Alleged Willful Conduct Enough to Bar Coverage Under California Insurance Code Section 533
Azhan Hasan, a Law Clerk at Wiley Rein LLP, authored this post. Edited by John Howell.
A California federal court, applying California law, found that a lawsuit for intentional interference with contractual relations necessarily alleged a willful act and was therefore uninsurable under California Insurance Code Section 533. United Talent Agency v. Markel Am. Ins. Co., 2023 WL 6449399 (C.D. Cal. Sept. 29, 2023). The court further held that other counts in the underlying lawsuit that were not necessarily willful were likewise precluded by Section 533 because they were inseparably intertwined with the alleged willful conduct.
During the effective period of its management liability policy, the insured talent management agency was sued by a competing agency. The competing agency alleged that the insured had intentionally interfered with contractual relations, induced breach of contract, intentionally interfered with prospective economic advantage, conspired to breach its fiduciary duty and duty of loyalty, aided and abetted breaches of fiduciary duty and duty of loyalty, breached its fiduciary duty, breached its duty of loyalty, and engaged in unfair competition under California law.
After resolving the underlying lawsuit by settlement, the insured sought and was denied coverage from the insurer. In the ensuing coverage litigation, the district court initially held that the policy’s professional services exclusion precluded coverage and that Section 533 required final adjudication of intentional acts before its exclusion of willful conduct applied. Reversing on both grounds, the Ninth Circuit instructed the lower court to redo its Section 533 analysis and “examine the allegations in the underlying complaint to determine whether those allegations necessarily involve a willful act.”
On remand, the district court found that six of the competing agency’s causes of action—intentional interference with contractual relations, inducing breach of contract, intentional interference with prospective economic advantage, conspiracy to breach fiduciary duty, conspiracy to breach duty of loyalty, and aiding and abetting breach of duty of loyalty—all necessarily required proof of willful conduct.
For the remaining causes of action that could conceivably be sustained without proof of willful conduct, the court found that, even if the competing agency could have succeeded without showing willful conduct, the facts supporting liability would have been “inseparably intertwined” with the six causes of action that necessarily involved willful conduct. The “gravamen” of the underlying complaint, according to the court, was the insured’s participation in a willful, fraudulent scheme intended to deliberately interfere with the competing agency’s economic relationships. Thus, even for the causes of action that did not require proof of willful conduct on their face, liability would have unavoidably originated from willful conduct, and Section 533 thereby barred coverage.