Archive for June, 2013

Hydraulic Fracturing Digest

Friday, June 28th, 2013

Our Hydraulic Fracturing Practice Group recently issued its June newsletter. This issue discusses the Bureau of Land Management call for the expansion of fracking on 36 million acres of Federal and Indian land and the response from the Obama administration with its own revised rules regarding Hydraulic Fracturing. These revised rules have been met with criticism from both sides of the issue.

Click here to read the full issue.

West Virginia Reverses Course, Concludes that Faulty Workmanship is Covered Under a CGL Policy

Thursday, June 27th, 2013

Last week, the Supreme Court of Appeals of West Virginia issued an opinion holding that faulty construction work qualifies as an “occurrence” under a CGL policy if it causes “bodily injury” or “property damage.” Cherrington v. Erie Insurance Property & Casualty Co., — S.E.2d —, 2013 WL 3156003 (W. Va. June 18, 2013). Cherrington reverses approximately 14-years’ worth of precedent concluding that CGL policies did not cover faulty workmanship.

For a full analysis of Cherrington and other recent case law addressing the “occurrence” issue in the context of faulty construction work, be sure to check out Sedgwick’s Construction Defect Coverage Quarterly when it drops next month.

Prior issues of the Construction Defect Coverage Quarterly can be found here.


New York Assembly Presents Insurance Reform Overhaul in Wake of Superstorm Sandy

Tuesday, June 25th, 2013

We previously reported on the New Jersey Legislature’s attempts to enact a bill that would allow policyholders to sue an insurer for bad faith in the wake of Superstorm Sandy.  New Jersey Assembly Bill A3710  is still pending.  On the other hand, New York’s Assembly has been very active after Superstorm Sandy and resoundingly passed 12 new bills on June 4, 2013, which would affect changes to the Insurance Law.  The State Senate is now holding debates for these bills, which provides insurers an opportunity to request the legislature to reject these proposed laws.

The American Insurance Association has attacked the new legislation, stating that it is “misguided, if well-intentioned” because the bills “would simply open the floodgates for even greater litigation after a catastrophe.”  Although policyholders already have considerable privileges under current law, the New York Assembly is attempting to rewrite insurance policies by rejecting basic contractual principles that allow parties to form the terms of their own agreements.  If passed, the insurance market may raise premiums to ensure they can pay the newly-mandated covered claims, and handle an increase in litigation costs.

The New York insurance reform legislative package includes the following bills:

• Investigation and Settlement Standards (Bill No. A01092, passed 121-23).  The Assembly is attempting to require insurers to investigate a claim and advise the claimant in writing within 15 days (with a potential additional 15 day extension) on whether the insurer has accepted or rejected the claim.  The insurer then must pay the claim within 3 days from the settlement date.

• Creating a Task-Force for Disasters (Bill No. A01093, passed 144-0).  This bill creates an 18-member task force, including officials from federal and state agencies, insurers and independent representatives who will examine and report on whether policyholders and communities have adequate insurance coverage for disasters.

• Discounts on Fire and Homeowner’s Insurance Upon Completing Residential Home Safety and Loss Prevention Course (Bill No. A01475, passed 141-3).  The Assembly is attempting to force insurers to provide discounts to homeowners for a three-year period upon completing a state-certified course that would teach insureds how to prevent losses triggered by weather-related events.  The bill does not comment on the amount of the discount, but requires the discount to be based on sound actuarial practices.

• A Homeowner’s Bill of Rights (Bill No. A02287, passed 118-26).  Legislators are attempting to educate homeowners who purchase property and casualty coverage by obligating insurers to provide them with a consumer guide written “in plain language in a clear and understandable format.”  This disclosure must provide information, such as how coverage is affected by different types of weather conditions and natural disasters as well as whether the property is located in a flood zone.  Additionally, the Department of Financial Services will be required to establish a “Consumer’s Guide on Insuring Against Catastrophic Loss” brochure.

• A Uniform Windstorm Deductible (Bill No. A02729, passed 144-0).  The Superintendent of Insurance will have the duty to institute a uniform and reasonable standard for hurricane windstorm deductibles.  Proponents of the bill claim it will help promote a better understanding of the applicability and amount of hurricane windstorm deductibles.

• Expediting State Disaster Emergency Insurance Claims (Bill No. A05570, passed 117-26).  This bill establishes an expedited procedure for claimants to advance any lawsuit against insurers that deny claims related to property damage sustained in counties where a State Disaster Emergency is declared by the Governor.

