Ohio Appellate Court Rejects Policyholder’s Notice-Prejudice and Continuity of Coverage Arguments

Andrew Daechsel | Property Casualty Focus

Claims-made liability insurance policies typically require the policyholder to notify the insurer of a claim within a set amount of time — typically during the policy period, or within a specific period of time after the end of the policy period — to obtain coverage. When policyholders fail to do so, they often argue that the “notice-prejudice rule” should apply, such that the insurer can only deny coverage if it was prejudiced by the policyholder’s untimely notice. Additionally, policyholders sometimes argue that their failure to provide timely notice should be excused if they renewed the subject policy and thus had an expectation of continuous coverage. In ISCO Industries, Inc. v. Great American Insurance Co., Ohio’s First District Court of Appeals, applying Ohio law, rejected both of these arguments.

Great American’s Claims-Made Liability Policy

The case involved a claims-made liability insurance policy that Great American issued to ISCO for the policy period from March 19, 2013, to March 19, 2014. The policy provided defense and indemnity coverage for certain “claims,” including lawsuits, first made against ISCO during the policy period and reported to Great American “as soon as practicable from the date the General Counsel, Risk Manager, or person with equivalent responsibility has knowledge of the Claim, and in no event later than ninety (90) days after the end of the Policy Period.”

Underlying Lawsuit Filed Against ISCO

In February 2014, during the policy period, a third-party company filed a lawsuit against ISCO, but ISCO did not provide notice of the lawsuit to Great American until August 2015, well after the notice deadline set forth in the policy. Great American subsequently denied coverage for the lawsuit due to ISCO’s failure to provide timely notice. Following this denial of coverage, ISCO settled the underlying lawsuit.

ISCO’s Coverage Lawsuit Against Great American Is Dismissed With Prejudice

After settling the underlying lawsuit, ISCO sued Great American for breach of contract, alleging that Great American had breached its duty to defend ISCO against the underlying lawsuit and to indemnify ISCO for the amount it paid to settle the underlying lawsuit. Great American moved to dismiss the lawsuit with prejudice, arguing that it was not obligated to provide coverage because ISCO failed to provide notice of the underlying lawsuit within 90 days after the end of the policy period, as required by the policy. The trial court granted the motion and dismissed the lawsuit with prejudice.

Appellate Court Affirms Dismissal With Prejudice

ISCO appealed the trial court’s dismissal with prejudice, and the appellate court affirmed.

On appeal, ISCO argued that the dismissal was improper because the “notice-prejudice rule” applied to the policy such that Great American could only deny coverage based on late notice if it was prejudice by the late notice. The appellate court rejected this argument, holding that the notice-prejudice rule was inapplicable to Great American’s policy. The appellate court acknowledged that, in Ferrando v. Auto-Owners Mutual Insurance Co., 781 N.E.2d 927 (Ohio 2002), the Ohio Supreme Court held that the notice-prejudice rule applied to an uninsured motorist policy that required the insured to provide “prompt notice” of claims. However, the appellate court found that Ferrando was inapplicable because Great American’s policy was a directors and officers liability policy (not an uninsured motorist policy like in Ferrando) and Great American’s policy required the insured to provide notice of claims by a specific deadline, within 90 days after the policy period (not just “prompt notice” like the policy in Ferrando).

ISCO also argued that the trial court’s dismissal was improper because ISCO had renewed the policy and thus had an expectation of continuous and seamless coverage, so long as it provided notice of the underlying lawsuit within a reasonable time. The appellate court rejected this argument because the plain language of the policy required ISCO to report a claim within 90 days after the end of the policy period, not just within a reasonable time. The appellate court noted, “It is well-established in Ohio, and indeed universally, that contracts, including insurance policies, ‘are to be interpreted so as to carry out the intent of the parties, as that intent is evidenced by the contractual language.’”

California Supreme Court Holds “Notice-Prejudice” Rule is “Fundamental Public Policy” of California, May Override Choice of Law Provisions in Policies

Anthony L. Miscioscia and Timothy A. Carroll | White and Williams | August 30, 2019

On August 29, 2019, in Pitzer College v. Indian Harbor Insurance Company, 2019 Cal. LEXIS 6240, the California Supreme Court held that, in the insurance context, the common law “notice-prejudice” rule is a “fundamental public policy” of the State of California for purposes of choice of law analysis. Thus, even though the policy in Pitzer had a choice of law provision requiring application of New York law – which does not require an insurer to prove prejudice for late notice of claims under policies delivered outside of New York – that provision can be overridden by California’s public policy of requiring insurers to prove prejudice after late notice of a claim. The Supreme Court in Pitzer also held that the notice-prejudice rule “generally applies to consent provisions in the context of first party liability policy coverage,” but not to consent provisions in the third-party liability policy context.

