United States: City Of Whittier v. Everest National Insurance Company

1. Relevant statutes

a. Labor Code section 1102.5

Labor Code section 1102.5 "provides whistleblower protections to employees who disclose wrongdoing to authorities" (Lawson v. PPG Architectural Finishes, Inc. (2022) 12 Cal.5th 703, 709 [289 Cal. Rptr. 3d 572, 503 P.3d 659] (Lawson)), as well as to employees who refuse to participate in illegal activities (see Nejadian v. County of Los Angeles (2019) 40 Cal.App.5th 703, 718 [253 Cal. Rptr. 3d 404] (Nejadian)).

Labor Code section 1102.5, subdivision (b) states, in relevant part: "An employer ... shall not retaliate against an employee for disclosing information ... to a government or law enforcement agency, to a person with authority over the employee or another employee who has the authority to investigate, discover, or correct the violation or noncompliance, or for providing information to, or testifying before, any public body conducting an investigation, hearing, or inquiry, if the employee has reasonable cause to believe that the information discloses a violation of state or federal statute, or a violation of or noncompliance with a local, state, or federal rule or regulation ... ."

Labor Code section 1102.5, subdivision (c) states, in relevant part: "An employer ... shall not retaliate against an employee for refusing to participate in an activity that would result in a violation of state or federal statute, or a violation of or noncompliance with a local, state, or federal rule or regulation."

To prevail on a claim under Labor Code section 1102.5, a plaintiff must prove "that he engaged in protected activity," such as a disclosure under subdivision (b) or a refusal to participate under subdivision (c), "that he was subjected to adverse employment action by his employer, and that there was a causal link between the [protected activity] and the adverse action." (Manavian v. Department of Justice (2018) 28 Cal.App.5th 1127, 1141 [239 Cal. Rptr. 3d 710] (Manavian).) For purposes of the statute, an adverse employment action is one that "'materially affects the terms, conditions, or privileges of employment.' [Citations.]" (Francis v. City of Los Angeles (2022) 81 Cal.App.5th 532, 541 [297 Cal. Rptr. 3d 362].)

b. Section 533

Section 533 of the Insurance Code provides, "An 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." This section is "'an implied exclusionary clause which by statute is to be read into all insurance policies.' [Citations.]" (J. C. Penney Casualty Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, 1020 [278 Cal. Rptr. 64, 804 P.2d 689] (J. C. Penney).) "As a statutory exclusion, section 533 is not subject to the rule of strict construction against an insurer." (Shell Oil Co. v. Winterthur Swiss Ins. Co. (1993) 12 Cal.App.4th 715, 739 [15 Cal. Rptr. 2d 815] (Shell Oil).)

A "wilful 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.) Section 533 also "precludes indemnification, whether or not the insured subjectively intended harm, if the insured seeks coverage for an intentional, wrongful act that is inherently and necessarily harmful." (Shell Oil, at pp. 740–741.) The statute "does not preclude coverage for acts that are negligent or reckless." (J. C. Penney, supra, 52 Cal.3d at p. 1021.)

Section 533 reflects a fundamental public policy of denying coverage for willful wrongs and discouraging willful torts. (J. C. Penney, supra, 52 Cal.3d at pp. 1019–1020, fn. 8 & 1021.) "'The public policy against insurance for losses resulting from such [wilful 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. ...' [Citation.]" (Downey Venture v. LMI Ins. Co. (1998) 66 Cal.App.4th 478, 514 [78 Cal. Rptr. 2d 142].) Accordingly, parties cannot contract for coverage precluded by section 533. (J. C. Penney, at pp. 1019–1020, fn. 8.)

. . .

Given the significant number of retaliation cases in our courts and importance of insurance in resolving those cases and securing compensation for injured employees, we tread carefully in applying the above jurisprudence to a new category of claims.

We agree with B & E Convalescent Center, Markel, and Valley Imaging that the alleged or proven acts of the employers in those cases were willful under section 533. To the extent, however, those cases can be read more broadly to assert that any retaliation against an employee engaging in protected conduct is per se willful under section 533, we disagree.