• Private Right of Action for Unfair Claim Settlement Practices (Bill No. A05780, passed 108-34).  The bill creates a private right of action for unfair claim settlement practices for claims relating to a loss or injury in an area under a declared disaster emergency.  If enacted, insurers will be liable for punitive damages if their claims practices are deemed willful.

• Limiting Insurers from Deciding Not to Renew Homeowners Policies (Bill No. A06913, passed 120-24).  The Assembly is trying to restrict insurers’ reduction of coverage by regulating notices of intention to not renew homeowner’s insurance policies.  If passed, insurance companies must file a plan with the Superintendent of Insurance if they intend to reduce by 20% the net number of these policies in New York, or if they plan to reduce the number of these policies by 500 within five years, whichever is greater.  Additionally, insurers must file a plan if they intend to not renew 4% or more of their total number of covered policies within New York.

• Coverage for Business Interruption Claims Arising From Excluded Perils (Bill No. A07452, passed 113-30).  This bill would force insurers to cover business interruption claims even if the loss directly or indirectly arose from or was caused by an excluded or uninsured peril.

• A Standard Set of Definitions (Bill No. A07453, passed 115-29).  This bill would force all New York insurance policies to adopt a standard set of definitions, as promulgated by the Superintendent of Insurance, for all commonly used terms and phrases.  The proposed legislation does not include a list of the terms and phrases it considers to be common, but provides that an insurer may use alternative definitions as long as they are not any less favorable to the policyholder.

• Providing a Copy of a Policy Prior to it Being Purchased (Bill No. A07454, passed 119-24).  The bill would require insurers to provide potential customers of personal and commercial lines of insurance a copy of the policy prior to the policy being purchased.  Legislators want customers to have sufficient time to review a policy before agreeing to buy it.

• Outlawing Anti-Concurrent Clauses (Bill No. A07455, passed 119-24).  The law would forbid insurers from denying a claim when a loss occurred from several causes, and one cause is covered while another cause is precluded from coverage.  If enacted, New York would be joining California,[1] North Dakota,[2] West Virginia,[3] and Washington[4] in eliminating anti-concurrent causation clauses.

The Assembly also passed Bill No. A07456 on June 10, 2013, by a vote of 125-14, which would require the Superintendent of Financial Services to prepare a report card on insurers’ responses to emergencies and disasters.  Insurers would be graded on: (1) the number of claims the insurer received and the status of those claims; (2) the number of independent adjusters the insurer has working in the field; (3) the number of policyholders who have hired public adjusters; (4) the average amount of time, in days, for the insurer to investigate a claim, make a payment, and close a claim; (5) the number of complaints the insurer has received from its insureds and the number of complaints the Department has received on each insurer; and (6) any other information the Superintendent deems necessary.  This report card must be published within 20 days of the declaration of a disaster or emergency and updated every week for at least 6 months or until the Superintendent determines that the report card is no longer necessary.


Another Victory for Arbitration: The UK Supreme Court

Thursday, June 20th, 2013

The United Kingdom’s highest court, the Supreme Court, has confirmed that English courts may intervene to issue an “anti-suit” injunction to restrain a party from bringing court proceedings in violation of an arbitration clause even if there are no arbitration proceedings in existence. This will be welcome news to the many insurers and reinsurers who incorporate London arbitration clauses into their policies, including carriers in the Bermuda market who frequently stipulate for coverage disputes to be resolved through arbitration in London under the English Arbitration Act 1996.

The appeal arose out of a high value dispute involving the operation of a hydroelectric power plant in Kazakhstan and a concession agreement that provided for disputes to be arbitrated in London.  The owner of the plant issued court proceedings in Kazakhstan and obtained an order declaring the arbitration agreement invalid.  The operator then filed court proceedings in England seeking a declaration that the arbitration agreement was valid and enforceable and an anti-suit injunction to restrain the owner from continuing the Kazakhstan proceedings in violation of the arbitration clause. However, the operator chose not to file arbitration proceedings seeking any relief in relation to the concession agreement.

The English court granted both the declaratory and injunctive relief sought. The owner then appealed to the Supreme Court on the grounds that English courts have no jurisdiction to restrain foreign proceedings brought in violation of an arbitration clause where no arbitral proceedings have been commenced or are proposed.  In dismissing the appeal, the Supreme Court affirmed that the English courts have a long-standing and well-recognized jurisdiction to restrain foreign proceedings brought in violation of an arbitration clause even where no arbitration is on foot or in contemplation.

