Choice of law provision in the insurance policy

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Many contracts include a choice of law provision in which the parties agree to use all of the laws of a particular jurisdiction to govern the contract. These provisions promote predictability. No matter where a dispute may arise under the contract, the contract will always be interpreted according to the laws of the chosen jurisdiction. This practice of including choice of law provisions extends to insurance policies.

However, these provisions relating to the choice of applicable law are not always enforceable. Section 187 of the Repositioning (second) of conflicts of laws indicates that the provision on the choice of law applicable by the parties would not apply if it is contrary to the fundamental public policy of a State and if that State has a materially greater interest in the resolution of the matter than the state chosen by contract.

The California Supreme Court recently considered this issue as part of a choice of law provision in an insurance policy in Canada. Pitzer College v. Indian Harbor Insurance Co., 8 cal. 5th 93 (Cal. 2019). In this case, the insurer Indian Harbor refused to cover Pitzer College following an environmental remediation of the land carried out by the school.

The insurance policy in issue contained a choice of law provision which stated that New York law would govern the policy. Additionally, the policy included a notice clause requiring Pitzer College to notify Indian Harbor of any pollution conditions it discovered, which resulted in loss or remediation costs as a prerequisite for coverage. Finally, the policy included a consent provision requiring that no “cost, charge or expense shall be incurred, nor payment made… without [Indian Harbor’s] written consent. “However, the consent provision provided an exception whereby Pitzer College could incur costs in an emergency, as long as it notified Indian Harbor” immediately thereafter. “

During the period of insurance, Pitzer College discovered lead contamination in the ground of a lot where a new dormitory was under construction. About two months after the pollution was discovered, Pitzer College remediated the land itself, at a cost of around $ 2 million. However, Pitzer College did not notify Indian Harbor of the remediation until six months after the pollution was discovered. In the end, Indian Harbor refused coverage for the loss on the grounds that Pitzer College failed to notify it in a timely manner of the loss or costs incurred, which both violated the notice provisions. and with the consent of the police.

Pitzer College has brought an action in federal court against Indian Harbor for alleged breach of contract. Specifically, Pitzer College alleged that under California law an insurer can only deny coverage for an insured’s failure to notify a loss in a timely manner if it can prove that it has been greatly prejudiced by delayed notice.

The district court disagreed with Pitzer College’s argument that Indian Harbor had the burden of showing that it had suffered substantial harm as a result of the late notification. The court ruled that because New York, in accordance with the policy choice of law provision, had a strict no-injury law for insurance policies issued outside New York, Indian Harbor was not not required to show prejudice in his denial of coverage at Pitzer College due to lack of notice. As such, the court issued summary judgment in favor of Indian Harbor. Pitzer College appealed to the Ninth Circuit Court of Appeals.

On appeal, the Ninth Circuit certified two questions to the California Supreme Court: (1) whether the California prejudicial notice rule was “fundamental public policy” for the choice of law analysis; and (2) whether the injurious opinion rule applied to the consent provision of the insurance policy.

In determining whether the California prejudicial notice rule was fundamental public policy, the California Supreme Court noted that a rule is fundamental public policy when it: (1) cannot be the subject of a contractual derogation; (2) protects against otherwise unfair results; and (3) promotes the public interest.

In that case, the court concluded that all three elements existed to establish the prejudicial notice rule as a fundamental public policy of the state. For the first part, the court noted that the rule of notice-damage could not be waived, because it restricted contractual freedom and prevented the execution of a contractual clause (technical forfeiture).

As to the second prong of its analysis, the court noted that insurance contracts were “inherently unbalanced” and “sticky” and that the prejudicial notice rule protects an insured against unfair results based on the superior bargaining power of an insurer. What is particularly interesting about this part of the Court’s analysis is that it made no distinction between the type of policy in this area (between a large sophisticated entity such as the Claremont University Consortium and Indian Harbor) and a more common type of insurance policy (between an individual without negotiating power and a carrier).

As to the third branch, the court concluded that the injurious opinion rule promoted objectives which are in the interest of the general public because it protected the public from bearing the costs of the damage that an insurance policy claims to cover. In other words, by requiring an insurer to demonstrate that it has suffered substantial harm as a result of an inappropriate notice, the rule decreases the likelihood that a loss covered by the policy will be denied by the policy. insurer on the basis of a technical detail. Essentially, the injurious opinion rule helps prevent an insurer from “harvesting[ing] the benefits of forfeiture ”of an insurance policy with a strict notice clause and lessens the risk of placing the burden of the costs of the loss on the public.

As to the second question certified by the Ninth Circuit to the California Supreme Court, the court found that the consent provision, with respect to first party claims, had substantially the same effect as the consent provision. the opinion. The underlying objective of the two provisions was to “facilitate the main tasks of the insurer in the context of the contact and to minimize the prejudices in the performance of these tasks”. Since the two provisions were inherently the same for the court, the rationale for the injurious opinion rule would also govern the consent provision. As such, Indian Harbor would have to show that Pitzer College’s failure to obtain consent, as prescribed by the policy, would not be grounds for denial of coverage, unless it could demonstrate that the failure to obtain the consent caused significant harm to Indian Harbor.

It is important to note that the court drew a distinction between first party claims and third party claims with respect to the consent provisions. Since third party claims involve liability coverage and the insurer assumes the defense of the case once the defense is presented by the insured, the rationale for the injurious opinion rule would not apply. not to the consent provisions in third party claims.

In ruling that the Indian Harbor Police Choice of Law provision would not be enforceable with respect to the notice and consent provisions, the California Supreme Court essentially ruled that California courts no. ‘would apply no notice provision in insurance policies unless the insurer can demonstrate that it has suffered substantial damage as a result of the lack of notice on the part of the insured.

This position introduces considerable uncertainty into the analysis of the choice of law, which is already fraught with complications as to the place of formation of contracts, the location of insured risks, etc. Sometimes the difference between the laws of certain jurisdictions is decisive in insurance disputes. In addition, not all states rely on the Reprocessing approach to conflict of laws, and thus the issue of “conflict” with the “fundamental policies” of that state may not even come into play. However, if other states adopt the approach in Pitzer College, this may ultimately render choice of law provisions moot.

© 2011-2021 Carlton Fields, Pennsylvania Revue nationale de droit, volume IX, number 291


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