Pitzer College v. Indian Harbor Insurance Company

California’s notice-prejudice rule generally allows

insureds to proceed with their insurance policy claims even if

they give their insurer late notice of a claim, provided that the

late notice does not substantially prejudice the insurer.

(Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303, 307

(Campbell).) In this context, we consider two narrow questions

from the United States Court of Appeals for the Ninth Circuit,

restated as follows: (1) Is California’s common law noticeprejudice

rule a fundamental public policy for the purpose of

choice of law analysis? (2) If so, does the notice-prejudice rule

apply to the consent provision of the insurance policy in this

case? (Cal. Rules of Court, rule 8.548(f)(5) [Supreme Court may

restate questions or ask the requesting court for clarification].)

In line with California’s strong preference to avoid technical

forfeitures of insurance policy coverage, we conclude (1) that our

notice-prejudice rule is a fundamental public policy of our state

in the insurance context, and (2) the rule generally applies to

consent provisions in the context of first party liability policy

coverage and not to consent provisions in third party liability

policies. We leave it for the Ninth Circuit to decide whether the

consent provision at issue here contemplates first party or third

party coverage.

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

2

I. FACTS AND PROCEDURAL HISTORY

The Claremont University Consortium (CUC) is an

umbrella entity that enters into insurance contracts on behalf of

the Claremont Colleges, including plaintiff Pitzer College

(Pitzer). (Pitzer College v. Indian Harbor Ins. Co. (9th Cir. 2017)

845 F.3d 993, 994 (Pitzer College).) The CUC purchased an

insurance policy (Policy) from defendant Indian Harbor

Insurance Company (Indian Harbor) that covered Pitzer for

legal and remediation expenses resulting from pollution

conditions discovered during the policy period of July 23, 2010

to July 23, 2011. (Ibid.)

The Policy contains three provisions pertinent to our

review. First, a notice provision requires Pitzer to provide oral

or written notice of any pollution condition to Indian Harbor

and, in the event of oral notice, to “furnish . . . a written report

as soon as practicable.”1 Second, a consent provision requires

Pitzer to obtain Indian Harbor’s written consent before

incurring expenses, making payments, assuming obligations,

and/or commencing remediation due to a pollution condition.2



1 The notice provision states in relevant part: “As a

condition precedent to the coverage hereunder, in the event . . .

any POLLUTION CONDITION is first discovered by the

INSURED that results in a LOSS or REMEDIATION

EXPENSE [¶] . . . [¶] The INSURED shall provide to the

Company, whether orally or in writing, notice of the particulars

with respect to the time, place and circumstances thereof, along

with the names and addresses of the injured and of available

witnesses. In the event of oral notice, the INSURED agrees to

furnish to the Company a written report as soon as practicable.”

2 The consent provision states in relevant part: “No costs,

charges, or expenses shall be incurred, nor payments made,

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Opinion of the Court by Chin, J.

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Pursuant to an emergency exception to this consent provision,

however, if Pitzer incurs costs “on an emergency basis where

any delay . . . would cause injury to persons or damage to

property or increase significantly the cost of responding to any

[pollution condition],” then Pitzer is not required to obtain

Indian Harbor’s prior written consent, but it is required to notify

Indian Harbor “immediately thereafter.” Third, a choice of law

provision states that New York law governs all matters arising

under the Policy.3

On January 10, 2011, Pitzer discovered darkened soils at

the construction site for a new dormitory on campus. (Pitzer

College, supra, 845 F.3d at p. 994.) “By January 21, 2011, Pitzer

determined that remediation would be required.” (Ibid.) With

pressure to complete the dormitory prior to the start of the 2012-

2013 academic year, Pitzer conferred with environmental

consultants who determined that the least expensive and most

expeditious option was to conduct lead removal onsite using a

transportable treatment unit (TTU). Pitzer reserved one of the

two TTUs that were licensed for use in Southern California and

began the treatment process. (Ibid.) Remediation work



obligations assumed or remediation commenced without the

Company’s written consent which shall not be unreasonably

withheld. This provision does not apply to costs incurred by the

INSURED on an emergency basis, where any delay on the part

of the INSURED would cause injury to persons or damage to

property or increase significantly the cost of responding to any

POLLUTION CONDITION. If such emergency occurs, the

INSURED shall notify the Company immediately thereafter.”