The Pitzer case arose from a discovery of polluted soil at Pitzer College during a dormitory construction project. Facing pressure to finish the project by the start of the next school term, Pitzer officials took steps to remediate the polluted soil at a cost of $2 million. When Pitzer notified its insurer of the remediation, and made a claim for the attendant costs, the insurer “denied coverage based on Pitzer’s failure to give notice as soon as practicable and its failure to obtain [the insurer’s] consent before commencing the remediation process.” The Supreme Court observed that Pitzer did not inform its insurer of the remediation until “three months after it completed remediation and six months after it discovered the darkened soils.” In response to the denial of coverage, Pitzer sued the insurer in California state court, the insurer removed the action to federal court and the insurer 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 insurance policy in Pitzer had three relevant provisions: (1) a notice provision requiring Pitzer to provide “notice of any pollution condition” with a “written report as soon as practicable;” (2) a consent provision requiring Pitzer to obtain the insurer’s written consent “before incurring expenses, making payments, assuming obligations, and/or commencing remediation due to a pollution condition;” and (3) a choice of law provision stating that New York law governed all matters arising under the Policy. Based on the choice of law provision, the federal district court in Pitzer held that New York law applied to the policy. Under New York law, a policy delivered in New York is subject to the notice-prejudice rule; however, a policy delivered outside of New York was subject to a “strict no-prejudice rule” under New York common law, “which denies coverage where timely notice is not provided.” Since the policy in Pitzer was delivered in California, the insurer did not need to prove prejudice from the College’s late notice of its pollution claim.

The district court in Pitzer held that the insurer was entitled to summary judgment because Pitzer College’s notice was not timely and the insurer did not need to show prejudice from that late notice. “[A]lthough a state’s fundamental policy can override a choice of law provision,” the district court observed, Pitzer “failed to establish that California’s notice-prejudice rule is such a policy.” Had it done so, Pitzer may have been able to avoid dismissal of its coverage claim due to its late notice of the pollution discovery and remediation work. Thus, Pitzer appealed to the Ninth Circuit Court of Appeals on the issue of whether the notice-prejudice rule was a fundamental public policy of California. The Ninth Circuit certified the question to the California Supreme Court.

The California Supreme Court in Pitzer held that the notice-prejudice rule was a fundamental public policy of California for several reasons, including that the rule “protects insureds against inequitable results that are generated by insurers’ superior bargaining power.” The notice-prejudice rule, the Supreme Court added, “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.’” (internal citations and quotations omitted). The Supreme Court left it for the Ninth Circuit Court of Appeals to determine, based on its holding that the notice-prejudice rule is California’s public policy, “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.”

Building on that holding, the Supreme Court also concluded that, with respect to the policy’s consent provision, “failure to obtain consent in the first party context is not inherently prejudicial” to insurers, and “the usual logic of the notice-prejudice rule should control. . . .” The Supreme Court found “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.” Thus, the court held, “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.” The California Supreme Court distinguished consent provisions in third-party liability policy context, “sometimes called ‘no voluntary payment’ provisions,” which “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.” In the third-party liability policy context, the Supreme Court observed, “the insurer’s right to control the defense and settlement of claims is paramount,” and California courts “generally refuse[ ] to find the notice-prejudice rule applicable to consent provisions in third-party policies.”

California Supreme Court Concludes Notice-Prejudice Rule Applies To Consent Clauses In First-Party Insurance Policies

Andrew B. Downs | Bullivant Houser Bailey | September 30, 2019

When it comes to insurance coverage, one cue to the court’s feelings about an issue is whether it views that issue as a “technicality.” When that happens, good things rarely result. Another cue is when the case turns on an esoteric legal issue of greater interest to academics than people living their daily lives. Pitzer College v. Indian Harbor Ins. Co. (August 29, 2019) combines both of those situations. The result was not good for the insurance industry.

Pitzer College is one of the Claremont Colleges in Southern California. Claremont bought a policy providing coverage for pollution remediation expenses. During the construction of a new dormitory, Pitzer discovered lead contamination on its property. It promptly began remediation activities. It didn’t notify its insurer until some months later after remediation was complete. The insurer denied the claim based on late notice and breach of the policy’s consent to incur expenses clause. The policy had a choice of law clause making New York law applicable to its interpretation and enforcement.

The California Supreme Court was asked to determine (a)Whether California’s notice-prejudice rule, under which an insurer denying on the basis of late notice must prove it was prejudiced, was a fundamental public policy which should be applied notwithstanding a contractual choice of law clause in favor of New York; and (b)whether that notice-prejudice rule should be applied to consent to incur expenses requirements in first-party policies.

Choice of law is a subject which can make both lawyers’ and judges’ brains hurt, but that’s reflective of the fact that the differences in state law can be outcome determinative. California, like most jurisdictions, will enforce contractual choice of law clauses, like the one in the policy here, provided it isn’t (in layman’s terms) really important that California law applies. In this case, if New York law applied, the insurer would win, while if California law applied, the policyholder might win. Under California’s choice of law jurisprudence, a contractual choice of law provision, like the one favoring New York here, won’t be enforced if the result would conflict with California’s fundamental public policy and if California had a materially greater interest in the determination of the issue than New York.

The notice-prejudice rule requires the insurer to prove the policyholder’s late notice of a claim has “substantially prejudiced” the insurer. Here, the California Supreme Court concluded the notice-prejudice rule was a fundamental public policy of California. Because the case reached the Supreme Court on certification from the federal Ninth Circuit Court of Appeals (a way for the federal courts to solicit the state court’s opinion on a question of state law), the Supreme Court wasn’t able to determine whether California had a materially greater interest in determining these issues than New York did.

