Liability Insurers May Have Duty to Defend Against Federal Prosecutions, California Court of Appeal Holds
The Second Appellate District of California held on May 1 in Mt. Hawley Ins. Co. v. Lopez that California Insurance Code section 533.5(b) does not eliminate a liability insurer’s duty to defend against a federal prosecution where the policy provides for a defense against criminal proceedings.
Section 533.5(b) precludes an insurer from defending against “any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to” California’s unfair competition law under Business and Profession Code section 17200 et seq. “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.”
Mt. Hawley involved Dr. Richard Lopez’s federal criminal prosecution for his role in a liver transplant. Dr. Lopez was a medical director of St. Vincent’s Medical Center. He allegedly diverted a liver designated for one patient to another patient who was much farther down the transplant wait list in violation of regulations promulgated under the National Organ Transplant Act. Dr. Lopez then allegedly covered up his actions by conspiring with others, making false statements and falsifying records.
Dr. Lopez was indicted by a grand jury and tendered his defense to Mt. Hawley, which declined to defend him on the basis that Section 533.5(b) precludes an insurer from providing a defense to a criminal prosecution. Mt. Hawley filed a declaratory relief action against Dr. Lopez and prevailed on summary judgment.
In reversing the trial court, the appellate court examined in great detail the legislative history of section 533.5, as well as several maxims of construction of statutes, ultimately reasoning that the legislative purpose behind Section 533.5(b) was to preclude insurers from providing a defense only to civil and criminal actions brought under California’s unfair competition laws and false advertising laws, which could only be brought by state and local – not federal – agencies. The court therefore concluded that Section 533.5(b) did not apply to federal prosecutions. The court also relied on the Ninth Circuit’s decision in Bodell v. Walbrook Ins. Co. which reached the same conclusion regarding the applicability of Section 533.5(b) to federal prosecutions.
The court of appeal stated that its interpretation “allows insurers to contract to provide a defense to certain kind of criminal charges, as the Legislature has said insurers can do in the cases of corporate agents and government employees charged with crimes.” The court further noted that its interpretation was consistent with the goal of encouraging individuals to serve on the boards of directors of corporations or as trustees of charitable trusts, observing that “unless directors can rely on the protections given by D & O policies, good and competent men and women will be reluctant to serve on corporate boards.”