(Insurance Code Section 553 Barring Coverage of Insured's Willful Acts Applied to Exclude Coverage of Successor Company's Liability Imposed for Conduct of Predecessor Company)

(July 2022) - In Certain Underwriters at Lloyd's London v. ConAgra Grocery Products Co., 77 Ca. App.5th 729 (April 19, 2022), the California First District Court of Appeal affirmed the trial court's entry of summary judgment in favor of insurers finding that Insurance Code section 533 applied to exclude coverage of ConAgra Grocery Products Company ("ConAgra") for an underlying judgment requiring it to pay $101,666,666 into a public fund established to abate lead paint used in homes constructed before 1950. ConAgra a was found liable as the successor to paint manufacturer, W.P. Fuller & Co. ("Fuller").

Insurance Code section 533 is imputed into liability insurance policies under California law and applies to exclude coverage for liability of an insured for its willful acts. The Court of Appeal explained the scope of Insurance Code section 533 as follows:

Section 533 provides that "[a]n insurer is not liable for a loss caused by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured's agents or others." '"Section 533 is "an implied exclusionary clause which by statute is to be read into all insurance policies." (Shell Oil, supra, 12 Cal.App.4th at p. 749, quoting J. C. Penney Casualty Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, 1019 [278 Cal. Rptr. 64, 804 P:2d 6891 (Penney).) The statute reflects a fundamental public policy of denying coverage for willful wrongs and discouraging willful torts.

(Penney, at pp. 1019-1021, fn. 8 and accompanying text.) '"The public policy against insurance for losses resulting from such [willful wrongful] acts is usually justified by the assumption that such acts would be encouraged, or at least not dissuaded, if insurance were available to shift the financial burden of the loss from the wrongdoer to the insurer ...."' (Downey Venture v. LMI Ins. Co. (1998) 66 Cal.App.4th 478, 514 {78 Cal. Rptr. 2d 1421 (Downey), quoting American States Ins. Co. v. Borbor (9th Cir. 1987) 826 F.2d 888, 895 (Borbor): PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 316, fn. 1. 317-318 [84 Cal. Rptr. 2d 455. 975 P.2d 652].) "As a statutory exclusion, section 533 is not subject to the rule of strict construction against an insurer; instead, we construe it according to the Legislature's intent, for which we refer first to the words of the statute. ([Penney], at p. 1020, fn. 9 and accompanying text.)" (Shell Oil, at p. 739.)

A "willful act" under section 533 means "an act deliberately done for the express purpose of causing damage or intentionally performed with knowledge that damage is highly probable or substantially certain to result." (Shell Oil, supra, 12 Cal.App.4th at p. 742; see Downey, supra, 66 Cal.App.4th at p. 500.) "Conduct for which the law imposes liability, and which is expected or intended to result in damage, must be considered wrongful and willful. Therefore, section 533 precludes indemnification for liability arising from deliberate conduct that the insured expected or intended to cause damage." (Shell Oil, at p. 743; Downey, at p. 501.) "The appropriate test for 'expected' damage is whether the insured knew or believed its conduct was substantially certain or highly likely to result in that kind of damage." (Shell Oil, at p. 748.) On the other hand, "no form of negligence amounting to less than section 533's 'wilful act' precludes coverage. (Penney, supra, [52 Cal.3d] at p. 1021.)" (Shell Oil, at p. 740.) Thus, "[a]cts of gross negligence or recklessness are not wilful acts within the meaning of section 533." (Downey, at p. 500.)

An insurer's duty to indemnify '"is only determined when the insured's underlying liability is established."' (Hartford Casualty Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, 287 [172 Cal. Rptr. 3d 653, 326 P.3d 2537.) "The duty to indemnify on a particular claim is determined by the actual basis of liability imposed on the insured." (Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1, 108 [52 Cal. Rptr. 2d 690] (Armstrong).

