Tuesday, May 22, 2018
Insurer May Have Duty to Defend, Indemnify In Action Under California False Claims Act
By a MetNews Staff Writer
An insurance company is not necessarily exempt from liability to an insured that is sued under California’s False Claims Act, the Ninth U.S. Circuit Court of Appeals held yesterday, rejecting the district court’s determination that the state statute barring coverage for intentional wrongs applies.
The memorandum opinion by a three-judge panel reinstates an action by Office Depot against AIG Specialty Insurance Company based on the insurer’s refusal to defend or indemnify it in connection with an action brought against it in 2009 by David Sherman, who had been one of its account managers. He sued in a qui tam action on behalf of the state based on alleged violations of the California False Claims Act (“CFCA”).
Sherman accused the business of overcharging U.S. Communities Government Purchasing Alliance for office and classroom supplies, with which it had a contract. Office Depot entered into a settlement with him in 2014.
Insurance Code §533
AIG disclaims liability based on California Insurance Code § 533 which provides:
“An insurer is not liable for a loss caused by the wilful act of the insured….”
District Judge Stephen V. Wilson of the Central District of California on July 21, 2016, dismissed the claim for indemnity, holding that “causes of action that include the intent to induce reliance are precluded from insurance coverage under §533 as a matter of law,” and that the “CFCA creates one such cause of action.”
On Jan. 4, 2017, Wilson granted summary judgment on the issue of the duty to defend, declaring “that since the Sherwin lawsuit alleged a violation of the CFCA, and since the CFCA necessitates a finding of willful conduct, there was no potential for coverage.”
Expectation of Coverage
He went on to say:
“Here, Office Depot analyzes several policy clauses but fails to analyze whether any of these policies can lead to a reasonable expectation of a duty to defend when read together with § 533. There is no policy in the insurance provision that explicitly promises a defense based on allegations under the CFCA….There is no policy that promises a defense based on willful conduct….Thus, there is nothing in the policy that would lead a reasonable insured to believe that willful conduct which violates the CFCA would be covered. General liability clauses are not enough.”
Yesterday’s opinion reversing Wilson points out that §533 precludes coverage where the wrongful conduct was “willful” while there is liability under CFCA where conduct is merely “reckless.”
“Therefore,” the opinion says, “CFCA claims do not necessarily involve the “willful” conduct required for preclusion under section 533.”
Panel Is ‘Unpersuaded’
“We are unpersuaded by the district court’s reasoning that CFCA liability also requires the ‘intent to induce reliance.’ ”
The opinion says that the insurer has the burden of showing that claims are excluded and observes that “AIG has failed to meet that burden here with respect to the CFCA claims.”
In remanding, the appeals court leaves it to the district court to decide “in the first instance” other defenses by AIG.
The case is Office Depot, Inc. v. AIG Specialty Insurance Co., 17-55125.
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