3 The choice of law provision states: “All matters arising

hereunder including questions related to validity interpretation,

performance and enforcement of this Policy shall be determined

in accordance with the law and practice of the State of New York

(notwithstanding New York’s conflicts of law rules).”

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

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commenced on March 9, 2011 with the setup of the TTU and was

successfully completed one month later at a total cost of nearly

$2 million. Indian Harbor’s expert later opined that the

remediation could have been performed at a reduced cost using

alternative methods, and that the manner of remediation

waived subrogation rights against others who may have been

responsible for the contaminated soil.

Pitzer did not obtain Indian Harbor’s consent before

commencing remediation or paying remediation costs. (Pitzer

College, supra, 845 F.3d at p. 995.) In fact, “Pitzer did not inform

Indian Harbor of the remediation until July 11, 2011,

approximately three months after it completed remediation and

six months after it discovered the darkened soils.” (Ibid.)

“On August 10, 2011, Indian Harbor acknowledged receipt

of Pitzer’s notice of remediation.” (Pitzer College, supra, 845

F.3d at p. 995.) On March 16, 2012, Indian Harbor denied

coverage based on Pitzer’s failure to give notice as soon as

practicable and its failure to obtain Indian Harbor’s consent

before commencing the remediation process. (Ibid.)

Pitzer sued Indian Harbor in Los Angeles County Superior

Court for declaratory relief and breach of contract. (Pitzer

College, supra, 845 F.3d at p. 995.) Indian Harbor removed the

case to federal court on the basis of diversity jurisdiction and

moved for summary judgment, claiming that it had no obligation

to indemnify Pitzer for remediation costs because Pitzer had

violated the Policy’s notice and consent provisions. The district

court granted the motion. (Ibid.)

The district court held that New York law applied, because

although a state’s fundamental policy can override a choice of

law provision, Pitzer had “failed to establish” that California’s

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

5

notice-prejudice rule is such a policy. (Pitzer College, supra, 845

F.3d at p. 995; see Indian Harbor Ins. Co. v. City of San Diego

(S.D.N.Y. 2013) 972 F.Supp.2d 634, 648-653.) Although section

3420, subdivision (a)(5) of New York Insurance Law applies a

notice-prejudice rule to insurance policies issued or delivered in

New York, policies issued and delivered outside New York [as in

this case] are subject to a strict no-prejudice rule under New

York common law, which denies coverage where timely notice is

not provided. Applying New York law pursuant to the Policy’s

choice of law provision, the court concluded that summary

judgment was warranted because Pitzer did not provide timely

notice, as required by the Policy’s notice provision. (Pitzer

College, supra, 845 F.3d at p. 995.) The district court did note,

however, that Indian Harbor would not have prevailed at

summary judgment on this ground if it had been required to

show prejudice. (Ibid.)

Additionally, the district court held that summary

judgment was separately warranted because Pitzer did not

comply with the Policy’s consent provision. (Pitzer College,

supra, 845 F.3d at p. 995.) Here, the court rejected Pitzer’s

argument that its remediation costs were incurred on an

emergency basis, and therefore it had not been required to

obtain prior written consent pursuant to the emergency

exception to the consent provision. (Ibid.) Even if the

emergency exception did apply, the court explained, Pitzer had

failed to notify Indian Harbor “immediately” after it incurred its

costs. (Ibid.) It is unclear whether the district court addressed

Pitzer’s arguments (1) that the notice-prejudice rule should

apply to the consent provision as well as the notice provision,

and (2) that the State of California has “a materially greater

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

6

interest” in the determination of the issue than the State of New

York for choice of law purposes.

Pitzer timely appealed, and oral arguments were heard

before the Ninth Circuit Court of Appeals. In issuing the

certified questions to us, the Ninth Circuit observed:

“Resolution of this appeal turns on whether California’s noticeprejudice

rule is a fundamental public policy for the purpose of

choice-of-law analysis. If the California Supreme Court

determines that the notice-prejudice rule is fundamental, the

appeal then turns on whether, in a first party policy like Pitzer’s,

a consent provision operates as a notice requirement subject to

the notice-prejudice rule. No controlling California precedent

answers either question. See Cal. R. Ct. 8.548(a). Because the

district court determined that ‘[i]f prejudice is required, [Indian

Harbor] would not be able to prevail at summary judgment,’

these questions are dispositive.” (Pitzer College, supra, 845 F.3d

at p. 995.)