While the Supreme Court’s ruling is unlikely to come as a surprise to most arbitration practitioners, its unequivocal support of the arbitration process – even in light of a contrary ruling by a foreign court – will provide comfort to the many insurers and reinsurers who chose London as the venue for any arbitrations arising under their polices.

Ust-Kamenogorsk Hydropower Plant JSC (Appellant) v AES Ust-Kamenogorsk Hydropower Plant LLP (Respondent) [2013] UKSC 35

California Court Holds That Broker’s Duties to Its Clients Did Not Extend to Loss Payee Investor

Friday, June 14th, 2013

In Travelers Property Casualty Company v. Superior Court, 215 Cal.App.4th 561 (2013), the California Court of Appeal held that an investor who obtained ownership of a condominium development and sustained a loss that was not covered by the insurance policy purchased by the original developer had no remedy at law against the developer’s insurance broker because the broker owed no duty of care to the investor.

Joy Investment Group (Joy) obtained a construction loan from East West Bank (EWB) to develop a condominium building in Los Angeles.  The terms of the loan required Joy to purchase a construction insurance policy through broker Koram Insurance Center, Inc. (Koram).  Joy defaulted on the loan while the insurance policy was still in effect.  EWB thereafter sold the loan note and assigned its deed of trust to investor Michael Braum.  After the assignment, but before the foreclosure sale, Joy represented to Koram that a homeowners association had been created and, therefore, on Koram’s suggestion, Joy replaced its expiring construction policy with a condominium policy from Travelers for the homeowners association.  The policy contained a vacancy exclusion.

In February 2009, shortly after the Travelers policy was issued, the condominium building was vandalized.  Joy subsequently filed for bankruptcy and Braum foreclosed on the property.   In September 2010, Braum submitted a claim to Travelers for the purported vandalism loss but, because the building was not yet occupied, Travelers denied coverage due to the vacancy exclusion (which voids coverage if a structure is vacant for a defined period of time before the loss).

The Court of Appeal vacated the trial court’s denial of Koram’s and Travelers’ respective motions for summary judgment and instructed the court to grant the motions.  The Court of Appeal determined that the vandalism loss was not covered due to the vacancy exclusion, as there was no dispute that the building was vacant for 60 days prior to the loss.  The court also held that Koram, the broker, did not owe a duty to Braum, the investor, as a loss payee.  The court concluded that there is no general rule that a broker owes a duty to the victim (or loss payee) of an insured whenever a claim is denied pursuant to an exclusion or limitation for which the insured reasonably contracted.

Blood, Money & the Duty to Defend

Thursday, June 13th, 2013

In Peerless Indemnity Insurance Company v. Phillips, No. H-12-1145 (S.D. Tex. Apr. 17, 2013), the United States District Court for the Southern District of Texas granted in part and denied in part the insurer’s motion for summary judgment.  The court found that the insurer had no duty to defend a law firm and one of its partners for allegations of conversion and negligent defamation because the alleged injuries arose out of intentional statements made by the law firm partner with knowledge of their falsity.  The court, however, determined that the duty to indemnify was not ripe because the underlying lawsuit is still pending in state court.

In 2006, Michael Phillips of Phillips Akers Womac represented Dinesh Shah in a civil suit filed by Joan Johnson, an heiress to the Exxon fortune.  After Johnson won a substantial money judgment, Shah offered and Phillips accepted thousands of private documents that Shah had stolen from Johnson. Phillips ultimately used the stolen documents to write and publish a book entitled Monster in River Oaks, which describes Shah’s victimization of Johnson and her children (the Johnsons).  Consequently, the Johnsons filed suit against Phillips, his law firm, and the publishing company in Harris County, Texas.  The Johnsons alleged that Phillips intentionally converted the Johnsons’ property by depriving them of the stolen items, and published a multitude of defamatory statements causing injury.  The Johnsons further contended that Phillips’ defamatory statements were committed with gross negligence.

Phillips sought a defense from his insurer, Peerless Indemnity Insurance Company.  Peerless refused and filed a declaratory judgment action in which it moved for summary judgment on the grounds that the alleged property damage was not caused by an “occurrence” and the “knowledge of falsity” exemption excludes any damages resulting from “personal and advertising injury.”

Noting that the Peerless policy only covers property damage caused by an “occurrence,” which the Policy defines as an “accident,” the court found that the underlying petition did not support Phillips’ claim that he only used documents of public record to write the book.  Because the underlying petition alleged that Phillips intentionally deprived the Johnsons of their property, the court held that the property damage was not accidental and, therefore, not an “occurrence.”