The parties' dispute arose of out an underlying action for representative public nuisance filed by multiple counties and governmental agencies against lead paint manufacturers. Such liability was premised on "the manufacturers promotion of lead paint for interior use with knowledge of the hazard that such use would create." Further, "because this type of nuisance action does not seek damages but rather abatement, a plaintiff may obtain relief before the hazard causes any physical injury or physical damage to property." ConAgra was found liable as Fuller's corporate successor through a series of mergers and consolidations. The trial court in the underlying action found that Fuller's liabilities ultimately flowed to ConAgra based on the fact that ConAgra knowingly assumed the liabilities of the predecessor, which in this case was Fuller.

As a successor corporation, ConAgra argued that it did not engage in any willful acts as required by Insurance Code section 533. Rather, it was Fuller that engaged in the wrongful act of promoting the use of lead paint with the knowledge that it would cause harm to children and property.

In affirming the trial court's decision, the Court of Appeal found that application of Insurance Code section 533 is appropriate in this situation because the successor in a merger is on notice that it is purchasing the predecessor subject to the liability of that entity. Hence, the successor entity is responsible as the wrongdoer, in the sense that the successor knew that the predecessor may have committed wrongdoing and thereby agreed to assume any liability thereof.

The Court of Appeal also rejected ConAgra's argument that a different causation analysis should be used in connection with determining whether an insured acted willfully as opposed to the causation analysis used to establish its liability in the underlying action. Hence, the judgment in the underlying public nuisance action did not establish that its predecessor, Fuller, acted willfully for purposes of applying Insurance Code section 533. In rejecting this argument, the Court of Appeal reasoned as follows:

ConAgra provides no support for its contention that section 533 could not be found to apply in this case absent proof that specific promotions by Fuller directly resulted in the need for inspection or abatement in each home for which ConAgra was held liable for payment. The underlying litigation conclusively established ConAgra's liability for public nuisance based on Fuller's intentional promotion of lead paint for interior residential use with knowledge of the danger such use would create. (Santa Clara II. supra. 17 Cat.App.5th at p.97). Santa Clara II rejected arguments attempting to limit each defendant's liability to damage proven to be directly tied to that entity's product and/or promotions, explaining that imposition of liability for the promotions did not require proof that lead paint made by each of the defendants was currently present in homes in the 10 jurisdictions or restriction of each defendant's liability to its proportionate contribution to creation of the public nuisance. (Id. at p. 108.) "A public nuisance is one which affects at the same time an entire community or neighborhood, or any considerable number of persons, although the extent of the annoyance or damage inflicted upon individuals may be unequal." (Civ Code, § 3480....) "[P]ublic nuisances are offenses against, or interferences with, the exercise of rights common to the public." (People ex rel. Gallo v. Acuna (1997) 14 Cal.4th 1090, 1103 [60 Cal. Rptr. 2d 277. 929 P. 2d 5961.)"' (Santa Clara II, at p. 112, some italics omitted, quoting Santa Clara II, supra. 137 Cal.App.4th at p. 305.) '""[T]he critical question is whether the defendant created or assisted in the creation of the nuisance.""' (Santa Clara II, at p. 109, quoting Santa Clara II, at p. 306.) Santa Clara II affirmed the trial court's determination that Fuller's promotions were a substantial factor in creating the public nuisance. (Id. at pp. 102-104.) The question under section 533 is whether the loss for which an insured seeks indemnity was caused by a willful act of the insured. The loss at issue here is the amount ConAgra paid into the abatement fund due to its liability for creating the public nuisance. The insurers' duty to indemnify is determined by the actual basis of liability imposed on the insured (Armstrong, supra. 45 Cal.App.4th at p. 108) – here, liability for public nuisance as successor to Fuller, whose conduct was a substantial factor in creating the nuisance. ConAgra has provided neither authority nor persuasive reasoning to support its contention that a different causation analysis is required under section 533 than that used to determine its underlying liability.

