        IN THE SUPREME COURT OF
               CALIFORNIA

                  PITZER COLLEGE,
                Plaintiff and Appellant,
                            v.
        INDIAN HARBOR INSURANCE COMPANY,
               Defendant and Respondent.

                           S239510

                        Ninth Circuit
                          14-56017

                 Central District of California
                    2:13-cv-05863-GW-E

__________________________________________________________

                       August 29, 2019

Justice Chin authored the opinion of the Court, in which Chief
Justice Cantil-Sakauye and Justices Corrigan, Liu, Cuéllar,
Kruger, and Groban concurred.
PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                             S239510


                 Opinion of the Court by Chin, J.


        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 notice-
 prejudice 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.




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    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.




      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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    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


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).”


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                   Opinion of the Court by Chin, J.


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


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    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


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



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    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


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 notice-
prejudice 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


                                  6
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                    Opinion of the Court by Chin, J.


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


                                   7
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


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 notice-
prejudice 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

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    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


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] notice-
prejudice 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 notice-
prejudice 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.)



                                  9
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


      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

                                 10
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


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 notice-
prejudice 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”].)

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    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                    Opinion of the Court by Chin, J.


       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 notice-
prejudice 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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    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


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 notice-
prejudice 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.)



                                 13
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


       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


                                 14
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


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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    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                    Opinion of the Court by Chin, J.


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

                                  16
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                    Opinion of the Court by Chin, J.


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

                                  17
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                    Opinion of the Court by Chin, J.


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


                                  18
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


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 notice-
prejudice 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

                                 19
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


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.)




                                 20
    PITZER COLLEGE v. INDIAN HARBOR INSURANCE COMPANY
                   Opinion of the Court by Chin, J.


       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 first-
party 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.
     III. CONCLUSION
      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


                                 21
   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.
                                                     CHIN, J.
We Concur:

CANTIL-SAKAUYE, C. J.
CORRIGAN, J.
LIU, J.
CUÉLLAR, J.
KRUGER, J.
GROBAN, J.




                                22
See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Pitzer College v. Indian Harbor Insurance Company
__________________________________________________________________________________

Unpublished Opinion
Original Appeal
Original Proceeding XXX on request pursuant to rule 8.548, Cal. Rules of Court
Review Granted
Rehearing Granted

__________________________________________________________________________________

Opinion No. S239510
Date Filed: August 29, 2019
__________________________________________________________________________________

Court:
County:
Judge:

__________________________________________________________________________________

Counsel:

Murtaugh Meyer Nelson & Treglia, Murtaugh Treglia Stern & Deily, Michael J. Murtaugh, Lawrence J.
DiPinto and Thomas N. Fay for Plaintiff and Appellant.

Polsinelli, Richard C. Giller and Michelle Buckley for United Policyholders as Amicus Curiae on behalf of
Plaintiff and Appellant.

Duane Morris, Max H. Stern, Jessica E. La Londe and Katherine Nichols for Defendant and Respondent.

Crowell & Moring, Laura A. Foggan and Michael Lee Huggins for Complex Insurance Claims Litigation
Association and American Insurance Association as Amici Curiae on behalf of Defendant and Respondent.
Counsel who argued in Supreme Court (not intended for publication with opinion):

Thomas N. Fay
Murtaugh Treglia Stern & Deily
2603 Main Street, Penthouse
Irvine, CA 92614-6232
(949) 794-4000

Max H. Stern
Duane Morris
Spear Tower
One Market Plaza, Suite 2200
San Francisco, CA 94105-1127
(415) 957-3000