In further analyzing whether the Peerless policy provided coverage for the Johnsons’ defamation claim, the court observed that, although the underlying petition may have stated a claim for negligence, the “knowledge of falsity” exemption applied because the petition made no factual contentions constituting negligent, careless, or reckless behavior.  Thus, Peerless had no duty to defend.

Nevertheless, the court denied Peerless’ motion as it related to the duty to indemnify.  The court explained that such a duty will turn on facts the Johnsons might actually prove in the underlying action.  Because the action is still pending, the court deferred resolution of the indemnity issues.


Like a Rolling Stone – You Don’t Always Get What You Want

Friday, June 7th, 2013

By Carol J. Gerner, Sedgwick Chicago

On June 4, 2013, the Second Circuit Court of Appeals ruled in favor of excess insurers and against former directors and officers (collectively, the “Directors”) when it concluded that the excess insurers did not have to “drop down” based on the “plain language of the relevant excess insurance policies required the ‘payment of losses’ – not merely the accrual of liability – in order to reach the relevant attachment points and trigger the excess coverage.”  Ali v. Fed.  Ins. Co., No. 11-5000-CV, 2013 WL 2396046 (2d Cir. June 4, 2013). 

In an unusual procedural posture, the Second Circuit was asked to review a final judgment that resulted from a voluntary dismissal following the denial of the Directors’ motion for summary judgment.  After the Second Circuit concluded it had appellate jurisdiction to review the District Court’s decision, it addressed the merits of the “drop down” argument that the Directors raised when two of their excess insurers in an eight-layer insurance tower, Reliance Insurance Company (“Reliance,” which insured the first and fourth excess layers) and Home Insurance Company (“Home,” which insured the third and sixth excess layers), ceased operations and liquidated their assets.  

Federal Insurance Company (“Federal,” which insured the second and fifth excess layers) filed a declaratory relief action against the Directors in the Southern District of New York.  Federal sought a declaration that, under the terms of the relevant polices, it was not required to “drop down” to cover liability that would have otherwise been covered by Reliance and Home.  The Directors filed a counter-claim and also brought in the Travelers Casualty and Surety Company of America (“Travelers,” which insured the seventh excess layer), seeking a declaration that Federal’s and Travelers’ coverage obligations were triggered after the total amount of the Directors’ defense and/or indemnity obligations exceeded the limits of any insurance policies underlying their respective policies, regardless of whether such amounts were actually paid by the underlying insurance companies. 

Federal’s and Travelers’ policies provided that their coverage would only attach after the Underlying Insurance has been exhausted by “payment” of claims or losses.  The Second Circuit readily affirmed the District Court’s holding that the excess coverage was not triggered until the underlying insurance was exhausted “solely as a result of payment of losses,” and not solely by the “aggregation” of the Directors’ covered losses.  The Directors unsuccessfully argued that the excess liability coverage was triggered when “defense and/or indemnity obligations” reach the attachment point.  The Second Circuit did not have any difficulty concluding that “obligation” was not synonymous with “payments” of those obligations.  It also noted, however, that the District Court did not specify which party was obligated to make the requisite payment because that issue was not raised by the Directors in the underlying proceeding. 

Significantly for insurers, the Second Circuit did not find persuasive the Directors’ reliance on the oft-cited decision in Zeig v Massachusetts Bonding & Insurance Co., 23 F.2d. 655 (2d Cir. 1928) and related cases, addressing situations in which policies were deemed exhausted as a result of an insured’s below-limit settlement of indemnity claims.  While not overruling Zeig, the Second Circuit found that the Directors neglected to address the critical distinction that Zeig involved a first-party property insurance policy as opposed to an excess liability policy.  The Second Circuit agreed with the District Court that the Directors’ requested relief, which focused on their obligations to pay third parties as opposed to seeking indemnification for out-of-pocket losses, was a relevant distinction for purposes of policy interpretation. 

While a favorable decision for insurers, the Second Circuit did not address the ramifications of the “drop-down” argument when payment is made by someone other than an insolvent underlying excess insurer.  The Second Circuit did, however, note the District Court’s observation that the relevant excess insurance policies contemplated continued coverage even if the Directors failed to maintain the underlying policies.   Accordingly, whether payment by someone other than a nonoperational insurance company will trigger attachment will depend upon the specific language of an excess policy.

