether the policy provided first- or third-party coverage, the California Supreme Court left the specific question of whether the prejudice notice rule applies to the consent provision of the policy to the Ninth Circuit.  This decision is important because it emphasizes California's acquis in Community law that if the insurer does not show significant prejudice, policyholders can continue with their claims despite allegations of late notice. It further extended the claims ratio and required the first-party insurer to show prejudice before being denied coverage with the insurance's consent, which often requires the policyholder to obtain the insurance company's written consent before costs and expenses.
1 Pitzer College vs. Indian Harbor Ins. Co. No. S239510, 2019 WL 4065521 (Cal. August 29, 2019).