The court modified its opinion filed on May 1, 2013, regarding the case involving Mt. Hawley Insurance Company and Richard R. Lopez, Jr. The modification corrected a citation error in the indictment details, specifically changing the reference from 18 U.S.C. § 18 to § 371, but affirmed that there would be no change in the judgment. The court's decision addressed Insurance Code section 533.5, subdivision (b), which prohibits insurers from defending certain claims in criminal actions or under California's unfair competition law. It clarified that this statute applies to state and local agency criminal actions but not to those initiated by federal prosecutors, aligning with the Ninth Circuit's ruling in Bodell v. Walbrook Ins. Co. Consequently, the insurer is obligated to provide a defense for its insured against federal criminal charges, regardless of the allegations' validity.
On January 6, 2010, a grand jury indictment was filed against Dr. Richard Lopez, medical director of the St. Vincent’s Medical Center Comprehensive Liver Disease Center, by the United States Attorney for the Central District of California. The indictment charges Lopez with criminal conspiracy, making false statements, concealment, and falsification of records. It alleges that he conspired with another doctor and hospital staff to improperly transplant a liver intended for one patient to another patient lower on the waiting list, violating regulations under the National Organ Transplant Act. Following the diversion, Lopez initially informed the United Network for Organ Sharing (UNOS) that the second patient had received the liver but later falsely claimed that the first patient had received it. As a result, the first patient was removed from the waiting list and subsequently died without receiving the transplant.
The indictment also details a cover-up orchestrated by Lopez, involving the restoration of the second patient’s name to the waiting list, the creation of a false pathology report for the first patient based on the second patient’s report, and the alteration of medical records to suggest the transplant program had made an honest mistake. The eight-count indictment cites violations of Title 18 of the United States Code, including sections on conspiracy, making false statements, and the destruction or alteration of evidence.
Additionally, Daughters of Charity Health Systems, Inc. (DCHS), which owns St. Vincent’s, holds a “Not For Profit Organization and Executive Liability Policy” with Mt. Hawley. This policy obligates Mt. Hawley to pay for losses incurred from claims against insured individuals, including Lopez, for wrongful acts. It defines “Loss” to include various forms of monetary damages and legal defense expenses. The policy stipulates that Mt. Hawley has the right and duty to defend claims covered under the policy, even if allegations are groundless or fraudulent. The policy also defines a “claim” to encompass criminal proceedings initiated by an indictment or formal investigations against any insured individual.
On March 3, 2010, Lopez submitted a defense request to Mt. Hawley regarding charges against him. Mt. Hawley responded on April 1, 2010, declining to defend or indemnify Lopez, and subsequently filed a lawsuit claiming Lopez authorized the wrongful transplantation of a liver, resulting in a cover-up involving document falsification. Mt. Hawley asserted it had no duty to defend Lopez based on sections 533.5, a remuneration exclusion, and a medical incident exclusion, seeking a declaration to this effect. In response, Lopez filed a cross-complaint for breach of contract and implied covenant of good faith.
Lopez challenged Mt. Hawley's claims through a motion for judgment and a demurrer, arguing that section 533.5 did not apply to federal charges, that no profit had been established against him, and that the medical incident exclusion was excluded from the policy. The trial court rejected Lopez’s arguments regarding section 533.5, allowed Mt. Hawley to amend its complaint, and overruled Lopez’s demurrer. Mt. Hawley later sought summary judgment, reiterating its lack of duty to defend based on the remuneration exclusion and acknowledging a clerical error regarding the medical incident exclusion, which they corrected through endorsements.
The trial court ultimately ruled that section 533.5 clearly bars coverage for criminal actions, affirming that Mt. Hawley is not obligated to defend or indemnify Lopez against the indictment. The court noted that while the legislative history indicated the section was intended to address issues related to civil actions under unfair competition law, it did not limit the application of section 533.5 to state and local criminal actions, thereby encompassing all criminal proceedings, including federal cases.
The prohibition against providing a defense in criminal actions applies irrespective of who initiated the prosecution. The trial court deemed the Ninth Circuit's ruling in Bodell non-binding and unpersuasive, finding its interpretation of section 533.5 erroneous. Consequently, the court granted Mt. Hawley's motion for summary judgment on both Mt. Hawley's first amended complaint and Lopez's cross-complaint, resulting in a judgment favoring Mt. Hawley against Lopez on June 23, 2011. Lopez subsequently filed a timely appeal on June 29, 2011.
