California Insurance Code Section 533.5(b) Does Not Preclude Insurers From Providing A Defense For All Criminal ActionsJune 5th, 2013
By Andrea M. Kendrick, Sedgwick San Francisco
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.