On January 6, 2010, the United States Attorney for the Central District of California filed a grand jury indictment charging Dr. Richard R. Lopez, Jr., with criminal conspiracy, false statements and concealment, and falsification of records. The indictment alleged that Lopez, who was the medical director of the St. Vincent Medical Center's comprehensive liver disease center, conspired with another doctor and other hospital employees in the liver transplant program to transplant a liver into the wrong patient.
According to the indictment, Lopez diverted a liver designated for one patient to a different patient who was further down the list of patients waiting for a liver transplant, in violation of regulations promulgated by the United States Department of Health and Human Services under the National Organ Transplant Act (Pub.L. No. 98-507 (Oct. 19, 1984) 98 Stat. 2339), and then
Daughters of Charity Health Systems (DCHS), which owns St. Vincent's, purchased a "Not For Profit Organization and Executive Liability Policy" pursuant to which Mt. Hawley agreed to "pay on behalf of the Insureds, Loss which the Insureds are legally obligated to pay as a result of Claims ... against the Insured for Wrongful Acts ...." The policy defines "Loss" as "monetary damages, judgments, settlements, including but not limited to punitive, exemplary, multiple or non-contractual liquidated damages where insurable under applicable law, ... and Defense Expenses which the Insureds are legally obligated to pay as a result of a covered Claim." The policy further provides that Mt. Hawley "shall have the right and duty to defend any Claim covered by this Policy, even if any of the allegations are groundless, false or fraudulent ...." An endorsement defines "claim" to include "a criminal proceeding against any Insured commenced by the return of an indictment" or "a formal civil, criminal, administrative or regulatory investigation against any Insured ...." The policy's definition of "insured" can include employees of St. Vincent's like Lopez.
On March 3, 2010, Lopez tendered the defense to the charges to Mt. Hawley. On April 1, 2010, Mt. Hawley, through its attorneys, sent a letter to Lopez declining to defend or indemnify Lopez, and on the same date filed this action. Mt. Hawley's first amended complaint alleged that a doctor at St. Vincent's, with Lopez's "knowledge and approval," transplanted a liver designated for one patient "who was second in line on the regional waitlist" for a liver into another patient "who was fifty-second on the waiting list," without prior approval. Mt. Hawley alleged that Lopez "engaged in an elaborate cover-up of the `switch,' which included falsification of documents and encouragement of others to participate in the cover-up." Mt. Hawley alleged that it had no duty to defend Lopez because of section 533.5, a "remuneration exclusion" or "personal profit exclusion," and a "medical incident exclusion."
Lopez filed a motion for judgment on the pleadings on Mt. Hawley's original complaint and a demurrer to Mt. Hawley's first amended complaint. Lopez argued in both motions that section 533.5 did not preclude an insurer from providing a defense to federal criminal charges brought by the United States Attorney's Office, that the remuneration/personal profit exclusion did not apply because there was no judgment or final adjudication against Lopez, and that the medical incident exclusion did not apply because it was not part of the policy. The trial court rejected Lopez's argument that section 533.5 did not apply, granted the motion for judgment on the pleadings on the original complaint with leave to amend to allow Mt. Hawley to attach a copy of the policy to the complaint, and then overruled Lopez's demurrer to the first amended complaint.
The trial court found that "section 533.5 unambiguously bars coverage for criminal actions and proceedings" and that "the plain language of section 533.5 bars Mt. Hawley's duty to defend or indemnify Dr. Lopez against the Indictment." The trial court acknowledged that "the legislative history seems to indicate that section 533.5 was enacted in response to difficulties that the Attorney General had encountered in settling actions under the unfair competition law due to the participation of insurance companies," but "perceive[d] nothing in the legislative history from which it could clearly conclude that section 533.5 was intended to apply to state and local criminal actions only as opposed to all criminal actions, including federal proceedings." The trial court concluded that "the correct interpretation of [section] 533.5 is that the enumeration of state, county and local prosecutors ought to be read as referring only to civil actions for unfair competition and false advertising. And that the prohibition against furnishing a defense in a criminal action applies regardless of the entity that commenced the criminal prosecution." The trial court stated that the Ninth Circuit's decision in Bodell was not binding and was unpersuasive, and concluded that the Bodell court's "analysis of [section] 533.5, is in error." The trial court therefore granted Mt. Hawley's motion for summary judgment on Mt. Hawley's first amended complaint and on Lopez's cross-complaint.
