Cal. Ins. Code section 533 does not bar coverage for a California statutory claim of employer retaliation for refusal to engage in illegal activity

The California Court of Appeals revisited the question of what alleged conduct is “wilful” and subject to California Insurance Code section 533 in City of Whittier v. Everest Nat’l Ins. Co., 97 Cal.App.5th 895 (2023).

City of Whittier addressed a dispute regarding coverage for the settlement of a California statutory claim for employer retaliation.  Plaintiffs in the underlying action asserted the Whittier Police Department instituted an unlawful citation and arrest quota in violation of California Vehicle Code sections 41600 et seq.  Plaintiffs alleged the police department retaliated against those who refused to participate in and/or reported the unlawful citation and arrest quota, as proscribed by Cal. Labor Code section 1102.5.  The insured settled the claims for $3 million and sought indemnity from its insurers.

The insurers argued California Ins. Code section 533 barred coverage for the settlement.  Section 533 bars coverage for “a loss caused by the wilful act of the insured.”

The court reviewed prior decisions that considered the application of section 533 to claims for sexual molestation, physical assault, wrongful termination, and employer retaliation for complaints and testimony confirming sexual harassment.  The court found that in those cases, the insured’s alleged conduct were affirmative acts that were inherently harmful or intended the alleged harm.

In City of Whittier, in contrast, plaintiffs’ claim included the allegation that the police department retaliated against plaintiffs who would not participate in an unlawful citation or arrest quota.  The court found this conduct only violated Cal. Labor Code section 1102.5(c) if the citation or arrest quota were actually illegal.  A good faith dispute about the legality of the quota would mean the insured’s conduct was not inherently harmful nor intended the alleged harm.  Under section 1102.5(c) an employer may be found liable to 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 City of Whittier court contrasted this alleged misconduct with the alleged retaliation in B&E Convalescent Center in which the employer wrongfully terminated an employee with the intent to interfere with protected labor union rights, which could not be the result of negligence.  The City of Whittier court found the police department’s alleged misconduct was more like disparate impact discrimination, which does not necessarily intend the alleged discrimination and which courts have found is not subject to section 533.

The dispositive question appears to be whether an insured may be liable if the insured’s acts were not inherently harmful or intentionally wrongful.  Cal. Ins. Code section 533 only bars indemnity for damages because of inherently harmful or intentionally wrongful acts.

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