No Coverage for California False Claims Act Suit

A California federal district court has granted an errors and omissions liability insurer’s motion for summary judgment that it had no duty to defend a suit against its insured alleging violations of the California False Claims Act (CFCA), holding that the underlying suit created no potential for coverage and that there was no reasonable expectation of coverage in light of the nature and kind of risks covered by the policy.  Office Depot, Inc. v. AIG Specialty Ins. Co., No. CV 15-02416-SVW-LPRx (C.D. Cal. Jan. 4, 2017).

After the insured office supply retailer was sued by a qui tam relator for alleged violations of the CFCA, it sought a defense and indemnification from its insurer.  The insurer denied coverage.  The retailer settled the CFCA suit, and then filed a coverage action alleging that its insurer was obligated to reimburse it for a portion of the settlement.  The court granted the insurer’s motion to dismiss with respect to the indemnity claim, holding that California Insurance Code § 533 – which precludes insurance coverage for losses caused by an insured’s willful acts – barred coverage for the settlement.

Considering the parties’ cross-motions for summary judgment with respect to the duty to defend, the court indicated that a duty to defend may be triggered even where § 533 bars indemnity coverage in two scenarios: (1) where the underlying lawsuit creates a potential for coverage, or (2) where there is a reasonable expectation of coverage in light of the nature and kind of risks covered by the policy.

With respect to the potential for coverage, the court concluded that, based on the allegations in the qui tam suit, the insured could not have been found liable for any conduct other than willful conduct.  Although a CFCA defendant may be liable for a reckless misrepresentation where the party is deliberately indifferent to the truth, § 533 precludes coverage even for negligent misrepresentations, which are deemed a species of fraud under California law.  The court also dismissed the retailer’s argument that it could have been held liable for vicarious liability, because the retailer provided no analytical framework supporting how it could be held vicariously liable in light of the allegations of the complaint.

With regard to the second scenario, the court held that an insured may have a reasonable expectation of coverage where a policy provision makes a specific promise of coverage for conduct as to which indemnification is nonetheless precluded by § 533.  The court determined that the retailer failed to show any policy provision which explicitly promised a defense for willful conduct.  The court therefore concluded that the insurer had no duty to defend and granted the insurer’s motion for summary judgment.