The trial court entered judgment in favor of Mt. Hawley and against Lopez on June 23, 2011. Lopez filed a timely notice of appeal on June 29, 2011.
We review a grant of summary judgment de novo. (Wiener v. Southcoast Childcare Centers, Inc. (2004) 32 Cal.4th 1138, 1142 [12 Cal.Rptr.3d 615,
A "decision to sustain or overrule a demurrer is subject to de novo review on appeal ...." (Montclair Parkowners Assn. v. City of Montclair (1999) 76 Cal.App.4th 784, 790 [90 Cal.Rptr.2d 598].) "In reviewing an order overruling a demurrer, we accept as true all properly pleaded facts in the complaint and exercise independent judgment to determine whether the complaint states a cause of action as a matter of law." (Caliber Bodyworks, Inc. v. Superior Court (2005) 134 Cal.App.4th 365, 373 [36 Cal.Rptr.3d 31]; see Boy Scouts of America National Foundation v. Superior Court (2012) 206 Cal.App.4th 428, 438 [141 Cal.Rptr.3d 819] ["`[t]he reviewing court accepts as true all facts properly pleaded in the complaint in order to determine whether the demurrer should be overruled'"].)
Section 533.5, subdivision (b), as originally enacted in 1988, provided: "No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subdivision (c), any claim in any civil or criminal action
In 1990 the Legislature amended section 533.5, subdivision (b), to read substantially as it does now: "No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subdivision (c), any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to Chapter 5 (commencing with Section 17200) of Part 2 of, or Chapter 1 (commencing with Section 17500) of Part 3 of, Division 7 of the Business and Professions Code in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, or any city prosecutor, notwithstanding whether the exclusion or exception regarding the duty to defend this type of claim is expressly stated in the policy." The parties agree that the language "... Chapter 5 (commencing with Section 17200) of Part 2 of, or Chapter 1 (commencing with Section 17500) of Part 3 of, Division 7 of the Business and Professions Code" refers to California's unfair competition and false advertising laws, commonly referred to as the UCL and the FAL. (See Hill v. Roll Internat. Corp. (2011) 195 Cal.App.4th 1295, 1298 [128 Cal.Rptr.3d 109].)
In 1991 the Legislature amended section 533.5, subdivision (b), a second time to add county counsel to the list of prosecutors in the statute. Thus, the statute currently reads: "No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subdivision (c), any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to" the UCL or the FAL "in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel, notwithstanding whether the exclusion or exception regarding the duty to defend this type of claim is expressly stated in the policy."
"The first step in the interpretive process looks to the words of the statute themselves." (Alejo, supra, 212 Cal.App.4th at p. 787; see Klein, supra, 50 Cal.4th at p. 77 ["[w]e look first to the words of the statute, `because the statutory language is generally the most reliable indicator of legislative intent'"].) "If the interpretive question is not resolved in the first step, we proceed to the second step of the inquiry. [Citation.] In this step, courts may `turn to secondary rules of interpretation, such as maxims of construction, "which serve as aids in the sense that they express familiar insights about conventional language usage."' [Citation.] We may also look to the legislative history. [Citation.] `Both the legislative history of the statute and the wider historical circumstances of its enactment may be considered in ascertaining the legislative intent.' [Citation.] [¶] `If ambiguity remains after resort to secondary rules of construction and to the statute's legislative history, then we must cautiously take the third and final step in the interpretive process. [Citation.] In this phase of the process, we apply "reason, practicality, and common sense to the language at hand." [Citation.] Where an uncertainty exists, we must consider the consequences that will flow from a particular interpretation. [Citation.] Thus, "[i]n determining what the Legislature intended we are bound to consider not only the words used, but also other matters, `such as context, the object in view, the evils to be remedied, the history of the times and of legislation upon the same subject, public policy and contemporaneous construction.' [Citation.]" [Citation.] These "other matters" can serve as important guides, because our search for the statute's meaning is not merely an abstract exercise in semantics. To the contrary, courts seek to ascertain the intent of the Legislature for a reason — "to effectuate the purpose of the law."'" (Alejo, at pp. 787-788; see MacIsaac, supra, 134 Cal.App.4th at p. 1084.)
