This summer, two courts weighed in on two California choice of law principles: the “place of performance” of an insurance policy determines which state’s law governs the interpretation of the policy and a California court will not apply another state’s law where the issue is a fundamental rule of public policy. In Arrow Elec., Inc. v. Liberty Mut. Ins. Co., 775 Fed. Appx. 305 (9th Cir. 2019), the Ninth Circuit held that Alabama law applied to a coverage dispute under an insurance policy issued in California arising out of environmental contamination in Alabama, reasoning that the parties intended that the contract would be performed in Alabama in light of the policies’ explicit reference to Alabama. Arrow highlights the importance of the determination of whether an insurance policy had a “place of performance” or not to a choice of law analysis under California law. In Pitzer College v. Indian Harbor Ins. Co., 447 P.3d 669 (Cal. 2019), the California Supreme Court held that the notice-prejudice rule is a “fundamental rule of public policy” for the purpose of determining whether a choice of law provision may be enforced. Pitzer highlights the importance of assessing the preliminary issue of whether a conflict of law implicates an issue of fundamental public policy before assuming a choice of law provision will apply or conducting a choice of law analysis.
Arrow arose out of environmental contamination at a location in Huntsville, Alabama. The insured entered into a consent order requiring it to address the environmental conditions at the site and sought coverage under its commercial general liability insurance and excess insurance policies. Each policy was issued to the named insured at its principal place of business in California and identified locations in over 15 states, including California and Alabama. While the district court applied California law, the Ninth Circuit reversed, holding Alabama law governed the interpretation of the policies. The courts agreed as to the choice of law standard under California law: “Under California law, a ‘contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made.’” Cal. Civ. Code § 1646. The district court concluded that because the policies covered the insured’s operations throughout the country, there was no “specific place of performance” for the policies. Relying on Frontier Oil Corp. v. RLI Ins. Co., 63 Cal.Rptr.3d 816 (Cal. Ct. App. 2007), the Ninth Circuit reversed, holding that the policies’ explicit reference to Alabama and/or the Huntsville facility indicated that the parties’ intention was that Alabama law would apply to claims arising from that facility and that Alabama was the intended place of performance of the contract under section 1646.
Pitzer involved the interpretation of an insurance policy with a choice of law clause providing New York law governed any dispute arising out of the policy. The district court held there was no coverage under the policy, as a result, the insured’s untimely notice because, under New York law, the insurer was not obligated to show prejudice in order to deny coverage. (Under New York law, insurance policies issued and delivered in New York are subject to the notice-prejudice rule, but an insurer need not show prejudice to deny coverage for late notice under an insurance policy issued outside New York like the policy at issue in Pitzer.) Under California law and Restatement Second Conflict of Laws section 187, the parties’ choice of law provision will govern “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.” On appeal, the Ninth Circuit certified the issue of whether the notice-prejudice rule was a “fundamental public policy” for the purpose of part one of this analysis. The California Supreme Court answered in the affirmative. While the court declined to set forth “bright line rules,” the court found that the notice-prejudice rule was a “fundamental” policy (rather than just a “strong” one) because its goal is to protect a party with inferior bargaining position. “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.” More specifically, the court found that three reasons for concluding the notice-prejudice rule were a fundamental public policy: (1) it could not be waived, (2) it protected against otherwise inequitable results, and (3) it promoted the public interest. The court also held that the notice-prejudice rule applied to the voluntary payments condition in the first-party insurance policy before the court.