California Supreme Court Strikes Blow to Insurers’ Choice-of-Law Provisions

The California Supreme Court has struck a blow to insurers’ attempts to contract out of more policyholder friendly jurisdictions, holding that the notice-prejudice rule is a fundamental public policy. Pitzer College v. Indian Harbor Insurance Co., 2019 WL 4065521. 

In Pitzer College, the Court analyzed a choice-of-law provision requiring that New York law applies to any policy disputes. New York courts apply a notice rule where an insured forfeits coverage based on late notice regardless of prejudice to the insurer. On the other hand, California courts apply a notice-prejudice rule requiring that an insurer show that it has been prejudiced by the late notice. Given that the notice-prejudice rule is a fundamental public policy, and the notice rule provides an insured fewer protections, the Court determined that New York must have a materially greater interest in determining the coverage issue for the choice-of-law provision to be enforced. This was left to the lower court to decide.

This ruling has a direct impact on how California courts make choice-of-law determinations for insurance policies. Specifically, insurers often include choice-of-law provisions in their policies that ostensibly require resolution of disputes based on the laws of a jurisdiction with little, or no, relationship to their policies. These jurisdictions have no relationship to where the (1) policy is procured, (2) insureds are domiciled, or (3) covered operations occur. Insurers do so because these chosen jurisdictions provide substantially less protection for policyholders than the laws of the jurisdiction substantially related to the policy. Now choice-of-law provisions will not be enforced if a fundamental public policy is implicated and the chosen jurisdiction provides less protection to policyholders. 

This is consistent with what other jurisdictions are doing as well. For instance, the Nevada Supreme Court has held that a choice-of-law provision in an insurance policy is unenforceable unless the forum selected by contract has “a substantial relation with the transaction” and the agreement is “not … contrary to the public policy of the forum” or other interested state. See Daniels v. National Home Life, 103 Nev. 674, 677 ( 1987) (denying effect to choice of law provision in insurance contract as law chosen provides less protection than the insured would receive in Nevada).

Takeaway

Although Pitzer College answers the question about whether the notice-prejudice rule is a fundamental public policy, it remains to be seen what other policyholder protections are also fundamental public policies.  Policyholders should be prepared to continue to face disputes over choice-of-law provisions.