We do not necessarily engage in all three steps of the analysis. "It is only when the meaning of the words is not clear that courts are required to take a second step and refer to the legislative history." (Soil v. Superior Court (1997) 55 Cal.App.4th 872, 875 [64 Cal.Rptr.2d 319]; accord, Sisemore v. Master Financial, Inc. (2007) 151 Cal.App.4th 1386, 1411 [60 Cal.Rptr.3d 719]; see MacIsaac, supra, 134 Cal.App.4th at p. 1084 ["[i]f ambiguity remains after resort to secondary rules of construction and to the statute's legislative history, then we must cautiously take the third and final step in the interpretive process"].)
Mt. Hawley argues that the "plain language of the statute ... is susceptible to only one, single, reasonable interpretation regarding the defense of criminal actions: that California law bars an insurance contract from providing for the defense of `any criminal action or proceeding.'" According to Mt. Hawley, "the statutory language used and enacted by the Legislature has plain meaning" and "[t]here is no need to refer to extrinsic aids to interpretation, specialized rules of grammar, or legislative history."
There are at least three reasonable interpretations of the statute. One reasonable interpretation, advocated by Mt. Hawley, is that section 533.5, subdivision (b), addresses "two separate and distinct types of actions: any criminal action or proceeding (unqualified),
Another reasonable interpretation, advocated by Lopez and adopted by the majority in Bodell, is that section 533.5, subdivision (b), applies to "any criminal action or proceeding" "in which the recovery of a fine, penalty, or restitution is sought by" the four California state and local public agencies listed in the statute, or to "any action or proceeding brought pursuant to [the UCL or the FAL] in which the recovery of a fine, penalty, or restitution is sought by" the four state and local public agencies. Under this interpretation, "in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel" modifies both "any criminal action or proceeding" and "any action or proceeding brought pursuant to [the UCL and FAL]." This interpretation precludes insurers from providing a defense in criminal or civil actions brought by the state and local agencies listed in the statute, but not in criminal or civil actions brought by federal prosecuting agencies.
Yet another reasonable interpretation, urged by neither Mt. Hawley at all nor by Lopez directly, is that section 533.5, subdivision (b), applies to "any claim" in either a criminal action or proceeding or a UCL or FAL action or proceeding "in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel." Under this interpretation, "in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel" modifies "any claim," whether the claim is part of a criminal, UCL, or FAL action or proceeding.
Thus, section 533.5, subdivision (b), is susceptible to at least these three reasonable interpretations. Even the dissenting judge in Bodell did not argue that the language of the statute is clear and unambiguous. (See Bodell, supra, 119 F.3d at pp. 1421-1422 (dis. opn. of Kozinski, J.).)
It may be that at first glance Mt. Hawley's proposed interpretation is more grammatically natural. Under the first step of the statutory interpretation analysis, however, that is not the test. The issue is whether Mt. Hawley's proposed interpretation is the only reasonable interpretation. And because it is not, we proceed to step two. (See County of San Diego v. Alcoholic Beverage Control Appeals Bd. (2010) 184 Cal.App.4th 396, 401 [109 Cal.Rptr.3d 59] ["[w]hen the language is reasonably susceptible of more than one meaning, it is proper to examine a variety of extrinsic aids in an effort to discern the intended meaning," including, "for example, the statutory scheme, the apparent purposes underlying the statute and the presence (or absence) of instructive legislative history"].)
The legislative history of section 533.5 reveals two unmistakable and undisputed facts about the 1988 statute. First, the Legislature intended the statute to apply equally to civil and criminal actions brought by the three (at the time) listed state and local public entities that seek to recover a fine, penalty or restitution, and not to actions brought by federal agencies. As originally enacted in 1988, section 533.5, subdivision (b), applied to "any claim in any civil or criminal action or proceeding in which the recovery of a fine, penalty, or restitution is sought by" the Attorney General, a district
Committee analyses and reports confirm the Legislative Counsel's understanding. (See Ailanto Properties, supra, 142 Cal.App.4th at pp. 589-590.) An analysis for the Assembly Committee on Finance and Insurance stated that Assem. Bill 3920 would prohibit "any policy of insurance providing, or being construed to provide, coverage or indemnity for the payment of fine, penalty, or restitution in any civil or criminal action brought by the Attorney General, district attorney, or city attorney regardless of what the policy says." (Assem. Com. on Finance and Insurance, Analysis of Assem. Bill 3920 (1987-1988 Reg. Sess.) Apr. 19, 1988, p. 1.) The bill also would prohibit "any insurance policy from providing, or being construed to provide, any duty to defend any claim" "in any civil or criminal action brought by" the three specified public entities. (Ibid.) Thus, as the Supreme Court noted in 1990, the original version of section 533.5 "on its face ... [did] not apply to relief sought by the federal government...." (AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d at p. 837, fn. 15, original italics; see Bank of the West, supra, 2 Cal.4th at p. 1271.)
