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Mt. Hawley Insurance Company v. Lopez

(Insurance Code Section 533.5 Does Not Apply to Bar the Defense of Criminal Actions Filed By the Federal Government. Rather, Such Code Section Only Applies to Actions Brought By Enumerated State Agencies.)

In Mt. Hawley Ins. Co. v. Lopez, 215 Cal.App.4th 1385 (May 1, 2013), the California Second District Court of Appeal reversed the trial court’s entry of summary judgment in favor of Mt. Hawley Insurance Company (“Mt. Hawley”) which held that a duty to defend was not owed to Dr. Richard R. Lopez, Jr. (“Lopez”) under a “Not For Profit Organization And Executive Liability Policy issued to the Daughters of Charity Health Systems, Inc. (“DCHS”). The United States Attorney for the Central District of California had filed a grand jury indictment charging Dr. Lopez with criminal conspiracy, false statements, and concealment, and falsification of records regarding the diversion of a liver to a patient on an organ sharing list who was lower on the list than a higher priority patient who died as a result of not receiving a liver. 


Dr. Lopez tendered the United States federal indictment to Mt. Hawley under the Not-For Profit Organization And Executive Liability Policy issued to DCHS. In response, Mt. Hawley denied a duty to defend Dr. Lopez against the indictment based on Insurance Code §533.5. Such code section states as follows:

“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 brought pursuant to” the UCL or the FAL “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.”

As a result of Mt. Hawley’s declination of coverage, Lopez filed a complaint for declaratory relief and bad faith against Mt. Hawley arguing that a duty to defend was owed under its policy in connection with the criminal indictment proceeding. Subsequently, the trial court entered summary judgment in favor of Mt. Hawley and held that Insurance Code § 533.5 applied to all criminal actions, rather than actions filed by certain enumerated state agencies. 


In reversing the trial court’s decision, the Court of Appeal reviewed the plain language of the statute as well as its legislative history.


    Our interpretation of section 533.5 allows insurers to contract to provide a defense to certain kinds of criminal charges, as the Legislature has said insurers can do in the cases of corporate agents and government employees charged with crimes. Interpreting section 533.5, subdivision (b), as Mt Hawley proposes and as the trial court did would create a potential conflict with statutes in the Corporations Code and the Government Code. (See Broughton v. Cigna Healthplans (1999) 21 Cal.4th 1066, 1086 [“[w]hen we construe potentially conflicting statutes, our duty is to harmonize them if reasonably possible”]; Walters v. Weed (1988) 45 Ca1.3d 1,. 9 [“[s]tatutes that are apparently in conflict should, if reasonably possible, be reconciled [citation], even when the court interprets provisions in different codes”]; Ailanto Properties, supra, 142 Cal.App.4th at p. 591 [refusing to adopt an interpretation of Gov. Code section that “would negate other statutory provisions” in the Water Code]; In re Marriage of Paddock (1971) 18 Cal.App.3d 355, 359 [“[s]tatutes should be construed so as to harmonize the various sections, and wherever possible seemingly conflicting provisions should be reconciled to avoid the declaration of an irreconcilable conflict”].)

    Our interpretation is also consistent with the goal of encouraging individuals to serve on boards of directors and trustees of corporations and charities. Allowing insurers to provide for defense costs in criminal cases against corporate agents enhances the ability of for-profit and non-profit organizations to attract directors, trustees, and, volunteers who otherwise might hesitate or decline to serve because of a fear of lawsuits and criminal prosecutions. (See In re WorldCom, Inc. Securities litigation (S.D.N.Y. 2005) 354 F.Supp2d 455, 469 directors can rely on the protections given by D & 0 policies, good and competent men and women will be reluctant to serve on corporate boards”]; Homestore, Inc. v. Tafeen (Del. 2005) 888 A.2d 204, 211 [“indemnification encourages corporate  service by capable individuals by protecting their personal financial resources from depletion by the expenses they incur during an investigation or litigation that results by reason of that service]; Griffith, Uncovering a Gatekeeper:  Why the SEC Should Mandate Disclosure of Details Concerning Directors' and Officers' Liability Insurance Policies (2006) 154 U.Pa. L.Rev. 1147, 1171 [“corporate managers insist on D&O insurance to protect their personal wealth from the risk of shareholder litigation, making such coverage necessary to attract qualified persons to board service and executive-level employment”].)


    Our interpretation that insurers may pay for defense costs in federal and some state criminal actions is also consistent with the principle that insureds charged with crimes begin with a presumption of innocence. (See Wiley u County of San Diego (1998) 19 Cal.4th 532,541 and unless they are found guilty, they are presumed innocent and must enjoy the constitutionally-based prerogatives of any citizen who stands merely accused, but not convicted, of a crime”]; CGET Ins. v. Tyson Assoc. (E.D.Pa. 2001) 140 ESupp.2d 415, 421 [public policy precluding insurance coverage for willful criminal acts or for intentional torts “is not appropriately considered during the duty to defend analysis,” particularly where insureds “have not been found guilty of any wrongdoing”].) The law punishes individuals convicted of crimes, not those accused of crimes.


    Finally, Mt. Hawley points to the statement in the dissenting opinion in Bodell that “no California court has ever construed an insurance policy to cover criminal defenses.” (Bodell, supra, 119 E3d at p. 1421 (dis. opn. of Kozinski, J.). No California court, however, has ever construed an insurance policy like this one not to cover criminal defenses, nor has any California court ever held that it is against public policy for an insurer to agree to provide a defense to criminal charges. The two cases cited by the dissent in Bodell, Perzik v. St. Paul Fire & Marine Ins. Co. (1991) 228 Cal.App.3d 1273 (Perzik), and Jaffe, supra, 168 Cal.App.3d 930, involved medical malpractice general liability policies that provided a defense to claims for damages and did not include an express provision providing for a defense against criminal charges. (See Perzik, at p. 1275; Jaffe, at p. 933.)  The policy here, unlike the policies in Perzik and Jaffe, provides that a covered claim includes “a criminal proceeding against any Insured commenced by the return of an indictment” and that Mt. Hawley has a duty to defend such a claim.

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