The standard of review for the summary judgment grant is de novo, allowing for a thorough examination of the record while favoring the non-moving party. This applies to statutory and insurance policy interpretations as well. The court emphasizes that when the facts are undisputed, the determination is a legal question reviewed de novo.
Section 533.5, initially enacted in 1988 and amended in 1990, states that no insurance policy shall impose a duty to defend claims in civil or criminal actions where recovery of fines, penalties, or restitution is sought by specific legal entities, regardless of any policy exclusions regarding such claims.
The parties confirm that references to "Chapter 5 (commencing with Section 17200) of Part 2" and "Chapter 1 (commencing with Section 17500) of Part 3 of the Business and Professions Code" relate to California’s unfair competition law (UCL) and false advertising law (FAL). In 1991, the California Legislature amended section 533.5, subdivision (b) to include county counsel among the prosecutors listed in the statute. Consequently, the statute stipulates that no insurance policy shall provide a duty to defend against claims in criminal actions or actions under the UCL or FAL where fines, penalties, or restitution are sought by various prosecutors, regardless of explicit exclusions in the policy. A California court has not yet ruled on whether this statute prevents insurers from defending all criminal actions, including federal ones. The Ninth Circuit's decision in Bodell interpreted that the statutory language limits defense to certain civil actions brought by state or local officials but did not engage in a comprehensive statutory interpretation analysis.
California’s approach to statutory interpretation aims to ascertain legislative intent, following a three-step process: first, examining the plain meaning of the statute; second, considering legislative history and secondary interpretive rules; and third, using cautious reasoning if ambiguity persists. The primary task is to determine lawmakers' intent to adopt a construction that aligns with the law's purpose.
The process of statutory interpretation involves applying reason, practicality, and common sense to the language of the law. When uncertainties arise, the consequences of various interpretations must be considered. Courts must look beyond the text to understand legislative intent, taking into account context, objectives, historical background, public policy, and existing interpretations. If the meaning of the statutory language is unclear, courts may refer to legislative history.
In the case of section 533.5, Mt. Hawley argues that the statute clearly prohibits insurance contracts from covering the defense of criminal actions. However, for this interpretation to be accepted, it must be the sole reasonable interpretation. The court finds that there are multiple reasonable interpretations of section 533.5. One interpretation suggests that the statute distinguishes between general criminal actions and specific actions seeking recovery of fines or penalties by certain state attorneys, indicating that while insurers cannot defend against criminal actions, they may defend against certain proceedings initiated by private parties. This interpretation means that the statute does not universally bar insurers from providing defense in all criminal cases, including those brought by federal prosecutors.
Section 533.5, subdivision (b), is interpreted to potentially apply to any criminal action or proceeding where a fine, penalty, or restitution is sought by four specified California state and local public agencies, as well as to actions under the Unfair Competition Law (UCL) or the False Advertising Law (FAL) for similar recoveries. This interpretation limits insurers from defending against claims brought by these state and local agencies but does not extend to federal prosecuting agencies. An alternative interpretation suggests that the section applies to any claim involving the recovery of fines or penalties sought by the same agencies across both criminal and civil contexts. Both interpretations reveal that the statute's language is not clear and unambiguous, necessitating further analysis of its purpose, legislative history, and secondary interpretive rules. The statutory interpretation process requires examination of extrinsic aids when multiple meanings exist, prompting a review of the legislative history and the issues the Legislature aimed to address.
Legislative Counsel’s digests and other summaries are critical for understanding legislative intent, though they are not legally binding, they carry significant weight in judicial interpretations. Legislative history, including committee reports, bill reports, and other records, serves as a primary source for ascertaining legislative intent, while personal motivations of individual legislators are typically excluded from consideration.
The 1988 enactment of section 533.5 aimed to apply uniformly to civil and criminal actions initiated by specified state and local public entities for the recovery of fines, penalties, or restitution, explicitly excluding actions by federal agencies. The Legislative Counsel’s digest for Assembly Bill No. 3920 indicated that the bill would prohibit insurance coverage for fines or restitution in actions brought by the Attorney General, district attorneys, or city prosecutors. An Assembly Committee analysis reinforced this understanding, clarifying that no insurance policy could provide coverage for such payments, irrespective of policy language. Consequently, the Supreme Court noted that the original version of section 533.5 did not extend to claims by federal authorities.