In the long run, the second issue addressed by the court may be more important. The policy required notice and, in non-emergency situations, consent to the expenditure of funds by the policyholder. Here, the Supreme Court drew a distinction between third-party liability policies where it agreed “no voluntary payment” provisions were enforceable without a need to prove prejudice and first-party policies where it concluded the notice-prejudice doctrine applied. The court reasoned the insurer’s right to control the defense and settlement of claims is paramount in third-party claims, so breaches of the consent clause are inherently prejudicial, but in the first-party context requiring proof of prejudice before denying coverage is appropriate because the failure to obtain advance consent is not inherently prejudicial unlike the situation in third-party claims.

What does this mean for insurers in their day to day operations? First, having a contractual choice of law clause that selects favorable, or at least predictable, law is not a panacea because if the different California law reflects a fundamental public policy in California, the choice of law clause may be disregarded. Second, in a first-party context (and the policy issued to Pitzer is somewhat unusual in that, at least from the policyholder’s perspective, it provided coverage for the voluntary remediation of the policyholder’s own property), the courts will expect some actual, not theoretical, harm, from the failure to give advance notice and obtain consent for expenditures.

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

Kevin Brantley and J. Kelby Van Patten | Payne & Fears | September 27, 2019

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).


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.

California Supreme Court holds that “Notice-Prejudice Rule” Is a “Fundamental Public Policy” of California for the Purpose of Choice of Law Determination

Susan White | Buchalter | September 12, 2019

On August 29, 2019, the California Supreme Court issued a decision on an important issue to many insurance coverage disputes. In Pitzer College v. Indian Harbor Insurance Co., the Court held that California’s “notice-prejudice rule”—which requires an insurer to prove it was substantially prejudiced by an insured’s untimely notice of a claim in order to deny coverage on that basis—is a “fundamental public policy” of California for the purpose of choice-of-law analysis. The Court also ruled that California’s notice-prejudice rule applies to consent provisions contained in “first party” policies, which, among other things, cover an insured’s costs arising from damage to its own property.

In Pitzer, the insurance policy contained a choice-of-law provision stating that New York law applied.  The Court noted that under New York law, “policies issued and delivered outside New York [as is the case here] are subject to a strict no-prejudice rule under New York common law, which denies coverage where timely notice is not provided.” Pitzer argued that this rule should not apply, but instead, a choice-of-law analysis should be invoked.

The Ninth Circuit certified two questions to the California Supreme Court in Pitzer’s dispute with Indian Harbor: (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 the Pitzer case?

The Court analyzed applicable choice-of-law principles, which provide that when a choice-of-law provision is stated in an insurance policy, 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 contractually chosen state.

The Court then agreed with Pitzer’s argument that the notice-prejudice rule is a fundamental public policy for the purpose of choice-of-law analysis because, among other reasons, it protects the state’s insureds from “technical forfeitures” of insurance coverage.

“The insurer establishes actual and substantial prejudice by proving more than delayed or late notice,” Associate Justice Ming W. Chin wrote for the Court.  “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.’”  Justice Chin further noted, “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.”

Because the Court was limited to answering the Ninth’s Circuit’s certified question, it left it to that court to decide whether California has a materially greater interest than New York in determining the coverage issue, such that the policy’s choice of law would be unenforceable because it is contrary to California’s fundamental public policy.  However, this decision has now eliminated an insurer’s ability to simply designate another state’s law in a policy issued to a California-based insured as a way to avoid California’s notice-prejudice rule.

The Court then moved on to the second question—whether the notice-prejudice rule also applies to a “consent” provision in Pitzer’s policy, which required the college to obtain Indian Harbor’s permission before incurring any remediation expenses.  In addition to its late notice defense, Indian Harbor also argued that Pitzer failed to obtain the insurer’s consent before incurring such remediation expenses.

The Court held, as a matter of first impression, that the notice-prejudice rule is equally applicable to consent provisions in first-party policies.  Justice Chin noted that “the notice-prejudice rule makes good sense for consent provisions in first party policies just as it does for notice provisions.”  Thus, a first-party insurer must prove it suffered prejudice in order to deny coverage due to an insured’s breach of a consent provision.

However, the Court did not apply the notice-prejudice rule to consent clauses in third-party liability policies, which protect an insured against claims for property damage or bodily injury brought by a third party.  It noted that third-party policies present somewhat different issues where the insurer’s right to control the defense and settlement of claims is paramount.

Why this matters:  Pitzer will have a huge impact on insurance cases, as insurers can no longer argue that choice-of-law provisions in their policies automatically preclude the applicability of California’s notice-prejudice rule to California-based insureds.  Moreover, insurers cannot continue to argue that the consent provisions in their first-party policies bar coverage unless they can prove that they were actually and substantially prejudiced by an insured’s failure to obtain consent.  Thus, this decision potentially can breathe new life into cases as California public policy is clear that forfeitures of coverage are to be avoided.