II. DISCUSSION

A. Choice of Law Analysis

The crux of this case lies in the choice of law provision,

designating that New York law should govern all matters

arising under the Policy. California applies the principles set

forth in section 187 of the Restatement Second of Conflict of

Laws (section 187) in determining the enforceability of

contractual choice of law provisions. (Nedlloyd Lines B.V. v.

Superior Court (1992) 3 Cal.4th 459, 464-466 (Nedlloyd), citing

§ 187, subd. (2).) Under section 187, the parties’ choice of law

generally governs unless (1) it conflicts with a state’s

fundamental public policy, and (2) that state has a materially

greater interest in the determination of the issue than the

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

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contractually chosen state. (Nedlloyd, supra, 3 Cal.4th at pp.

465-466.) In Nedlloyd, we articulated California’s multi-step

choice of law analysis: “[T]he proper approach under

Restatement section 187, subdivision (2) is for the court first to

determine either: (1) whether the chosen state has a substantial

relationship to the parties or their transaction, or (2) whether

there is any other reasonable basis for the parties’ choice of law.

If neither of these tests is met, that is the end of the inquiry, and

the court need not enforce the parties’ choice of law. [Fn.

omitted.] If, however, either test is met, the court must next

determine whether the chosen state’s law is contrary to a

fundamental policy of California. [Fn. omitted.] If there is no

such conflict, the court shall enforce the parties’ choice of law.

If, however, there is a fundamental conflict with California law,

the court must then determine whether California has a

‘materially greater interest than the chosen state in the

determination of the particular issue. . . .’ (Rest., § 187, subd.

(2).) If California has a materially greater interest than the

chosen state, the choice of law shall not be enforced, for the

obvious reason that in such circumstance we will decline to

enforce a law contrary to this state’s fundamental policy.”

(Nedlloyd, supra, at p. 466.) Thus, if the party opposing the

application of the choice of law provision—here, Pitzer—can

establish “both that the chosen law is contrary to a fundamental

policy of California and that California has a materially greater

interest in the determination of the particular issue,” then the

court will not enforce the provision. (Washington Mutual Bank

v. Superior Court (2001) 24 Cal.4th 906, 917.)

Regarding the first step of Nedlloyd’s choice of law

analysis, the parties agree with the district court’s finding that

there is at least a “reasonable basis” for the selection of New

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

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York law. (Nedlloyd, supra, 3 Cal.4th at p. 466.) Our initial

task, therefore, is to decide the first part of Nedlloyd’s second

step and determine whether California’s notice-prejudice rule is

a fundamental public policy.

B. California’s Notice-prejudice Rule

California’s notice-prejudice rule requires an insurer to

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. (See Shell Oil Co. v.

Winterthur Swiss Ins. Co. (1993) 12 Cal.App.4th 715, 760-763

(Shell Oil); Campbell, supra, 60 Cal.2d 303.) As the Court of

Appeal observed in Shell Oil, “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. (Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d

[865,] 881-883; Billington v. Interinsurance Exchange (1969) 71

Cal.2d 728, 737-738; [citations].) Prejudice is not presumed

from delayed notice alone. [Citations.] The insurer must show

actual prejudice, not the mere possibility of prejudice.

[Citation].” (Shell Oil, at pp. 760-761.)

Although no case has referred to California’s noticeprejudice

rule as a fundamental rule of public policy, we have

called the rule “the public policy of this state,” favoring

compensation of insureds over technical forfeiture. (Campbell,

supra, 60 Cal.2d at p. 307; see UNUM Life Ins. Co. of America

v. Ward (1999) 526 U.S. 358, 372 [noting that California’s policy

of enforcing the notice-prejudice rule was key to its decision]; see

also UNUM, supra, 526 U.S. at p. 372 [noting that California’s

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

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notice-prejudice rule is “grounded in policy concerns specific to

the insurance industry”]; Service Management Systems, Inc. v.