Section 533.5 was enacted by the Legislature to address challenges faced by the Attorney General and public entities in enforcing the Unfair Competition Law (UCL) and the False Advertising Law (FAL). The primary issue identified was that defendants often claimed their unlawful conduct was covered by business insurance policies, leading to litigation primarily between public entities and insurance companies rather than accountability for the individuals responsible. This situation resulted in extensive use of prosecutorial resources without meaningful restitution or penalties imposed on the offenders, as settlements paid by insurers did not hold defendants accountable for their wrongful actions.
The Attorney General, advocating for the legislation, emphasized that the bill aimed to ensure individual accountability for unfair business practices and false advertising, thus preventing cases from devolving into disputes over insurance liability. He pointed out that while businesses typically have insurance for operational losses, the existing law's ambiguity allowed insurers to defend against claims under UCL and FAL, undermining public interests. The Attorney General argued that fines and penalties should not be covered by insurance, as doing so does not serve a legitimate public purpose and dilutes the consequences faced by wrongdoers.
In 1990, the Legislature amended section 533.5, subdivision (b) through Assembly Bill No. 3334 (AB 3334), referred to as a “clean-up bill” by the Attorney General. The legislative history indicates two main points regarding this amendment. First, it was not intended to broaden the application of section 533.5, subdivision (b); rather, it aimed to restrict the civil actions subject to its limitations. The Legislative Counsel’s digest emphasized that the amendment was designed to prevent those violating unfair competition and advertising laws from using insurance to circumvent accountability. The Assembly Committee on Finance and Insurance noted that AB 3334 sought to align current law with its original intent without impacting other insurance coverage issues.
Second, the amendment specifically addressed challenges faced by state and local public entities concerning insurers' interpretations of section 533.5, which allowed them to avoid covering environmental cleanup costs. The Attorney General highlighted that, following the 1988 legislation, businesses were reluctant to pay penalties or restitution while insurance claims were pending, leading to prolonged legal actions. To remedy this, section 533.5 was enacted to prohibit insurance coverage for fines, penalties, and restitution in actions initiated by the Attorney General and other legal authorities. However, insurers began to argue that environmental cleanup costs did not qualify as damages under typical liability policies, thus limiting their liability. AB 3334 aimed to clarify the original intent of section 533.5, ensuring the recovery of public funds for statutory environmental programs, like superfund initiatives, related to hazardous substance releases.
The Assembly Finance and Insurance Committee reviewed a memorandum from the Environmental Section of the Attorney General's Office regarding a bill proposal on hazardous waste insurance. The memorandum indicated that Insurance Code section 533.5 prohibits insurance coverage for fines, penalties, and restitution in civil or criminal actions initiated by the Attorney General and local prosecutors. It proposed an amendment to clarify that section 533.5 applies specifically to criminal actions and civil law enforcement actions under the Unfair Competition Law (UCL) and the False Advertising Law (FAL), excluding actions under hazardous substance and waste control laws. The Attorney General acknowledged that section 533.5 was overly broad, unintentionally affecting various regulatory activities beyond its original intent, which was to address UCL and FAL actions. Consequently, the Legislature amended the statute to limit the prohibition on insurance coverage for defense to UCL and FAL actions, rather than all civil actions, as insurers argued that the original language included environmental cleanup cases. Legislative analyses indicate that the amendment aimed to clarify that the prohibition on insurance for fines, penalties, or restitution applies only to UCL and FAL actions and criminal proceedings, though inconsistencies in legislative history exist.
The legislative history surrounding the amendment indicates that its interpretation is not supported by the circumstances of its enactment. The Senate committee analysis emphasized the need for the amendment to prevent negative effects from a misinterpretation of the broad reference to "any civil action." It did not clarify which agency, state or federal, could bring the action. Mt. Hawley argues that section 2 of AB 3334 establishes that the 1988 intent was for the statute to apply to insurance coverage and the duty to defend only in criminal actions and civil actions initiated by specified state authorities under the Unfair Competition Law (UCL) and the False Advertising Law (FAL). While this statement reflects the Legislature's intent, it is not binding for judicial interpretation, as established in Apple Inc. v. Superior Court and McClung v. Employment Development Dept. Courts retain the authority to interpret statutes independently of legislative declarations, although these declarations may inform judicial understanding if consistent with original intent. It is established that the original enactment of section 533.5 in 1988 applied solely to actions from state and local agencies, excluding federal agencies. Additional legislative records from 1990 reinforce that the statute was intended for actions by specific state and local entities seeking fines, penalties, or restitution. Legislative history from subsequent enactments can be used to clarify earlier legislative intent, and while such expressions are not binding, they can aid in understanding the original purpose of prior acts.