Second, the Legislature enacted section 533.5 to address a problem the Attorney General had encountered (only) in UCL and FAL actions and to address a specific problem that public entities were experiencing when they brought unfair competition or false advertising actions, whether civil or criminal, against individuals and businesses. According to the Attorney General, the bill's sponsor and principal supporter, section 533.5 was intended to facilitate "the consumer protection activities of our office and local district attorneys and city attorneys." (See Catlin v. Superior Court (2011) 51 Cal.4th 300, 305-306 [120 Cal.Rptr.3d 135, 245 P.3d 860] [considering a letter to Senate and Assembly Committees on Public Safety expressing the Attorney General's concerns about proposed legislation as part of the legislative history].)
The Attorney General argued to the Assembly Committee on Finance and Insurance that the proposed new law would address "a problem which arises under current law when the Attorney General or a district attorney seeks to enforce [the UCL and FAL]," because "[i]n many instances" the defendants were claiming "that the conduct involved is covered by their business insurance policy." (Office of the Atty. Gen., Statement on Assem. Bill 3920
The Attorney General also argued to the Assembly Committee on Finance and Insurance and the Senate Insurance Committee that "[m]ost businesses purchase insurance to protect against losses arising from the operation of the business. Although existing law expressly prohibits insurance for losses incurred as a result of an insured's willful misconduct, the Attorney General's office frequently encounters problems enforcing [the UCL and FAL] because business defendants claim that the conduct involved is covered by their business insurance policies. If there is any ambiguity as to the potential liability of the insurance company, and there often is because there is no statute expressly dealing with this issue, the insurance company is obligated to defend the business. [¶] ... [¶] Instead of individual accountability, the litigation becomes a contest between the public entity and the insurance company in which the involvement of the person whose conduct is at issue is almost negligible." (Office of the Atty. Gen., letters to Assemblyman Patrick Johnston, Chair of the Assem. Com. on Finance and Insurance, and Senator
In 1990 the Legislature amended section 533.5, subdivision (b), by enacting what was referred to as a "clean-up bill" from the Attorney General, Assembly Bill No. 3334 (1989-1990 Reg. Sess.) (Assem. Bill 3334). The legislative history reveals two unmistakable and undisputed facts about the 1990 amendment.
First, the legislative history makes clear that the Legislature did not intend the 1990 amendment to the statute to expand the reach of section 533.5, subdivision (b). The Legislative Counsel's Digest stated that the bill to amend section 533.5 was designed to "restrict the civil actions to which those limitations apply...." (Legis. Counsel's Dig., Assem. Bill 3334 (1989-1990 Reg. Sess.) 5 Stats. 1990, Summary Dig., p. 613.) The Assembly Committee on Finance and Insurance analysis stated that Assem. Bill 3334, "like its 1988 predecessor, is sponsored by the Attorney General, to reinforce the notion that person[s] violating our unfair competition and unfair advertising law may not use their insurance coverage to evade the personal consequences of wrongdoing. This proposition is not in controversy." (Assem. Com. on Finance and Insurance, Analysis of Assem. Bill 3334 (1989-1990 Reg. Sess.) Apr. 17, 1990, p. 1.) The committee analysis stated that the amendment "seeks to conform current law to its originally declared purpose while avoiding any adverse effect, one way or another, upon other issues of insurance contract coverage." (Id. at p. 2.) There is nothing in the legislative history indicating that the Legislature intended to expand the scope of the statute. (See Donovan v. Poway Unified School Dist. (2008) 167 Cal.App.4th 567, 597 [84 Cal.Rptr.3d 285] ["the absence of legislative history [can] be of significance in deciphering legislative intent"], citing Jones, supra, 42 Cal.4th at p. 1169; Starving Students, Inc. v. Department of Industrial Relations (2005) 125 Cal.App.4th 1357, 1363 [23 Cal.Rptr.3d 583] [court can consider "the presence (or absence) of instructive legislative history"].)