Steadfast Ins. Co. (9th Cir. 2007) 216 Fed. Appx. 662, 664

[noting the “strong public policy behind [California’s] noticeprejudice

rule”]; Insurance Co. of State of Pennsylvania v.

Associated Int’l Ins. Co. (9th Cir. 1990) 922 F.2d 516, 524 [noting

“California’s strong public policy against ‘technical forfeitures’ ”

in context of notice provision]; National Semiconductor Corp. v.

Allendale Mut. Ins. Co. (D.Conn. 1982) 549 F.Supp. 1195, 1200

[noting “strong and abiding policy” of California’s noticeprejudice

rule].)

As one California Court of Appeal has recognized, there

are no “bright-line rules for determining what is and what is not

contrary to a fundamental policy of California. Comment g to

Restatement section 187 itself says that ‘[n]o detailed statement

can be made of the situations where a “fundamental” policy . . .

will be found to exist.’ ” (Discover Bank v. Superior Court (2005)

134 Cal.App.4th 886, 893-894.) Likewise, although Nedlloyd

observes that a statute, constitution, or principle of contractual

unconscionability may establish a fundamental policy, it states

no requirement that a fundamental policy must be established

by any one of these vehicles. (Nedlloyd, supra, 3 Cal.4th at p.

471.)

Initially, we note that the difference between a “strong”

public policy and a “fundamental” one is essentially semantic

when our goal is to protect those with inferior bargaining power

in the insurance context. A policy such as the notice-prejudice

rule may be considered fundamental because it is connected to

concerns of fundamental fairness in the negotiation process.

(See Campbell, supra, 60 Cal.2d at p. 307.)

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

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We can look to other courts for guidance on how to

determine whether a policy is fundamental in the absence of

legislative mandate. (See Prince George’s County. v. Local Gov’t

Ins. Trust (2005) 388 Md. 162, 183, fn. 9 [879 A.2d 81].) Courts

in these jurisdictions have cited three essential reasons for

adopting the notice-prejudice rule: “1) ‘the adhesive nature of

insurance contracts’; 2) ‘the public policy objective of

compensating tort victims’; and 3) ‘the inequity of the insurer

receiving a windfall due to a technicality.’ ” (Century Sur. Co. v.

Jim Hipner, LLC (Wyo. 2016) 377 P.3d 784, 789.) These reasons

are largely in accord with the justifications courts have set forth

in determining that other rules constitute fundamental public

policies. Namely, rules have been found to be fundamental

public policies when (1) they cannot be contractually waived; (2)

they protect against otherwise inequitable results; and (3) they

promote the public interest.

The first reason for establishing the notice-prejudice rule

as a fundamental policy of our state is that the notice-prejudice

rule cannot be contractually waived and, thus, restricts freedom

of contract. When it applies, the rule prevents enforcement of a

contractual term. It overrides the parties’ express intentions for

a defined notice term, preventing a technical forfeiture of

insurance benefits unless the insurer can show it was prejudiced

by the insured’s late notice.

Such restriction on parties’ freedom of contract has led to

the adoption of fundamental policies in other contexts, including

the constitutional right to a jury trial (Rincon EV Realty LLC v.

CP III Rincon Towers, Inc. (2017) 8 Cal.App.5th 1, 11-13); the

statutory requirement that contractual attorney fees provisions

be reciprocal (ABF Capital Corp. v. Grove Properties Co. (2005)

126 Cal.App.4th 204, 117); and the statutory ban on collecting a

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

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postforeclosure balance from a borrower (Guardian Savings &

Loan Assn. v. MD Associates (1998) 64 Cal.App.4th 309, 321).

To this end, we have already pointed out that the noticeprejudice

rule is designed to restrict freedom of contract because

it is intended to prevent inequitable technical forfeitures that

may otherwise result from the contract’s terms. (See Cisneros

v. UNUM Life Ins. Co. of America (9th Cir. 1998) 134 F.3d 939,

946.) As Nedlloyd observes, courts may consider application of

a public policy that is designed to “restrict freedom of contract.”