No insurance policy is required to provide a defense or coverage for civil or criminal actions initiated by the Attorney General, district attorneys, or city prosecutors concerning fines, penalties, or restitution. This principle was established by California law through Assembly Bill 3920 in 1988, aimed at ensuring personal accountability for unfair business practices and misleading advertising. The legislative history indicates that section 533.5 was enacted to address actions initiated by state and local agencies and was later amended in 1990 to restrict its application. A subsequent amendment in 1991, through Senate Bill 709, added county counsel to the list of entities authorized to prosecute unfair competition law (UCL) actions but did not change the overarching limitation on insurance coverage for fines or penalties. The legislative analyses confirm that section 533.5 applies to UCL actions brought by specified public entities, reinforcing that no insurance policy can cover such penalties or restitution.
The legislative history indicates that the California Legislature did not intend to prohibit insurers from providing a defense in federal criminal actions or any actions outside of those under the Unfair Competition Law (UCL) and the False Advertising Law (FAL) brought by specific state and local agencies. The original statute and subsequent amendments from 1988, 1990, and 1991 were aimed at limiting insurer defenses in UCL and FAL cases initiated by the Attorney General, district attorneys, city attorneys, and later, county counsel. The original section 533.5, subdivision (b), applied solely to civil and criminal actions by these state officials and did not extend to actions brought by federal agencies.
The 1990 amendment clarified that the prohibition on insurer defenses specifically pertained to UCL and FAL actions by the named agencies, addressing a previous loophole that allowed defenses in environmental cleanup cases. Throughout this legislative process, there was no indication that the Legislature intended for section 533.5 to apply to actions other than UCL and FAL cases from the specified public entities or to federal criminal actions. A federal court emphasized this interpretation, noting that there is no insurance coverage or duty to defend in actions under the UCL.
The legislative history reveals no intent to differentiate between state and federal criminal prosecutions, reinforcing that the focus was solely on actions enforceable by state and local agencies. The absence of any reference to federal prosecutions in the legislative discussions supports the conclusion that the statute was not meant to encompass federal actions. The overall legislative intent centered on addressing state resource concerns related to UCL and FAL prosecutions, with no consideration given to federal entities.
Section 533.5, subdivision (b), prohibits insurers from defending claims in criminal actions or actions under the Unfair Competition Law (UCL) or the False Advertising Law (FAL) when recovery of fines, penalties, or restitution is sought by state or local authorities. Mt. Hawley contends that the grammatical structure of the statute indicates that the list of legal representatives applies only to the actions described in the second phrase, which is separated by "or" from the preceding clause. While grammatical analysis is a tool for determining legislative intent, it should not overshadow the actual aims of the statute. Courts must interpret statutes with an understanding of the human issues they address, rather than as mere logical exercises. The intent behind section 533.5 includes preventing insurers from providing defense or indemnity for UCL and FAL actions initiated by public entities, as well as addressing misuse of the statute concerning environmental cleanup costs. The legislative history reflects a clear intent to bar indemnity and defense in UCL and FAL cases without indicating that this prohibition extends to federal criminal cases. Thus, strict adherence to grammatical rules should not obstruct the legislative intent of section 533.5.
The excerpt examines the application of the last antecedent rule in legal interpretation, particularly in the context of statutory language regarding actions under the Unfair Competition Law (UCL) and the False Advertising Law (FAL). The last antecedent rule dictates that modifying phrases apply to the closest preceding words unless specified otherwise. Mt. Hawley asserts that a clause regarding recovery by public prosecutors modifies only actions brought under the UCL or FAL and not criminal actions. However, the text notes that this rule is not absolute and has exceptions. These exceptions allow for broader interpretation where the intent of the statute or the context suggests that the phrase should apply to all relevant preceding terms. The document cites various cases to support the assertion that the clause in question applies equally to criminal and civil actions, emphasizing that public prosecutors can pursue both civil penalties and restitution across different types of legal proceedings under the UCL and FAL.