Tenth Circuit Applies Broad Interpretation Of “Interrelated Wrongful Acts” Under New York Law

Thursday, June 6th, 2013

By Sean R. Simpson, Sedgwick Irvine

In Brecek & Young Advisors, Inc. v. Lloyds of London Syndicate 2003, ___F.3d ___, 2013 WL 1943338 (10th Cir. (Kan.) May 13, 2013), the United States Court of Appeals for the Tenth Circuit broadly applied the definition of “Interrelated Wrongful Acts” commonly found in errors and omissions and directors and officers liability policies and held that, under New York law, numerous unsuitability claims constituted a single claim first made prior to inception of the policy.

In May 2007, Paul and Marie Wahl brought an arbitration proceeding against Brecek & Young Advisors, Inc. (BYA), alleging that the Wahls received financial advice from B&G Financial Network, Inc. (B&G).  BYA acted as the broker-dealer through which B&G sold the Wahls several of its investment products.  The complaint alleged that the Wahls were sold unsuitable investments and that BYA engaged in the frequent “flipping” and “churning” of the investments.  The Wahls amended their complaint to add additional claimants who similarly alleged unsuitability and flipping/churning. 

Lloyds of London Syndicate 2003 (Lloyds), which issued a professional liability policy to BYA, agreed to defend BYA, but asserted that each of the claimants in the Wahls action presented a separate Claim, subject to a separate $50,000 retention, pursuant to the following policy provision: “All Claims based upon or arising out of … Interrelated Wrongful Acts shall be considered a single Claim…”  The phrase “Interrelated Wrongful Act” was defined as Wrongful Acts that are, inter alia, “connected by reason of any common fact, … or one or more series of facts…” 

BYA sued Lloyds and the district court granted summary judgment for BYA.  The court held that the Wahls’ arbitration constituted a single claim, but permitted supplemental briefing on an alternative position raised by Lloyds as to whether the Wahls’ action and earlier claims brought by investors Knotts and Colaner in 2005 and 2006 constituted a single claim first made prior to inception of the Lloyds policy.  BYA argued that the claims were not sufficiently related and that Lloyds’ argument was precluded by the doctrines of waiver or estoppel.  The court rejected the waiver/estoppel argument, but held that the Wahls matter was not related to the earlier Knotts and Colaner claims.

On appeal, the parties agreed that the principle issue on aggregation of the claims was whether there existed a “sufficient factual nexus” between the claims.  Emphasizing that “Wrongful Acts” are interrelated if they are “connected by reason of any common fact,” the Tenth Circuit concluded that there were “several common facts” connecting all of the claims, including:  they named the same respondents, they alleged misconduct occurring in the same general time period, they alleged that the respondents had been sold unsuitable investments, they involved allegations of flipping or churning, and they were predicated by BYA’s liability on theories of vicarious liability and failure to supervise.  As such, the Tenth circuit concluded that the Wahls, Knotts and Colaner matters constituted a single “Claim” under the policy.  In addition, although the court rejected BYA’s waiver argument on the basis that coverage under an insuring clause or the application of exclusions from coverage cannot be waived, it held that the district court abused its discretion in ruling that that BYA could not establish estoppel, and thus  the case was remanded so that the district court could  consider the extent to which BYA detrimentally relied on Lloyds’ representations of coverage.


Failure to Provide Timely Notice Proves Costly For Insured

Wednesday, June 5th, 2013

A federal district court in Missouri granted insurer Philadelphia Indemnity Insurance Company’s Motion for Summary Judgment in a coverage dispute finding that the insured, Secure Energy, Inc., did not provide timely notice of a claim as required under the D &O Policy.  In Secure Energy, Inc. v. Philadelphia Indemnity Insurance Company, case number 4:11-cv-01636 (E.D. Mo. May 16, 2013), the court found that not only did Secure Energy wait too long before reporting the claim, but also that the insurer did not have to demonstrate it was prejudiced by the late notice.

Secure Energy was insured under several D&O policies issued by Philadelphia between October 11, 2007 and October 11, 2012, which provided coverage on a “claims made” basis.  The policies required that Secure Energy provide notice to Philadelphia of all claims as soon as practicable but no later than 60 days after the expiration of the policy.  On December 20, 2007, Secure Energy received a memorandum from a former employee seeking payment of unpaid commissions totaling $1,800,000.  On May 16, 2008, the former employee filed suit against Secure Energy seeking his commission plus $2,000,000 in punitive damages.  Secure Energy’s first notice to Philadelphia was on May 4, 2011.  Philadelphia denied Secure Energy’s tender on the ground that the notice was untimely.  Secure Energy filed suit seeking a declaratory judgment that Philadelphia was obligated to provide coverage for the defense and indemnity costs incurred in the former employee’s lawsuit.