Although Labor Code section 1102.5 encompasses the sort of misconduct in B & E Convalescent Center, Markel, and Valley Imaging, in which employers punished employees who either reported clearly unlawful conduct or refused to participate in it, the statute is not limited to such obviously intentional misconduct. Indeed, it is conceivable an employer could be found liable under Labor Code section 1102.5 despite making concerted and reasonable efforts to avoid violating the law.

This is best illustrated by claims brought under subdivision (c) of Labor Code section 1102.5. Unlike subdivision (b) of that section, which protects an employee's right to report what the employee has reasonable cause to believe is a violation of the law, subdivision (c) addresses the situation in which an employee does not merely report, but refuses to comply with an employer's directives. (Lab. Code, 1102.5, subd. (c) ["An employer ... shall not retaliate against an employee for refusing to participate in an activity that would result in a violation" of law].) The law is less protective of employees in this circumstance—whereas an employee's disclosures are protected under subdivision (b) so long as the employee has reasonable cause to believe the conduct at issue is illegal, an employee is protected under subdivision (c) only if the activity in which the employee refuses to participate is actually illegal. (Nejadian, supra, 40 Cal.App.5th at p. 719.)

Thus, in a trial on a claim under Labor Code section 1102.5, subdivision (c), the court must "'determine the legal question whether the identified activity would result in a violation or noncompliance with [an] identified statute, rule, or regulation ... .' [Citation.]" (Zirpel v. Alki David Productions, Inc. (2023) 93 Cal.App.5th 563, 573 [310 Cal. Rptr. 3d 730].) If that question is one of first impression, an employer might not discover it has "retaliate[d]" against an employee for purposes of Labor Code section 1102.5, subdivision (c) until the claim is brought to trial and a court has determined the activity the employer directed the employee to perform does, in fact, violate a statute, rule, or regulation.

Further, liability under Labor Code section 1102.5, subdivision (c) does not require proof of bad faith, malice, or punitive intent on the part of the employer. To prove the employer's intent to retaliate, a plaintiff need only show that the protected activity—for example, the employee's refusal to participate in unlawful activity—was a "contributing factor" to the adverse employment action. (Lab. Code, § 1102.6; Lawson, supra, 12 Cal.5th at p. 712; see Manavian, supra, 28 Cal.App.5th at p. 1141 [plaintiff must show "a causal link between the [protected activity] and the adverse action"].) This means an employer can be held liable for an adverse employment action against an employee who refuses to participate in an unlawful activity even if the employer honestly believes the activity is lawful and acts not to punish, but to mitigate the harm to the employer's business from what it believes is an insubordinate employee.

. . .

The Rivera complaint asserted a single cause of action under Labor Code section 1102.5, without express reference to any particular subdivision of that statute. The complaint alleged, however, retaliation for the Rivera plaintiffs' refusal to participate in a purportedly unlawful quota system, thus alleging liability under Labor Code section 1102.5, subdivision (c).

. . .

Under these allegations, the City could be found liable if (1) a court found the City policy at issue violated a statute, regulation, or rule and (2) the City subjected the Rivera plaintiffs to adverse employment actions because of their refusal to comply with that policy. The Rivera plaintiffs would not have to prove the City knew or should have known the City policy was illegal, or acted maliciously, punitively, or in bad faith, nor could the City avoid liability by establishing it reasonably believed the alleged policy was legal.

. . .

Although we conclude the Rivera complaint itself does not base liability on necessarily willful conduct, we express no opinion whether the insurers may defeat or reduce the City's coverage claim by showing, for example, that the City's conduct was in fact willful, and/or that some or all of the settlement is in fact allocable to willful conduct. The trial court may address such issues on remand should the parties wish to raise them.

Starr's policy states, "We will pay on your behalf sums in excess of the retained limit that the insured becomes legally obligated to pay for damages to compensate others for loss arising out of your employment practice liability wrongful act. . ." This language is materially identical to that of the policies in Powerine and Aerojet-General, in which the courts held the term "damages" to be limited to money ordered by the court.