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'Notice Prejudice' Rule Does Not Apply Where Parties Contracted for Coverage Subject to Strict Provisions
Insurance Law Update
California Court of Appeal
The California Court of Appeal, Second District, affirmed a superior court ruling that an insurer’s notice limitation in its pollution buyback clause did not violate California’s notice-prejudice rule or public policy because imposing a prejudice requirement upon the insurer would expand coverage beyond that which was agreed to by the contracting parties.
In Venoco, Inc. v. Gulf Underwriters Ins. Co., 175 Cal.App.4th 750 (July 1, 2009), Gulf issued a liability insurance policy with a pollution exclusion to Venoco effective April 1, 1996 to April 1, 1997. Venoco was the assignee to an oil and gas lease for a site located next to Beverly Hills High School. In 2003, Venoco was sued by numerous former students and employees of the high school alleging they had been exposed to toxic chemicals, causing them to develop cancer and other serious illnesses. Gulf denied Venoco’s tender of the lawsuit based on the pollution exclusion, and because the insured did not satisfy the 60-day notice provision in the exception to the exclusion (i.e., the pollution buyback clause). Thereafter, Venoco sued Gulf for breach of contract, bad faith and declaratory relief.
The superior court granted Gulf’s motion for summary judgment on the basis that the insured never gave notice of any occurrence during the policy period or the subsequent 60-day “buyback” period. On appeal, Venoco contended that the pollution buyback clause violated public policy, including the notice-prejudice rule. The Court of Appeal affirmed, holding that the pollution buyback clause did not offend public policy. The court analogized the buyback clause to a claims made and reported policy where the insurer is providing high-risk coverage for claims made within a defined time period that includes reporting of the claim. The court reasoned that providing such coverage allows high-risk businesses (such as Venoco) to obtain affordable coverage that would otherwise be unavailable. Moreover, the court found that imposing a prejudice requirement would essentially rewrite and expand the terms of the policy.
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