(Nedlloyd, supra, 3 Cal.4th at p. 468.)

Second, the notice-prejudice rule protects insureds against

inequitable results that are generated by insurers’ superior

bargaining power. We have consistently recognized that

insurance contracts typically are “inherently unbalanced” and

“adhesive,” which “places the insurer in a superior bargaining

position.” (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d

809, 820; see Kransco v. American Empire Surplus Lines Ins. Co.

(2000) 23 Cal.4th 390, 404 [“A fundamental disparity exists

between the insured, which performs its basic duty of paying the

policy premium at the outset, and the insurer, which, depending

on a number of factors, may or may not have to perform its basic

duties of defense and indemnification under the policy”].)

Comment g to section 187 at page 568, also finds that

policies “designed to protect a person against the oppressive use

of superior bargaining power” may be considered fundamental

and unwaivable. (See, e.g., In re DirecTV Early Cancellation

Litigation (C.D.Cal. 2010) 738 F.Supp.2d 1062, 1087

[“California Civil Code § 1671(d) . . . reflects California’s

fundamental policy to protect consumers against the oppressive

use of liquidated damages clauses by parties with superior

bargaining power”].)

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

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The third criterion for establishing a fundamental policy

is also satisfied in this case: The notice-prejudice rule promotes

objectives that are in the general public’s interest because it

protects the public from bearing the costs of harm that an

insurance policy purports to cover. (Campbell, supra, 60 Cal.2d

at p. 306.) Where California has an important interest at stake,

there is no reason why that interest is any less valid or worthy

of consideration because it was developed in court decisions and

not by legislative action.

Indian Harbor’s contrary argument that the noticeprejudice

rule is not a fundamental policy is unpersuasive.

Initially, it relies on Gantt for its contention that our declaration

of a fundamental public policy must be “delineated in

constitutional or statutory provisions” or a rule of

unconscionability. (Gantt v. Sentry Insurance (1992) 1 Cal.4th

1083, 1095.) In Gantt, the plaintiff sued his former employer,

alleging he had been constructively discharged in retaliation for

testifying truthfully about a coworker’s sexual harassment

claim. (Id. at pp. 1087-1089.) Gantt held that the employer

violated a fundamental public policy that was grounded in

Government Code section 12975, which prohibits obstruction of

a Department of Fair Employment and Housing investigation.

(Gantt, supra, 1 Cal.4th at pp. 1096-1097.)

Although Gantt emphasized that while “[t]he employer is

bound, at a minimum, to know the fundamental public policies

of the state and nation as expressed in their constitutions and

statutes” (Gantt, supra, 1 Cal.4th at p. 1095), we distinguish it

from the case at hand because implicit in Gantt is the

recognition that it would be unreasonable to expect employers

to anticipate what fundamental public policies that courts might

identify, on pain of liability in tort (ibid.). The fundamental

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Opinion of the Court by Chin, J.

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public policy we identify in the insurance context brings with it

no potential for tort liability; on the contrary, it prevents a

windfall redounding to the benefit of the insurer, the party with

superior bargaining power. Additionally, courts already decline

to enforce contractual provisions that they consider to be

contrary to state public interests. (See Sheppard, Mullin,

Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2018)

6 Cal.5th 59, 73 [concluding that a contract or transaction may

be found contrary to public policy despite Legislature’s silence

on the issue].)

Amicus curiae in support of Pitzer, United Policyholders,

notes that comment g to section 187 makes the same point.

Comment g observes that for a policy to be considered

fundamental, it must be “substantial” and “may be embodied in

a statute which makes one or more kinds of contracts illegal or

which is designed to protect a person against the oppressive use

of superior bargaining power.” (§ 187, com. g, p. 568, italics

added.)

Application of the notice-prejudice rule as a fundamental

public policy is also consistent with Nedlloyd’s holding that the

implied covenant of good faith and fair dealing is not a

fundamental policy of California. (Nedlloyd, supra, 3 Cal.4th at

p. 468.) The implied covenant of good faith and fair dealing in

employment contracts operates differently from the noticeprejudice

rule in an insurance contract. The implied covenant

supplements, rather than overrides, an agreement with a

promise to act in good faith in order to “carry out the presumed

intentions of contracting parties.” (Ibid.) The notice-prejudice

rule, by contrast, overrides a contractual term, and is expressly

“designed to restrict freedom of contract.” (Ibid.)