The Attorney General, who proposed the 1990 amendment as he had the original 1988 legislation, argued to the Assembly Committee on Finance and Insurance that "Insurance Code section 533.5 was proposed due to the concerns about insurance companies being involved, on behalf of insured businesses, in the defense and settlement of cases brought under the unfair competition and false advertising statutes." (Office of the Atty. Gen., letter to Assemblyman Patrick Johnston, Chair of the Assem. Com. on Finance and Insurance, regarding Assem. Bill 3920, Apr. 10, 1990, p. 1.) The problem in 1988, the Attorney General noted, was that "businesses were unwilling to pay penalties or restitution to defrauded customers out of their own funds, as long as they had ... pending claims against insurance companies," which meant that "unfair competition and false advertising cases were dragging out and consuming a large measure of prosecutorial resources." (Ibid.) The Attorney General explained that, to resolve these problems, the Legislature enacted section 533.5, which "prohibits insurance coverage for fines, penalties, and restitution in any civil or criminal action brought by the Attorney General, district attorneys, and city attorneys." (Office of the Atty. Gen., letter to Assemblyman Patrick Johnston, Chair of the Assem. Com. on Finance and Insurance, regarding Assem. Bill 3920, supra, at p. 1.)
In the area of environmental cleanup costs, however, insurers were taking the position "that state agencies are precluded from arguing that damages within the meaning of the typical liability policy include environmental clean up costs because such costs are in the nature of equitable restitution." (Office of the Atty. Gen., letter to Assemblyman Patrick Johnston, Chair of the
The Assembly Committee on Finance and Insurance also considered a lengthy memorandum from the environmental section of the Attorney General's Office entitled "Bill Proposal: Hazardous Waste Insurance." (See People v. Cruz (1996) 13 Cal.4th 764, 773, fn. 5 [55 Cal.Rptr.2d 117, 919 P.2d 731] ["it is reasonable to infer that those who actually voted on the proposed measure read and considered the materials presented in explanation of it, and that the materials therefore provide some indication of how the measure was understood at the time by those who voted to enact it"].) This memorandum stated that "section 533.5 ... prohibits insurance coverage for fines, penalties and restitution in any civil or criminal action brought the Attorney General, district attorneys and city attorneys. The Environmental Section proposes an amendment to clarify that section 533.5 is directed at criminal actions and civil law enforcement actions brought under [the UCL and FAL] and does not apply to actions filed under state and federal hazardous substance and hazardous waste control laws." (Office of the Atty. Gen., Bill Proposal: Hazardous Waste Insurance, Assem. Bill 3334 (1989-1990 Reg. Sess.) (undated) p. 1.) The Attorney General noted that "[t]he problem at hand is that Insurance Code section 533.5 was not intended to address the currently active issue of toxic pollution insurance coverage, yet the statute has played, and undoubtedly will continue to play[,] a role in resolving the coverage question." (Id. at p. 2.)
Thus, the use of the broad term "any civil action" in the 1988 statute was the problem because it covered more than just UCL and FAL civil actions. As the Attorney General noted, section 533.5 as originally drafted was "too broad, in that it affects many more regulatory activities than consumer protection...." (Office of the Atty. Gen., Bill Proposal Summary, supra, at p. 4.) The statute was supposed to solve a narrow problem in UCL and FAL actions brought by state and local agencies, but it created problems in other kinds of cases. As a result, the Legislature amended the statute so that the prohibition on providing a duty to defend applied to UCL and FAL actions, rather than all civil actions, which insurers were arguing included environmental cleanup actions. As the analysis of Assem. Bill 3334 from the Assembly Committee on Finance and Insurance explained, the amendment
Of course, as is often the case with legislative histories, the legislative history of Assem. Bill 3334 is not always entirely consistent. For example, an analysis prepared for the Senate Committee on Insurance, Claims and Corporations stated that the bill "clarifies that the prohibition against insurance to provide coverage or indemnity for the payment of any fine, penalty or restitution shall apply only to proceedings pertaining to unfair business practices or false or misleading advertisements rather than all civil actions, in addition to criminal actions." (Sen. Insurance, Claims and Corporations Com., Analysis of Assem. Bill 3334 (1989-1990 Reg. Sess.) Aug. 8, 1990, p. 1.) This fragment of the legislative history can be read to support Mt. Hawley's position that the 1990 amendment revised section 533.5 to bar insurers from providing a defense in (1) UCL and FAL actions seeking to recover a fine, penalty, or restitution, and (2) criminal actions. As explained above, however, the vast majority of the amendment's legislative history and the circumstances of its enactment do not support this interpretation. Indeed, the Senate Committee analysis went on to state that the amendment "is needed to avoid any adverse [e]ffects that may result as a misinterpretation of the unintended broad reference to `any civil action.'" (Sen. Insurance, Claims and Corporations Com., Analysis of Assem. Bill 3334, supra, at p. 2.) The committee analysis also did not discuss the issue of what agency (state or federal) was bringing the action.
