Statute Barring Insurer Defense Does Not Apply to Policy Promising to Defend Insured in Criminal Proceeding, Court Concludes

Publish Date:May 06, 2013
Summary:
In a decision issued on May 1, 2013, the California Court of Appeal (Second Appellate District) ruled in Mt. Hawley Insurance Company v. Lopez that Insurance Code Section 533.5(b) did not preclude an insurer from providing it’s insured with a defense to federal criminal charges.

In a decision issued on May 1, 2013, the California Court of Appeal (Second Appellate District) ruled in Mt. Hawley Insurance Company v. Lopez that Insurance Code Section 533.5(b) did not preclude an insurer from providing it’s insured with a defense to federal criminal charges. Section 533.5(b) states: “No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subsection (c), any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to [California’s unfair competition and false advertising laws] 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 Insurance Company insured a medical center. The insurer’s policy provided that the company would defend the medical center’s employees in a criminal proceeding commenced with the return of an indictment. Dr. Richard Lopez, director of the medical center, was served with a federal indictment which alleged that Lopez made false statements and destroyed evidence related to federal investigations. Lopez tendered the defense to the charges to Mt. Hawley.

Mt. Hawley responded that it had no duty to defend because Section 533.5(b) barred the insurer from providing a defense in a criminal action. Lopez countered that Section 533.5(b) barred providing defense in criminal actions brought by state or local prosecutors but did not bar defense in an action brought by the federal government.  The trial court granted Mt. Hawley’s motion for summary judgment, concluding that “Section 533.5 unambiguously bars coverage for criminal actions and proceedings.” Lopez appealed the trial court’s ruling.

The Court of Appeal reached an interpretation of Section 533.5(b) which was different than the interpretation advocated by either Mt. Hawley or Lopez. After a lengthy review of the legislative history of Section 533.5(b) and the application of canons of statutory construction, the court concluded that Section 533.5(b)’s bar against providing defense is limited to actions related to unfair competition and false advertising laws. The court acknowledged that Mt. Hawley’s position seemed to be correct according to the rules of grammar but observed, “We cannot allow technical rules of grammar and construction to defeat the clear legislative intent behind Section 533.5.”

The Court of Appeal concluded, “Outside the special area of [unfair competition and false advertising laws] brought by state and local prosecuting agencies, there is no public policy in California against insurers contracting to provide a defense to insureds facing criminal charges, as opposed to indemnification for those convicted of criminal charges.”

The court’s ruling on the scope of Section 533.5(b) caused the court to the reverse the trial court’s granting of Mt. Hawley’s motion for summary judgment. In the Court of Appeal’s view, since the criminal indictment against Lopez did not involve California’s unfair competition or false advertising laws, Insurance Code Section 533.5(b) did not bar Mt. Hawley from providing Lopez with a defense to the federal criminal charges pursuant to the company’s insurance policy.

A copy of the Court of Appeal’s opinion is available at www.courts.ca.gov                                 
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