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Opinion of the Court by Chin, J.

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Based on the foregoing reasoning, we 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.’ ” ” (Carrington Estate

Planning Services v. Reliance Standard Life Ins. Co. (9th Cir.

2002) 289 F.3d 644, 647.) Prejudice is a question of fact on which

the insurer has the burden of proof. (Campbell, supra, 60 Cal.2d

at p. 306.) The insured’s delay does not itself satisfy the burden

of proof. (See Shell Oil, supra, 12 Cal.App.4th at p. 761.) 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.’ ” (Safeco Ins. Co. of America

v. Parks (2009) 170 Cal.App.4th 992, 1004.) 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. (Ibid.)

Because our review is limited to answering the Ninth

Circuit’s first question in the affirmative, we leave it to that

court to decide the remaining issues concerning whether

California has a materially greater interest than New York in

determining the coverage issue, such that the contract’s choice

of law would be unenforceable because it is contrary to our

fundamental public policy. (Washington Mutual Bank v.

Superior Court, supra, 24 Cal.4th at p. 917.) We now turn to the

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Ninth Circuit’s second question, as modified: whether

California’s notice-prejudice rule applies to the Policy’s consent

provision.

C. Consent Provision and the Notice-prejudice

Rule

We begin by reviewing the Policy’s requirements. As

discussed above, the consent provision here provides that, in the

absence of an emergency, “[n]o costs, charges, or expenses shall

be incurred without the Company’s written consent, which shall

not be unreasonably withheld.” There is no dispute that Pitzer

failed to obtain Indian Harbor’s prior written consent and that

Pitzer notified Indian Harbor after it had remediated the

pollution damage.

As we explain below, such a consent requirement serves a

role beyond the requirement to give prompt notice of a coverage

event. But both promises are, nevertheless, ancillary to the

insured’s “basic duty of paying the policy premium” in exchange

for the insurer’s basic duties of defense, indemnification, or

coverage for loss or remediation expenses. (Kransco, supra, 23

Cal.4th at p. 404.) As one court explained, “the purpose of a

notice provision is to protect the interests of the insurer” in the

performance of its basic duties — “for example, by affording the

insurer the opportunity to acquire full information about the

circumstances of the case, assess its rights and liabilities, and

take early control of the proceedings.” (Prince George’s County

v. Local Government Ins. Trust (Md. 2005) 879 A.2d 81, 95.) And

so, “[i]f the insured violates the notice provision without

harming the interests of the insurer — i.e. without prejudice —

then there is no reason to deny coverage.” (Ibid.; see also Weaver

Bros., Inc. v. Chappel (Alaska 1984) 684 P.2d 123, 125 [“[T]he

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notice requirement is designed to protect the insurer from

prejudice. In the absence of prejudice, regardless of the reasons

for the delayed notice, there is no justification for excusing the

insurer from its obligations under the policy.”].)

Courts have widely recognized that strict enforcement of

a notice provision permits the insurer “to reap the benefits

flowing from the forfeiture of the insurance policy” despite a lack

of prejudice. (Alcazar v. Hayes (Tenn. 1998) 982 S.W.2d 845,

852.) In addition to this unfair windfall, the inequitable

forfeiture has consequences that fall not only on the insured but

also on the general public. Indeed, we have recognized that

“[t]he field of insurance so greatly affects the public interest that

the industry is viewed as a ‘quasi-public’ business, in which the

special relationship between the insurers and policyholders

requires special considerations.” (Egan, supra, 24 Cal.3d at p.

820; see also Glickman v. New York Life Ins. Co. (1940) 16 Cal.2d

626, 635 [“The object and purpose of insurance is to indemnify

the policyholder in case of loss, and ordinarily such indemnity

should be effectuated rather than defeated. To that end the law

makes every rational intendment in order to give full protection

to the interests of the policyholder.”].) Where an insured fulfills

its primary duty under the parties’ bargain, failure to give

timely notice will not excuse the insurer’s reciprocal obligations

unless the insurer demonstrates prejudice from the failure.

