The California Court of Appeal has held that despite the coverage afforded by a liability policy’s “supplementary payments” clause, Insurance Code section 533 prohibits an insurer from indemnifying an insured for statutory attorney’s fees awarded to the plaintiff in a race discrimination case. ( Combs v. State Farm Fire & Casualty Co., 2006 WL 2940828)
Facts
Fair Housing of Marin (FHOM) filed a federal lawsuit against Jack Combs (Combs), alleging race discrimination in the management of an apartment complex. Combs tendered defense of the suit to his liability insurer, State Farm Fire & Casualty Company (State Farm). The State Farm policy provided that State Farm would indemnify an insured against damages because of bodily injury and personal injury, and that State Farm would defend an insured against any suit seeking covered damages. The policy also contained a standard “supplementary payments” clause which provided that “[i]n addition to the limits of insurance, we will pay, with respect to any claim or suit we defend … all costs taxed against the insured in the suit .” (Italics added.) State Farm agreed to defend Combs in the discrimination lawsuit, subject to a reservation of rights.
Later, Combs repeatedly failed to comply with discovery orders in the discrimination lawsuit, and as a result, the federal district court struck Combs’ answer and entered his default. The district court then held an evidentiary hearing and found Combs liable for intentional race discrimination. Ultimately, the district court entered a judgment requiring Combs to pay compensatory damages, punitive damages and statutory attorney’s fees to FHOM. State Farm refused to indemnify Combs for any portion of the judgment.
Combs then filed a state court action against State Farm, alleging breach of the insurance contract. Combs conceded that under California Insurance Code section 533, State Farm was not obligated to indemnify him for the compensatory and punitive damages which were awarded to FHOM in the underlying discrimination lawsuit. However, Combs argued that under the policy’s “supplementary payments” clause, State Farm was obligated to indemnify him for the statutory attorney’s fees which had been awarded to FHOM. The trial court disagreed, finding that section 533 barred coverage.
Holding
The California Court of Appeal affirmed. The appellate court acknowledged that because State Farm had defended Combs in the underlying discrimination case, and because the statutory attorney’s fees awarded against Combs are considered “costs,” the policy’s “supplementary payments” clause would seemingly require State Farm to indemnify Combs for the attorney’s fees awarded to FHOM. However, the appellate court concluded that notwithstanding the coverage afforded by the supplementary payments clause, section 533 prohibited State Farm from indemnifying Combs for the attorney’s fees awarded to FHOM.
The appellate court reasoned that Combs’ intentional race discrimination was a “willful act” within the meaning of section 533, and that this willful act directly led to the award of attorney’s fees against him. It would contravene section 533 if Combs could pass the consequences of his willful act along to State Farm. Therefore, “despite [State Farm’s] contractual agreement to pay these costs, section 533 prohibits State Farm from doing so.”
Comment
Insurance Code section 533 acts as an “implied exclusion” in every California insurance policy. The primary purpose of the statute is to discourage “willful acts” by denying insurance coverage for such acts. This case illustrates that, irrespective of what an insurance policy might say, section 533 precludes an insurer from indemnifying an insured against a loss caused by the insured’s willful act. In other words, an insurer and an insured may not contract for coverage that is barred by section 533.