The legislation enacting and amending section 533.5, subdivision (b) aims to prevent insurers from providing a defense in actions under the Unfair Competition Law (UCL) and the False Advertising Law (FAL), while allowing defenses in environmental actions initiated by state agencies that seek fines, penalties, and restitution. The interpretation of the statute indicates that the phrase regarding recovery by public agencies pertains to "any criminal action," extending beyond just civil UCL and FAL proceedings. The last antecedent rule does not override the overall intent of the statute, which does not suggest that it applies to federal criminal actions; federal prosecutors do not seek recovery of fines or restitution under these laws. Statutory language must be interpreted in context to avoid absurd outcomes, reinforcing that the term "recovery" pertains to civil, not criminal cases, as prosecutors do not seek “recovery” in the same manner in criminal prosecutions. Moreover, the absence of a comma between phrases in the statute does not necessitate a strict adherence to the last antecedent rule, as punctuation alone cannot determine the meaning of legislative text. Prosecutors, however, do seek fines and restitution in cases related to UCL and FAL violations, establishing a broader context for understanding the statute's application.
Prosecutors have the discretion to waive fines if they do not request them or fail to object when a trial court neglects to impose them, as established in *People v. Tillman* (2000). Restitution hearings in criminal cases require the presence of the prosecutor, even if the victim is represented by counsel, as these hearings are integral to the sentencing process, with the district attorney playing a crucial role (referencing *People v. Dehle* (2008) and *People v. Smith* (2011)). Restitution hearings, addressing both economic and noneconomic damages, are classified as criminal sentencing hearings, not civil trials.
The term “in which the recovery of a fine, penalty, or restitution is sought” applies to criminal actions, not solely to civil actions under the Unfair Competition Law (UCL) or False Advertising Law (FAL), since fines cannot be pursued in civil cases. Only public entities can initiate misdemeanor prosecutions under the UCL and FAL to seek fines, as noted in *Kasky v. Nike, Inc.* (2002). Private plaintiffs under the UCL are limited to remedies such as injunctive relief and restitution, as highlighted in *Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co.* (1999) and *Lavie v. Proctor & Gamble Co.* (2003).
The Attorney General and district attorneys can prosecute UCL violations criminally and pursue civil enforcement actions for equitable relief and civil penalties not available to private litigants. Crimes are viewed as offenses against the state, punishable by fines or imprisonment, distinguishing them from civil wrongs resolved through individual lawsuits. Therefore, the phrase must apply to “any criminal action or proceeding,” emphasizing that statutory interpretation should avoid making any statutory language redundant or meaningless, as stated in various case law references. Concerns about the lack of sense in the interpretation, particularly regarding the role of county counsel in criminal matters, are acknowledged but do not undermine the statutory framework's intent.
The addition of "county counsel" to a specific legal list does not indicate relevance to criminal prosecutions, as the list pertains only to attorneys authorized to initiate unfair competition and false advertising actions. The 1991 amendment to the Unfair Competition Law (UCL) allowed county counsel to file such actions, aiming to address issues of indemnification and defense by insurers in UCL and False Advertising Law (FAL) cases, rather than affecting insurers' ability to defend against all criminal charges. Legislative history supports that the amendment was intended to prevent insurers from litigating against state prosecutors in these specific matters.
Interpretation of the statute emphasizes the legislative intent and purpose, as shown in case law suggesting extrinsic aids may clarify ambiguous statutory language. The inclusion of county counsel alongside the Attorney General, district attorney, and city attorney was a practical decision in the statute's structure.
Furthermore, it is confirmed that outside UCL and FAL actions, California public policy does not oppose insurers defending clients against criminal charges, distinguishing this from indemnification for convicted individuals. Insurers retain discretion regarding defense in criminal cases, as highlighted in relevant case law, emphasizing that an insurer's obligation to defend is not negated by legal or contractual prohibitions on indemnification.
