Ninth Circuit Holds That California Prohibition on Insuring Willful Conduct Does Not Require Final Adjudication in Underlying Action

The United States Court of Appeals for the Ninth Circuit, applying California law, has held that California Insurance Code Section 533, which prohibits insurance coverage for willful conduct, does not require a final adjudication of such conduct in the underlying action. Aspen Specialty Ins. Co. v. Miller Barondess, LLP, 2023 WL 2523841 (9th Cir. Mar. 15, 2023). The court also found that the statute’s carveout for vicarious liability did not apply.

An insurer issued a professional liability policy to a law firm. The law firm faced a suit for malicious prosecution in connection with a real estate transaction gone awry, which settled prior to trial. The insurer denied coverage for the settlement based on California Insurance Code Section 533. Section 533 provides that “[a]n insurer is not liable for a loss caused by the wilful act of the insured.”

The insurer sought declaratory relief that its policy did not cover the settlement. The United States District Court for the Central District of California held that, because the underlying lawsuit settled, the willful conduct was not sufficiently established and therefore Section 533 did not apply.

The Ninth Circuit reversed, holding that Section 533 does not require a final adjudication of willful conduct. The court held that, in applying Section 533, California courts examine the allegations of the underlying complaint, not whether there has been an actual adjudication of those allegations. The court also rejected an argument that the underlying lawsuit fell into a carveout to Section 533, providing that an insurer “is not exonerated by the negligence of the insured, or of the insured’s agents or others.” The court noted that, even though the underlying lawsuit sought to hold the insured law firm vicariously liable for the actions of its partners, it was not based on an innocent party’s vicarious liability for the wrongdoing of another. That is, the underlying complaint alleged that the insureds themselves, not an agent or third party, engaged in the malicious prosecution.