Ninth Circuit Holds Section 533 ‘Willful Acts’ Exclusion Does Not Bar Coverage for Alleged Violations of California False Claims Act

The United States Court of Appeals for the Ninth Circuit has held that Section 533 of the California Insurance Code does not bar coverage for claims brought under the California False Claims Act (the “CFCA”).  Office Depot, Inc. v. AIG Specialty Ins. Co., 2018 WL 2296036 (9th Cir. May 21, 2018).

In 2009, the insured company sought coverage under a media liability insurance policy for a qui tam lawsuit alleging violations of the CFCA.  The insurer denied coverage based on Section 533 of the California Insurance Code, which bars indemnification of “willful” wrongful conduct.  In the ensuing coverage litigation, the trial court agreed, holding that Section 533 bars coverage for liability under the CFCA as a matter of law.  The trial court reasoned that, while the CFCA only requires “recklessness” as to the truth or falsity of the statement, it also requires a separate element of “intent to induce reliance.”  According to the trial court, the “intent to induce reliance” element brought the CFCA claims within Section 533’s “willful” conduct standard.

On appeal, the Ninth Circuit reversed the trial court’s ruling.  In doing so, the court relied on the fact that the CFCA only requires “recklessness” as to the truth or falsity of the statement, rather than “[p]roof of specific intent to defraud” necessary to constitute “willful” conduct.  In addition, the court noted that it was “unpersuaded” by the trial court’s reasoning that the CFCA also requires “intent to induce reliance.”  Accordingly, the Ninth Circuit held that Section 533 does not exclude coverage as a matter of law for liability under the CFCA.

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