The Central District of California held that Section 533 of the Insurance Code eliminated any potential for coverage for suit under the state False Claims Act.
On January 4, the U.S. District Court for the Central District
of California held that California's Insurance Code precluded
AIG Specialty Insurance Company from reimbursing $15 million in
defense expenses incurred by Office Depot in defending a False
Claims Act suit.
In
Office Depot, Inc. v. AIG Specialty Insurance Company,
Case No. 15-02416-SVW-LPRx (C.D. Cal. Jan. 4, 2017), the court
analyzed whether AIG had a duty to defend Office Depot against a
qui tam lawsuit alleging that the company overcharged public
entities in violation of the California False Claims Act. Office
Depot settled the suit in 2014 for $77.5 million and sued AIG in
2015, claiming that AIG was obligated to reimburse Office Depot for
the settlement and its defense costs. Office Depot also asserted
bad faith.
Before addressing the duty to defend claim, the court dismissed
Office Depot's indemnity claim with prejudice. The court based
its dismissal on Section 533 of the California Insurance Code,
which states that "an insurer is not liable for a loss caused
by the willful act of the insured." Office Depot argued that
Section 533 did not apply because a party may be liable under the
CFCA for "reckless" misrepresentations and Section 533
does not bar the indemnification of reckless conduct. The court
disagreed and held that a CFCA claim requires "the intent to
induce reliance"—i.e. an intent that the government pays
the claim—and thus was more akin to negligent
misrepresentation than purely reckless conduct, where the result is
not intended by the act.
Upon the parties' competing motions for summary judgment, the
court held there was also no duty to defend. First, the court found
that Section 533 precluded any potential indemnity coverage for a
claim under the CFCA. "Though specific intent of fraud is not
required, any person who 'burie[s] his head in the sand and
fail[s] to make simple inquires which would alert him that false
claims are being submitted', certainly expects the harm to
occur. This is intentionally harmful conduct." Further, the
court held that Office Depot had no reasonable expectation of a
defense for CFCA claims that could not be indemnified under Section
533. While Office Depot relied on the general coverage grant to
establish its "reasonable expectation," the court noted
there was no specific promise to defend CFCA claims or willful
conduct. "General liability clauses," the court held,
"are not enough."
Accordingly, the court held that Section 533 relieved AIG of any
obligation to reimburse the approximately $15 million in defense
costs incurred by Office Depot. The court's Order did not reach
AIG's arguments under the policy's insuring agreement and
exclusions, which AIG asserted independently barred coverage.
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