(See, e.g., Campbell, supra, 60 Cal.2d at pp. 305-307.)

Much the same rationale applies to first party policy

provisions requiring the insurer’s consent before the

policyholder incurs costs. Indian Harbor itself has suggested

that a consent provision guards against the insured making

unnecessary expenditures, allows the insurer to approve and

control costs, and protects the insurer’s subrogation rights. In

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Opinion of the Court by Chin, J.

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the case of a pollution remediation policy, a consent requirement

also avoids the potential destruction of evidence, through the

insured’s unilateral remediation efforts, that could permit the

insurer to make more fully informed decisions about whether to

approve certain expenses. Yet at core, these purposes are much

the same as those pertaining to notice provisions. They all

facilitate the insurer’s primary duties under the contract and

speak to minimizing prejudice in performing those duties. For

these reasons, the notice-prejudice rule makes good sense for

consent provisions in first party policies just as it does for notice

provisions.

We have no reason to believe imposing this rule on first

party insurers will prove so unmanageable for those suffering

actual prejudice to justify a contrary conclusion. (See Campbell,

supra, 60 Cal.2d at p. 307.) Requiring the first party insurers to

show prejudice because the insured’s actions meaningfully

increased remediation costs or significantly hampered insurers’

abilities to seek subrogation against responsible parties

adequately protects their interests while furthering the broader

public policy considerations we have already discussed.

Whereas first party coverage obligates the insurer to pay

damages claimed by the insured itself, third party coverage

obligates the insurer to defend, settle, and pay damages claimed

by a third party against the insured. “[A] first party insurance

policy provides coverage for loss or damage sustained directly by

the insured (e.g., life, disability, health, fire, theft and casualty

insurance). A third party liability policy, by contrast, provides

coverage for liability of the insured to a third party who has been

injured because of the insured’s negligence. Examples of such

coverage are typically found in (but not limited to) commercial

general liability policies, a homeowner’s liability policy, a

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

18

directors and officers liability policy, or an errors and omissions

policy. In the usual first party policy context, the insurer

promises to pay money to the insured upon the happening of an

event (also known as an occurrence), the risk of which has been

insured against. In the typical third party liability policy

context, the carrier assumes a contractual duty to pay

judgments the insured becomes legally obligated to pay as

damages because of bodily injury or property damage caused by

the insured.” (Montrose Chemical Corp. v. Admiral Ins. Co.

(1995) 10 Cal.4th 645, 663 (Montrose).) Thus, in the first party

context, the insured looks to the insurer to cover an insured

event or occurrence. (Id. at p. 664.) The insured must not ignore

the damage once it is discovered, or otherwise prejudice the

insurer’s ability to investigate and cover the loss. In the third

party liability context, “the insurer is invested with the complete

control and direction of the defense.” (Truck Ins. Exchange v.

Unigard Ins. Co. (2000) 79 Cal.App.4th 966, 981.) In third party

cases, “the decision to pay any remediation costs outside the civil

action context raises a judgment call left solely to the insurer.”

(Jamestown Builders Inc. v. General Star Indemnity Co. (1999)

77 Cal.App.4th 341, 346 (Jamestown Builders).)

In third-party insurance policies, then, consent provisions,

sometimes called “no voluntary payment” provisions, “are

designed to ensure that responsible insurers that promptly

accept a defense tendered by their insureds thereby gain control

over the defense and settlement of the claim.” (Jamestown

Builders, supra, 77 Cal.App.4th at p. 346.) Jamestown Builders

explained that these consent clauses mean that “insureds

cannot unilaterally settle a claim before the establishment of the

claim against them and the insurer’s refusal to defend in a

lawsuit to establish liability. . . . In short, the provision protects

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

19

against coverage by fait accompli.” (Ibid.) The insurer’s duties

to defend and settle a lawsuit are crucial to its coverage

obligations. (Helfand v. National Union Fire Ins. Co. (1992) 10

Cal.App.4th 869, 888; see Pacific Employers Ins. Co. v. Superior

Court [insurer left without control of its insured’s defense or

settlement under a claims-made policy has been inherently

prejudiced by the lack of timely notice].) Because the insurer’s

right to control the defense and settlement of claims 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. (See

Insua v. Scottsdale Inc. Co. (2002) 104 Cal.App.4th 737, 745;

Jamestown Builders, at p. 346 [notice-prejudice rule does not

apply to consent provisions].)