Section 533.5 does not alter the existing law regarding indemnification in actions initiated by certain state and local agencies. Courts have consistently ruled that Section 533, enacted in 1935, which prohibits indemnification for losses caused by the insured's willful acts, does not eliminate an insurer's obligation to defend an insured facing accusations of such acts. Notably, the rulings in Gray v. Zurich Ins. Co. and State Farm General Ins. Co. v. Mintarsih affirm that while Section 533 may preclude indemnity, the insurer still has a contractual duty to provide a defense if the insured reasonably expects coverage for the allegations involved.
The Legislative Counsel's digest for AB 3920 clarified that the statute's provisions were declaratory of existing law, which allowed insurers to provide defense for criminal charges despite limitations on indemnity. Cases such as Jaffe v. Cranford Ins. Co. illustrate that an insurer cannot deny defense based on the exclusion of indemnity for criminal acts, as Section 533 limits insurer liability for losses but does not restrict their right to offer legal services. The strong public policy in California discouraging certain conduct applies to indemnification but not to the duty to defend. Additionally, Section 1668 of the Civil Code supports this view, stating that contracts exempting a party from responsibility for willful injury or violation of law are against public policy, reinforcing the idea that the duty to defend remains intact despite indemnification restrictions.
Liability under California law is complicated by statutory provisions regarding indemnity agreements in insurance policies. Section 1668's applicability to such agreements remains uncertain. Section 533 limits indemnification, stating that if there is no reasonable expectation of a defense when indemnification is excluded, then there is no duty to defend an insured party. However, if there is a distinct promise to defend against intentional torts, the insurer may still have a duty to defend despite a lack of indemnification.
Further, there are conflicting interpretations regarding section 533.5, particularly between subdivisions (a) and (b). Subdivision (a) prohibits indemnification for fines or restitution in criminal proceedings, while subdivision (b) raises questions about potential coverage for federal criminal fines. Critics argue that interpreting subdivision (b) to allow federal indemnification creates inconsistencies with subdivision (a). Ultimately, section 533 maintains a broad prohibition against indemnifying criminal fines, applicable to both state and federal cases. The legislative intent behind section 533.5 was to address the Attorney General's concerns related to Unfair Competition Law (UCL) and False Advertising Law (FAL) cases, rather than to permit coverage for federal criminal fines.
Subdivision (b) allows insurers to provide a defense against federal criminal charges without conflicting with subdivision (a). Relevant legal precedents emphasize that related provisions should be harmonized to avoid inconsistencies while achieving the legislative intent. The Legislature has enacted statutes permitting insurance to defend individuals in various legal contexts, including criminal cases. Specifically, Corporations Code section 317 allows corporations to indemnify agents against expenses related to legal defenses, provided the agents acted in good faith and believed their conduct was lawful. This section also permits corporations to condition the advance of defense costs on the filing of a bond, ensuring repayment if indemnification is later deemed inappropriate. Additionally, it empowers corporations to maintain insurance for their agents against liabilities incurred in their roles. The legislative intent behind section 317 is to protect individuals serving corporations in good faith from liability, thereby encouraging capable individuals to fulfill their duties without fear of personal financial repercussions from honest actions.
The Legislature has established a policy encouraging capable individuals to represent corporations by offering indemnification for legal defense costs arising from lawsuits linked to their roles as corporate agents. Government Code section 990 allows local public entities to insure or contract against defense expenses for claims against the entity or its employees if the liability stems from actions within the scope of employment. Additionally, section 995.8 permits public entities to defend employees in criminal proceedings related to their employment, provided the defense serves the entity's best interests and the employee acted in good faith. The law does not mandate such defenses but allows them under certain conditions. The interpretation of these statutes should harmonize potentially conflicting provisions across different codes, emphasizing the importance of encouraging individuals to serve on corporate boards by assuring them of legal protections. This approach aims to alleviate concerns about legal liabilities that could deter participation in governance roles.
Good and competent individuals may be deterred from serving on corporate boards due to the risk of personal financial depletion from legal expenses associated with investigations or litigation. Indemnification and Directors and Officers (D&O) insurance play crucial roles in protecting these individuals' financial resources, thereby attracting qualified candidates to corporate governance and executive roles. Insurers are permitted to cover defense costs in both federal and certain state criminal cases, acknowledging the presumption of innocence for those accused, which is a fundamental principle of criminal law. This principle ensures that individuals charged with crimes maintain the right to defend themselves without undue governmental interference, utilizing their resources lawfully. Public policy prevents insurance coverage for willful criminal acts or intentional torts, but this does not apply during the duty to defend analysis if no guilt has been established. The dissenting opinion in Bodell notes a lack of California court precedent for interpreting insurance policies to cover criminal defenses; however, it points out that no courts have ruled against such coverage either. The policies discussed here explicitly include provisions for defending against criminal charges, distinguishing them from those in past cases like Perzik and Jaffe, which did not expressly provide such coverage.
