Where a liability policy expressly provided for a defense against criminal charges, California Insurance Code section 533.5(b) did not relieve the insurer of a duty to defend an insured against a federal criminal indictment. ( Mt. Hawley Insurance Company v. Lopez (2013) 215 Cal.App.4th 1385)
Facts
Dr. Richard Lopez was the medical director of St. Vincent’s Medical Center Comprehensive Liver Disease Center. Dr. Lopez allegedly diverted a liver designated for one patient to another patient who was further down the transplant wait list. He then allegedly covered up his actions by conspiring with others, making false statements and falsifying records. The patient who was supposed to receive the transplant later died.
Thereafter, a federal grand jury indicted Dr. Lopez in connection with the alleged switch and cover-up. The federal indictment charged Dr. Lopez with criminal conspiracy, false statements and falsification of records, all in violation of federal law.
Daughters of Charity Health Systems, Inc., which owns St. Vincent’s, was the named insured on a “Not for Profit Organization and Executive Liability Policy” issued by Mt. Hawley Insurance Company. Dr. Lopez qualified as an insured under the policy. The policy provided that Mt. Hawley would “pay on behalf of the Insureds, Loss which the Insureds are legally obligated to pay as a result of Claims … against the Insured for Wrongful Acts ….” The policy defined the term “Loss” so as to include “defense expenses,” and defined “Claim” so as to include “a criminal proceeding against any Insured commenced by the return of an indictment” and “a formal civil, criminal, administrative, or regulatory investigation against any Insured.”
Dr. Lopez tendered the defense of the federal criminal prosecution to Mt. Hawley. However, Mt. Hawley refused to defend Dr. Lopez based on California Insurance Code section 533.5(b). That statute provides: “No policy of insurance shall provide, or be construed to provide, any duty to defend … any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to [California’s Unfair Competition Law and False Advertising Law] 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.”
Mt. Hawley later filed a state court declaratory judgment action against Dr. Lopez seeking a ruling that section 533.5(b) precluded Mt. Hawley from defending Dr. Lopez against any criminal proceeding. The trial court agreed with Mt. Hawley’s position and entered judgment in favor of Mt. Hawley. Dr. Lopez appealed.
Holding
The California Court of Appeal reversed. The appellate court found that Insurance Code section 533.5(b) was susceptible to at least three reasonable interpretations: (1) the statute precludes insurers from providing a defense in any criminal action; (2) the statute precludes insurers from providing a defense in criminal or civil actions brought by state and local agencies; and (3) the statute precludes insurers from providing a defense in any criminal, unfair competition or false advertising action or proceeding brought by state and local agencies for the recovery of a fine, penalty, or restitution.
Because section 533.5(b) was susceptible to various interpretations, the appellate court examined the statute’s legislative history, the circumstances of its enactment and statutory maxims of construction. The court ultimately concluded that the legislative purpose behind section 533.5(b) was to preclude insurers from providing a defense to civil and criminal actions brought under California’s unfair competition laws and false advertising laws. Notably, those actions can only be brought by state and local agencies – not federal agencies. Therefore, because section 533.5(b) did not apply to federal prosecutions, Mt. Hawley was obligated to defend Dr. Lopez against the federal criminal prosecution.
Comment
The state appellate court’s decision in the above Lopez case is consistent with the federal appellate court’s earlier decision in Bodell v. Walbrook Ins. Co. (9th Cir. 1997) 119 F.3d 1411. In Bodell , the Ninth Circuit Court of Appeals held that Insurance Code section 533.5(b) applies to criminal actions brought by the listed state and local agencies, but does not apply to criminal actions brought by federal prosecutors. The state appellate court agreed with Bodell that section 533.5(b) does not preclude an insurer from agreeing to provide an insured with a defense against a criminal action brought by federal prosecutors. Therefore, an insurer which agrees to provide an insured with a defense in “a criminal proceeding . . . commenced by the return of an indictment” cannot avoid its contractual duty to defend an insured against federal criminal charges by relying on section 533.5(b).