No California court has addressed whether the noticeprejudice

rule should be extended to a consent provision in the

context of first party coverage. In a true first party context,

there is no claim of liability for the insurer to defend and hence

no logical need for it to retain unimpaired control over the claims

handling. Thus, the reasons courts have refused to apply the

notice-prejudice rule to consent provisions in third party policies

generally do not apply to first party coverage. Primarily, in a

first party policy, the insurer’s duty to defend and settle

potential claims is not crucial to its coverage obligations.

Compared with third party coverage, the insurer simply does

not exercise the same contractual control over the potential loss

or occurrence, which can happen long after the policy period has

expired. (Montrose, supra, 10 Cal.4th at p. 663.)

For these reasons, failure to obtain consent in the first

party context is not inherently prejudicial, and the usual logic of

the notice-prejudice rule should control, in the absence of a

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

20

coverage requirement for a third party claim or potential claim.

Where the insurer owes no duty to defend against third party

claims, the insured’s failure to seek the insurer’s consent to

remediate a loss implicates risks that, while perhaps different

in degree, are not so dissimilar to those in failing to provide

notice of a loss to warrant departure from a case-by-case

analysis of prejudice. For these reasons, we hold that

California’s 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.

Yet ultimately this case is not one where we can offer a

definitive ruling on whether the notice-prejudice rule applies to

the Policy’s consent provision because the parties vigorously

dispute whether Indian Harbor’s policy provides first party or

third party coverage. The Policy’s insuring provisions are

written in two parts: Section I.B. of the Policy describes the

Insuring Agreement with respect to remediation liability, reads

as follows: “The Company will pay on behalf of the INSURED

for REMEDIATION EXPENSE and related LEGAL EXPENSE

resulting from any POLLUTION CONDITION on, at, under or

migrating from any COVERED LOCATION:

“1. for a CLAIM first made against the INSURED during

the POLICY PERIOD which the insured has or will

become legally obligated to pay; or

“2. that is first discovered during the POLICY PERIOD,

provided that the INSURED reports such CLAIM or

POLLUTION CONDITION to the Company, in writing,

during the POLICY PERIOD or, where applicable, the

EXTENDED REPORTING PERIOD.” (Italics added.)

PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY

Opinion of the Court by Chin, J.

21

Pitzer argues that section 1.B.2 provides first party

liability coverage. Pitzer points out that the insurer in part

1.B.2 is arguably promising to pay money to the insured upon

the happening of an event that the insured itself discovers—and

the typical claims-made third party policy does not have a

“discovery requirement as a prerequisite of triggering coverage.”

(Montrose, supra, 10 Cal.4th at p. 664.) Indian Harbor asserts,

to the contrary, that sections 1.B.1 and 1.B.2 do not provide

coverage for true first party remediation, in part because the

policy defines “Remediation Expense” as an expense incurred to

abate a pollution condition “to the extent required by” federal,

state, or local laws or by “a legally executed state voluntary

program” for cleaning up a pollution condition.

Resolving the question whether the Policy’s coverage

should be considered first party or third party for purposes of

the notice-prejudice rule is beyond the scope of the Ninth

Circuit’s question to us. (As originally framed, the federal

court’s question was only whether “a consent provision in a firstparty

claim insurance policy [can] be interpreted as a notice

provision such that the notice-prejudice rule applies.”) Without

additional evidence regarding the intent of the parties in

forming the Policy, we leave it to the Ninth Circuit to determine

what type of policy is at issue, and the ultimate question of

whether the notice-prejudice rule applies to the consent

provision here.

Based on the foregoing reasoning, we conclude that the notice-prejudice rule is a fundamental public policy of our state and that it applies to consent provisions in first party insurance policies. Because the parties dispute the type of policy at issue PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY Opinion of the Court by Chin, J. here, we leave construction of the insurance contract to the Ninth Circuit. That construction will determine whether the notice-prejudice rule applies to the Policy’s consent provision.