The trial court ruled in favor of Mt. Hawley, granting summary adjudication on Lopez's claim for breach of the implied covenant of good faith and fair dealing, determining that Insurance Code section 533.5, subdivision (b), negated any duty to defend. The court noted that only the Perzik policy explicitly mandated a duty to defend, while the Jaffe case suggested that a potential for coverage could establish such a duty. Mt. Hawley argued that it was not obligated to defend Lopez due to policy exclusions surrounding uninsurable matters and the stipulations of section 533.5. The court found that since section 533.5 does not eliminate Mt. Hawley's duty to defend, the exclusion regarding uninsurable matters was inapplicable. Consequently, Lopez's breach of contract claim failed as a matter of law.
The trial court also did not address Mt. Hawley's alternative argument that it reasonably denied coverage based on a genuine dispute regarding its duty to defend. On appeal, Mt. Hawley maintained that even if it had a duty to defend, the denial was still reasonable and based on a genuine dispute. However, the applicability of the "genuine dispute doctrine" in third-party duty to defend cases remains unsettled, with conflicting precedents suggesting that this doctrine typically arises in first-party coverage disputes. The court expressed skepticism about applying the genuine dispute doctrine in this context, indicating that a genuine dispute might actually trigger the duty to defend. It concluded that material factual issues precluded Mt. Hawley from succeeding on summary adjudication concerning Lopez's bad faith claim regarding the refusal to defend.
The reasonableness of an insurer's actions is typically a factual question, with an exception for cases where only one reasonable inference can be drawn from the evidence. Bad faith claims generally allow a jury to evaluate conflicting evidence regarding an insurer's conduct. Although Mt. Hawley's legal stance on the interpretation of section 533.5, subdivision (b) was deemed reasonable, evidence presented by Lopez raised factual issues regarding the reasonableness of Mt. Hawley's refusal to defend Lopez against criminal charges. Notably, Mt. Hawley had previously agreed to defend DCHS in a similar case under the same policy and advanced $600,000 in defense costs. The distinction in treatment between DCHS and Lopez was not explained by Mt. Hawley. Lopez also contended that Mt. Hawley improperly relied on a policy exclusion that he argued was not applicable, citing case law indicating that an insurer's reliance on uncommunicated exclusions may suggest bad faith. The failure of Mt. Hawley's summary adjudication motion to address Lopez's allegations of breaching the implied covenant of good faith and fair dealing further supports Lopez's claims. Summary adjudication cannot resolve less than an entire cause of action, emphasizing the necessity of a comprehensive evaluation of the case.
Mt. Hawley is not entitled to summary adjudication regarding Lopez's claim for breach of the implied covenant of good faith and fair dealing. The trial court correctly overruled Lopez's demurrer against Mt. Hawley's first amended complaint, which presented two causes of action for declaratory relief: one concerning Mt. Hawley's duty to defend and the other regarding its duty to indemnify. Mt. Hawley's claims of no coverage obligations were based on section 533.5, a medical incident exclusion, and a remuneration/personal profit exclusion. Lopez's demurrer contested only the first cause of action, arguing that the exclusions did not apply, but this argument relied on evidence outside the pleadings and not subject to judicial notice. The court clarified that while it could acknowledge the existence of pleadings, it could not accept the truth of their contents at the demurrer stage. The applicability of the medical incident exclusion could be determined at trial or summary judgment, but not through a demurrer. Since Mt. Hawley presented a viable claim for declaratory relief, the trial court's decision to overrule the demurrer was justified. Additionally, Lopez's new argument regarding issue preclusion was not considered as it was raised for the first time in his reply brief, which is generally deemed waived. The June 21, 2011 order granting Mt. Hawley's motion for summary judgment is reversed, while the October 18, 2010 order against Lopez's demurrer is affirmed. Lopez's request for judicial notice of his federal criminal case judgment is granted, and he is entitled to recover costs on appeal.
