Adir International, LLC. v. Starr Indemnity And Liability Company
(California Insurance Code Section 5335(b) Bars Defense of Insured for Action Brought by the Attorney General’s Office for Violation of California’s Unfair Competition Law and False advertising Law)
(July 2021) - In Adir International, LLC v. Starr Indem. and Liability Co., 994 F.3d 1032 (April 15, 2021) (“AG lawsuit”), the United States Ninth Circuit Court of Appeals affirmed the district court’s dismissal of a declaratory relief action filed by Adir International, LLC (“Adir”) against Starr Indemnity and Liability Company (“Starr”) arguing that a duty to defend was owed under Starr’s directors and officers policy for an underlying action filed by the California Attorney General’s (“AG”) office against Adir alleging violation of California’s Unfair Competition Law (“UCL”) and False Advertising Law (“FAL”). Starr had agreed to defend Adir against the AG lawsuit. However, after receiving a letter from the AG advising Starr that Insurance Code section 533.5(b) barred the defense of actions filed by the AG alleging violation of the UCL and FCL, it stopped defending Adir.
Subsequently, Starr filed a motion for summary judgment arguing that Insurance Code section 533.5(b) barred a duty to defend Adir in the AG lawsuit. The district court agreed with Starr and entered summary judgment in its favor.
In affirming the district court’s decision, the Court of Appeals rejected Adir’s argument that Insurance Code section 533.5(b) was unconstitutional as it deprived Adir of its due process right to retain counsel to defend the AG lawsuit. The Court of Appeals reasoned as follows:
Section 533.5 provides:
(a) No policy of insurance shall provide, or be construed to provide, any coverage or indemnity for the payment of any fine, penalty, or restitution in any criminal action or proceeding or in any action or proceeding brought pursuant to [the UCL or FAL] by the Attorney General . . . notwithstanding whether the exclusion or exception regarding this type of coverage or indemnity is expressly stated in the policy.
(b) No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subdivision (c), any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to [the UCL or FAL] in which the recovery of a fine, penalty, or restitution is sought by the Attorney General . . . notwithstanding whether the exclusion or exception regarding the duty to defend this type of claim is expressly stated in the policy.
(c) For the purpose of this section, "duty to defend" means the insurer's right or obligation to investigate, contest, defend, control the defense of, compromise, settle, negotiate the compromise or settlement of, or indemnify for the cost of any aspect of defending any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to [the UCL or FAL] in which the insured expects or contends that (1) the insurer is liable or is potentially liable to make any payment on behalf of the insured or (2) the insurer will provide a defense for a claim even though the insurer is precluded by law from indemnifying that claim.
(d) Any provision in a policy of insurance which is in violation of subdivision (a) or (b) is contrary to public policy and void.
. . .
In the civil context, courts have limited the reach of the Due Process Clause to cases in which the government has actively prevented hiring or communicating with counsel. Adir has not alleged such impingements by the state. There is also no allegation that Adir cannot afford competent counsel absent coverage under the policy. We thus reject Adir’s facial constitutional challenge to California Insurance Code § 533.5(b).
The Court of Appeals also rejected Adir’s argument that Insurance Code section 533.5 (b) only applies to claims seeking damages and not injunctive relief. The Court of Appeals held as follows:
To start, there are plenty of textual clues that the phrase "any claim ... in which the recovery of a fine, penalty, or restitution is sought" does not mean the same thing as the phrase "any claim ... in which only the recovery of a fine, penalty, or restitution is sought." Most obviously, the word "only" is absent from this section of the statute. Adir's interpretation would require the court to impermissibly read that extra word into the statute. See, Lamie v. U.S. Trustee, 540 U.S. 526. 538, 124 S. Ct. 1023, 157 L. Ed. 2d 1024 (2004) (declining to "read an absent word into the statute"). Along those same lines, the phrase "in which" merely communicates that the claim seeks monetary relief, but beyond that, "in which" does not at all imply that only monetary relief is sought. As Starr points out, Adir's interpretation essentially replaces "in which the recovery of a fine, penalty, or restitution is sought" with the more restrictive modifier "for the recovery of a fine, penalty, or restitution." 6 That reading goes against the plain text of the statute.
. . .
Adir reads “claim” to mean “relief” or “remedy” to contrive a UCL or FAL "claim" for monetary relief as distinct from a UCL or FAL "claim" for injunctive relief. But Adir does not offer any authority for that reading of the word "claim." Nor does Adir's reading make sense given the statute's inclusion of the phrase "in any action or proceeding," which seems to refer to the entire lawsuit as a whole. If "action or proceeding" refers to the entire lawsuit, then it would follow that the word "claim" refers to the individual causes of action within the lawsuit, which, in this case, would be the UCL claim and the FAL claim. With that framework in mind, the statute's reference to "duty to defend ... any claim" seems to most naturally refer to coverage (or not) for particular causes of action within a larger "action or proceeding."
. . .
Further, the statutory framework does not support a bifurcation of injunctive relief and civil penalties. Government officials may "seek redress through the bringing of civil law enforcement cases seeking equitable relief and civil penalties" for violations of the UCL and FAL. Mt. Hawley, 156 Cal. Rptr. 3d at 794; see also Cal. Bus. & Professions Code § 17206. Equitable remedies (injunctive relief, restitution, and civil penalties) are the only remedies available under California Business and Professions Code §§ 17200-17210. See Nationwide Biweekly Admin., Inc. v. Superior Ct. of Alameda Cty., 9 Cal. 5th 279, 261 Cal. Rptr. 3d 713, 462 P.3d 461, 469 (Cal. 2020); see also In re Tobacco II Cases, 46 Cal. 4th 298, 93 Cal. Rptr. 3d 559, 207 P.3d 20, 29 (Cal. 2009) ("To achieve its goal of deterring unfair business practices in an expeditious manner, the Legislature limited the scope of the remedies available under the UCL" to "equitable damages such as "injunctive relief and restitution."). "The primary form of relief available under the UCL to protect consumers from unfair business practices is an injunction." McGill v. Citibank, N.A., 9 2 Cal. 5th 945, 216 Cal. Rptr. 3d 627. 393 P.3d 85. 89 (Cal. 2017) (cleaned up).
In light of the statutory framework as a whole, it would be illogical to conclude that the legislature intended to carve out an exception to allow for the defense for the primary form of equitable relief (injunctions) but not the others (fine, restitution or civil penalty). See Los Angeles Cty. Metro. Transportation Auth. v. Aiameda Produce Mkt., LLC, 52 Cal. 4th 1100, 133 Cal. Rptr. 3d 738, 264 P.3d 579, 583 (Cal. 2011) ("We must harmonize the statute's various parts by considering it in the context of the statutory framework as a whole ").
Lastly, the Court of Appeals affirmed the district court’s ruling that Starr was entitled to reimbursement from Adir for the $2 million it spent in defending Adir against the AG lawsuit based on an express clause in its policy entitling Starr to reimbursement for the defense of uncovered claims.