Secure Energy argued that, although it did not strictly comply with the notice requirement under the D&O policies, Philadelphia could not deny coverage unless it first established that it was prejudiced by the late notice.  In support of its position, Secure Energy cited to a number of decisions in Missouri which held that under an “occurrence” policy the insurer must first demonstrate that it was prejudiced by the insured’s late notice.  The federal district court rejected Secure Energy’s argument, finding that the Missouri Supreme Court distinctly held that an insurer is not required to show prejudice resulting from an untimely notice under a “claims made” policy.  In reaching its decision, the court noted that, unlike an “occurrence” policy where the occurrence of an act or omission during the coverage period triggers coverage, a “claims made” policy provides coverage when the act or omission is discovered and brought to the attention of the insurer, regardless of the occurrence date.  Because there was no question that Secure Energy failed to provide timely notice, the court held that, under Missouri law, Philadelphia was not required to demonstrate that it was prejudiced by the late notice.

California Insurance Code Section 533.5(b) Does Not Preclude Insurers From Providing A Defense For All Criminal Actions

Wednesday, June 5th, 2013

In Mt. Hawley Ins. Co. v. Lopez, –Cal. Rptr. 3d–, 2013 WL 1818627 (Cal. App. 2 Dist. May 1, 2013), a California court of appeal held that California Insurance Code section 533.5(b) does not preclude insurers from providing a defense for all criminal actions, and the statute does not apply to criminal actions brought by federal prosecutors.  Section 533.5(b) precludes insurers from providing a defense for criminal actions brought under California’s unfair competition and false advertising laws—commonly referred to as UCL and FAL actions—by the four state and local agencies listed in the statute.

California Insurance Code section 533.5(b) provides:

No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in
subdivision (c), any claim in any criminal action or proceeding or in any action or proceeding brought
pursuant to Chapter 5 (commencing with Section 17200) of Part 2 of, or Chapter 1 (commencing with
Section 17500) of Part 3 of, Division 7 of the Business and Professions Code in which the recovery of a fine,
penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or
any county counsel, notwithstanding whether the exclusion or exception regarding the duty to defend
this type of claim is expressly stated in the policy.

The United States District Attorney filed a grand jury indictment against Dr. Richard Lopez, charging him with criminal conspiracy, false statements and concealment, and falsification of records.  The indictment alleged that Dr. Lopez, who was the medical director of St. Vincent’s Medical Center Comprehensive Liver Disease Center, conspired with another doctor and other hospital employees to transplant a liver into the wrong patient.

Dr. Lopez tendered his defense to Mt. Hawley under the hospital system’s Not for Profit Organization and Executive Liability Policy.  Under the terms of the policy, Mt. Hawley agreed to pay for Loss which the Insureds are legally obligated to pay as a result of Claims.  An endorsement defined “Claim” to include “a criminal proceeding against any Insured commenced by the return of an indictment” or “a formal civil, criminal, administrative or regulatory investigation against any Insured . . . .”

Mt. Hawley alleged it had no duty to defend Lopez for reasons that included the application of section 533.5(b).  The court noted that no California court had addressed the issue raised by the appeal of whether section 533.5(b) precludes an insurer from providing a defense in all criminal actions, including federal criminal actions.  The court determined the statute was ambiguous and reviewed its legislative history.

The court concluded that the Legislature enacted section 533.5 to address a problem the Attorney General had encountered only in UCL and FAL—the defendants would tender the defense of the actions to insurers and the public entity found itself litigating with an insurance company instead of the individual whose conduct violated the provisions of the Business & Professions Code.  “The legislative history of the original 1988 statute and the 1990 and 1991 amendments makes it clear that the purpose of the statute, the circumstances of its enactment, and the Legislature’s goal in enacting the statute, were to preclude insurers from providing a defense in civil and criminal UCL and FAL actions brought by the Attorney General, district attorneys, city attorneys, and (later) county counsel.”  According to the court, at no time did the Legislature ever intend section 533.5(b) to apply to criminal actions other than UCL and FAL actions brought by state and local agencies or to apply to criminal actions brought by public entities other than the three and then four enumerated state and local agencies, such as criminal actions brought by the federal prosecuting authorities.

The court noted its interpretation of section 533.5 allows insurers to contract to provide a defense in federal and some state criminal actions.  While it is true that California law recognizes a strong public policy of discouraging certain types of conduct by barring insurance coverage for any resulting damages, that public policy applies to indemnification, not defense.

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