The Court of Appeal also rejected ConAgra's argument that actual knowledge found in the underlying public nuisance action for purposes of finding liability on the part of predecessor, Fuller, was not the same as the subjective "substantial certainty" required to bar coverage under section 533. ConAgra argued that such "substantial certainty" could only be shown by evidence that Fuller's senior management was substantially certain its promotions would result in the loss for which ConAgra seeks indemnity and no such showing was made in the underlying public nuisance action. In rejecting ConAgra's argument, the Court of Appeal reasoned as follows:

ConAgra next argues the underlying findings did not establish as a matter of law that Fuller acted with the knowledge required for section 533 to apply. ConAgra argues the "actual knowledge" found in the underlying litigation is not the same as the subjective "substantial certainty" required to bar coverage under section 533, and Fuller's knowledge could be shown only by evidence that senior management was substantially certain its promotions would result in the loss for which ConAgra seeks indemnity, as to which no evidence was presented or findings made.

The underlying cases established that when Fuller promoted lead paint for residential use, it had '"actual knowledge of the hazards of lead paint-including childhood lead poisoning,"' and specifically that "(1) 'lower level lead exposure harmed children,' (2) 'lead paint used on the interiors of homes would deteriorate,' and (3) 'lead dust resulting from this deterioration would poison children and cause serious injury."' (Santa Clara II, supra, 17 Cal.App.5th at pp. 84-85.) Santa Clara II found substantial evidence that Fuller (and therefore ConAgra) "must have known by the early 20th century that interior residential lead paint posed a serious risk of harm to children." (Id. at p. 85, italics omitted.)

The trial court viewed the findings that Fuller knew "'lead paint used on the interiors of homes would deteriorate"' and '"lead dust resulting from this deterioration would poison children and cause serious injury"' satisfied section 533's willfulness standard. ConAgra argues, however, that for section 533 to apply, there would have to be evidence that Fuller believed the "widespread prevalence of deteriorated lead paint" found to constitute a public nuisance in this case "was substantially certain to result from its few actionable promotions" and that Fuller knew all the events ConAgra sees as having intervened during the decades following the promotions would occur and be substantially certain to result in the widespread deterioration. In ConAgra's view, "Fuller's promotions could have resulted in present-day lead hazards inside homes only if (1) people were influenced by Fuller promotions (above all other lead paint promotions), (2) those so influenced placed lead paint inside of homes, (3) that paint gradually deteriorated, and (4) the paint was not properly maintained or abated in the ensuing decades." These arguments are based on premises rejected in Santa Clara II. The trial court in the underlying cases expressly found that lead paint "'inevitably deteriorates,"' as well as that '"[s]ince antiquity, it has been well known that lead is highly toxic and causes severe health consequences when ingested' and that '[e]ven relatively low levels of lead exposure have severe health consequences."' (Santa Clara II supra, 17 Cal.App. 5th at p. 79.) The finding that Fuller promoted lead paint for interior residential use with actual knowledge that lead paint "would deteriorate" and the resulting lead dust "would poison children and cause serious injury" was, in essence, a determination that Fuller must be deemed to have known the deterioration of lead paint and resulting harm to children was inevitable. These findings, conclusively established by Santa Clara II, cannot be reconciled with any conclusion other than that Fuller "knew or believed its conduct was substantially certain or highly likely to result" (Shell Oil, supra. 12 Cal.App.4th at p. 7 48) in the conditions found in this case to be a public nuisance. We therefore agree with the trial court that the actual knowledge findings in the underlying litigation establish the "willful act" required for application of section 533.

In summary, the Court of Appeal found that Fuller had actual knowledge of the harms associated with lead paint, and that such knowledge necessarily satisfied the "substantial certainty" requirement in Insurance Code section 533. Hence, section 533 applied to bar indemnity coverage of ConAgra for the underlying public nuisance action judgment.

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