Insurance Code Section 533.5(b) Does Not Apply To Federal Prosecutions

Mt. Hawley Insurance Company v. Lopez
(Cal. Ct. of App., 2d Dist.), filed May 1, 2013

On January 6, 2010, the United States Attorney for the Central District of California filed a grand jury indictment charging Dr. Richard Lopez with criminal conspiracy, false statements and concealment, and falsification of records in conjunction with certain liver transplants.

Lopez tendered the defense of the matter to Mt. Hawley Insurance Company, the insurer of the hospital where he worked. Mt. Hawley sent Lopez a denial letter and filed a declaratory relief action. Mt. Hawley alleged that it had no duty to defend Lopez because of Insurance Code section 533.5(b), a “remuneration exclusion” or “personal profit exclusion,” and a “medical incident exclusion.”

Insurance Code section 533.5(b) precludes insurers from providing a defense for certain kinds of claims. It 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 under Business and Professions Code sections 17200 and 17500, “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.”

Lopez filed a motion for judgment on the pleadings on Mt. Hawley’s original complaint and a demurrer to Mt. Hawley’s first amended complaint. Lopez argued that section 533.5(b) did not preclude an insurer from providing a defense to federal criminal charges brought by the U.S. Attorney’s Office. The trial court denied his motions. It then granted a motion for summary judgment in favor of Mt. Hawley.

The Court of Appeal reversed.

In the case of Bodell v. Walbrook Ins. Co., 119 F.3d 1411 (9th Cir. 1997), the Ninth Circuit Court of Appeals held that section 533.5(b) applies to criminal actions brought by the four listed state and local agencies but does not apply to criminal actions brought by federal prosecutors.

The court agreed with the Ninth Circuit. Therefore, the insurer, which had agreed to provide its insureds with a defense in “a criminal proceeding …commenced by the return of an indictment…even if the allegations are groundless, false or fraudulent,” could not avoid its contractual duty to defend an insured against federal criminal charges by relying on section 533.5(b).