Insurance Law

• Publication year: 2019
• Author: By Stephen Raucher and Michael Sohigian

Insurance Law

By Stephen Raucher and Michael Sohigian

Introduction

The final year of the decade was generally a good one for policyholders in California courts. The California Supreme Court held that the notice-prejudice rule constitutes a fundamental public policy, and extends to the consent provision in first party policies. Also, in the first party context, the Ninth Circuit overturned summary judgment in favor of an insurer who was relying on "War" exclusions to avoid losses resulting from Hamas rocket attacks. As for third party liability policies, California appellate courts gave an expansive reading to the term "Inappropriate Employment Conduct" under an Employment Practices Liability Policy and refused to find that a "Care, Custody or Control" exclusion precluded additional insured coverage for a general contractor. Finally, 2019 also saw the resolution of several insurer v. insurer disputes, all in favor of more coverage rather than less.

First Party Policies

Supreme Court Finds Notice-Prejudice Rule Constitutes a Fundamental Public Policy for Choice of Law Analysis and Applies to Consent Provisions

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."¹ In what could be the most consequential insurance case of 2019, Pitzer College v. Indian Harbor Ins. Co., the Ninth Circuit asked the California Supreme Court two important questions: "(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?"² As with any coverage dispute, specific policy language and the underlying facts played a critical role in the Court's decision.

Pitzer College purchased an insurance policy from Indian Harbor covering legal and remediation expenses resulting from pollution discovered during the policy period. The policy required Pitzer to provide notice of any pollution conditions "as soon as practicable," and to obtain Indian Harbor's written consent prior to incurring remediation expenses. The policy also contained a choice of law provision specifying that New York law governed.

On January 20, 2011, Pitzer discovered darkened soils at the construction site of a new dorm. Under pressure to complete construction before the upcoming academic year, Pitzer spent nearly $2 million to conduct lead removal. Indian Harbor was not informed of the remediation until July 11, 2011 and denied coverage based on violation of both the notice and consent provisions.

After Pitzer sued, the district court granted summary judgment for Indian Harbor, finding that California's notice-prejudice rule did not constitute a fundamental public policy so as to overcome the choice of law provision, and that New York law, which denies coverage where timely notice is not given under policies delivered out of state, instead applied. On appeal, the Ninth Circuit certified the two questions quoted above to the California Supreme Court.

The Supreme Court found that the notice-prejudice rule constitutes a fundamental public policy in California for three reasons. First, the rule cannot be contractually waived and thus restricts freedom of contract. Second, it "protects insureds against inequitable results that are generated by insurers' superior bargaining power."³ Third, the "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."⁴ Having resolved this issue, the Supreme Court left the remaining choice-of-law analysis to the Ninth Circuit.

However, the Ninth Circuit also questioned whether, assuming California law governed, the notice-prejudice rule also applies to consent provisions. The Supreme Court found that, while notice and consent provisions serve different roles, they are both, nonetheless, ancillary to the insured's basic duty to pay premiums in return for coverage. Thus, as with notice provisions, strict enforcement of consent provisions absent a showing of prejudice to the insurer would work an inequitable forfeiture. Accordingly, the Court ruled that the notice-prejudice rule also applies to consent provisions, although only in first party policies.

The reason for this distinction is that first party coverage obligates the insurer to pay damages claimed by the insured itself, whereas third party coverage requires the insurer to defend, settle and indemnify against third party claims. Because third party policies give the insurer the right to control the defense and settlement of claims, such policies contain consent provisions barring insureds from incurring unauthorized defense expenses or unilaterally settling. Accordingly, the notice-prejudice rule cannot be extended to third party policy consent provisions.

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Ironically, the policy at issue in Pitzer contained elements of both first party and third party coverage, so the question of whether the notice-prejudice rule would apply to its consent provision was left unanswered by the Supreme Court, which returned the case for further proceedings in the Ninth Circuit.

Attacks That Forced Insured to Move Television Production Don't Trigger Policy's "War" Or "Warlike Actions" Exclusions

When Hamas fired several rockets into Israel during the summer of 2014, Universal Cable Productions ("Universal") moved its production of the television series Dig to another location, at great expense. Universal filed a claim for its losses against its production policy with Atlantic Specialty Insurance ("Atlantic"). Atlantic denied Universal's claim based on the policy's exclusions for expenses resulting from "war," "warlike action by a military force," and "insurrection, rebellion, [or] revolution." Universal sued for breach of contract and bad faith, arguing in Universal Cable Productions, Inc. v. Atlantic Specialty Ins. Co.,⁵ that the war exclusions did not apply due to the specialized meaning of those terms in the insurance context. Though the district court granted Atlantic's summary judgment motion based on the ordinary and plain meanings of the terms "war" and "warlike action," the Ninth Circuit Court of Appeals reversed and found these exclusions did not apply.

Atlantic's policy "covered losses that are 'a direct result of an unexpected, sudden or accidental occurrence entirely beyond your control to include . . . [i]mminent peril, defined as certain, immediate and impending danger of such probability and severity to persons or property that it would be unreasonable or unconscionable to ignore.' The Policy, which was negotiated before December 2013, covered loss caused by terrorism if that loss was not otherwise excluded."⁶

The exclusions were for:

1. War, including undeclared or civil war; or
2. Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign, or other authority using military personnel or other agents; or
3. Insurrection, rebellion, revolution, usurped power, or action taken by the governmental authority in hindering or defending against any of these. Such loss or damage is excluded regardless of any other cause or event contributed concurrently or in any sequence to the loss.
4. Any weapon of war including atomic fission or radioactive force, whether in time of peace or war . . . .⁷

In its denial letter, Atlantic conceded that Universal's claim triggered coverage, thus, the question before the Ninth Circuit was "...not whether the loss falls within the insuring clause but whether the war exclusion' applies. Atlantic concluded that 'the extra expense associated with the move is not covered under [the Policy] because of the exclusion for war and warlike action' — the first and second war exclusions."⁸ Since the parties agreed the loss was a covered one, it was Atlantic's burden to establish it was subject to an exclusion. The applicability of such exclusions depended on the meaning of "war" and "warlike action," and whether they should be "understood in their ordinary and popular sense" or whether "a special meaning is given to them by usage, in which case the latter must be followed."⁹

Relying on caselaw, insurance treatises, and expert testimony, "Universal provided the district court with substantial unrebutted evidence that, in the insurance context, the term 'war' has a special meaning that requires the existence of hostilities between de jure or de facto governments."¹⁰ Universal presented case law establishing that prior courts had refused to apply the war exclusion to violent actions by Palestinian terrorist organizations. A leading treatise defined war in similar terms, "because '[w]ar is often viewed as the method by which a nation prosecutes its right by force."¹¹ And "Universal's insurance industry expert stated that under insurance industry custom, 'an underwriter cannot merge the two concepts and say that "an act of terrorism" can be also an "act of war," because 'if the policy does not contain a terrorism exclusion, there is a reasonable expectation that acts of terrorism by a known terrorist organization, regardless of however else they may be characterized, will be covered.'"¹²

California Civil Code section 1644 provided additional support for Universal's position. Section 1644 requires application of a term's specialized meaning rather than its plain, ordinary meaning when (1) the specialized meaning has been developed from customary usage in a given industry and (2) both parties have been given constructive notice of the meaning. The Court found both factors were present. While Universal was not in the insurance trade, it was a sophisticated party that frequently engaged in business related to insurance, and was represented by a broker in the...