These declarations and statements of prior legislative intent are relevant to our inquiry, but no individual expression is determinative. Section 2 of Assem. Bill 3334 does not, as Mt. Hawley argues, definitively prove that the Legislature intended (in 1988 or 1990) that "the list of attorneys who are prosecuting an action modifies only those civil actions brought pursuant to the UCL and the [FAL]," and not criminal actions. The entirety of the legislative history and purpose of the statute show that the Legislature enacted section 533.5 in 1988 to address actions brought by state and local agencies, and then amended section 533.5 in 1990 to limit — not expand — the application of the statute.
In 1991 the Legislature again amended section 533.5, subdivision (b), as part of Senate Bill No. 709 (1990-1991 Reg. Sess.) (Sen. Bill 709). Sen. Bill 709, sponsored by the County of San Bernardino, made a relatively minor change in the UCL by adding county counsel to the list of public entities that can bring UCL actions. The Legislative Counsel's Digest states that the bill would allow "a county counsel authorized by agreement with the district attorney in actions involving violation of a county ordinance to prosecute an action for injunction to enjoin unfair competition." (Legis. Counsel's Dig., Sen. Bill 709 (1991-1992 Reg. Sess.) 4 Stat. 1991, Summary Dig., p. 560.) The Legislative Counsel's Digest also states that the bill would authorize the county to collect any fine recovered in such an action brought by a county counsel. (Ibid.) Although Sen. Bill 709 was primarily about amending the UCL, the last section of the bill added county counsel to the group of public entities listed in section 533.5, subdivision (b). (Sen. Bill 709 (1991-1992 Reg. Sess.) § 4.)
Most of the legislative history of Sen. Bill 709 concerns the issue of adding county counsel to the list of public entities that can bring UCL actions. An analysis of Sen. Bill 709 prepared for the Senate Committee on Judiciary explains that the bill "would provide that in addition to the Attorney General, the district attorney and the city attorney, any county counsel can bring an action for any violation of, or an injunction pursuant to, specified provisions [of the Unfair Trade Practices Act]." (Sen. Com. on Judiciary, Analysis of Sen. Bill 709 (1990-1991 Reg. Sess.) May 14, 1991, p. 2.) This analysis contains one of the few references in the legislative history of Sen. Bill 709 to section 533.5 and confirms that section 533.5, subdivision (b), applies to UCL actions brought by state and local agencies: "Existing law also provides that no policy of insurance shall provide, or be construed to provide[,]
The legislative history of the original 1988 statute and the 1990 and 1991 amendments makes it clear that the purpose of the statute, the circumstances of its enactment, and the Legislature's goal in enacting the statute, were to preclude insurers from providing a defense in civil and criminal UCL and FAL actions brought by the Attorney General, district attorneys, city attorneys, and (later) county counsel. It is undisputed that the original version of section 533.5, subdivision (b), applied only to criminal and civil actions brought by the Attorney General, a district attorney, or a city attorney seeking the recovery of a fine, penalty, or restitution, and not to actions brought by federal agencies. Although the original version of section 533.5, subdivision (b), did not specifically mention UCL and FAL claims, the Legislature enacted the original statute to address UCL and FAL actions. It was in response to a perceived defect in the wording of the original statute, which allowed insurers to use the statute as a defense in environmental cleanup cases, that the Legislature in 1990 amended the statute to make it clear that the prohibition on providing a defense applied only in UCL and FAL cases brought by the three (and in 1991 four) named state and local agencies. At no time did the Legislature ever intend section 533.5, subdivision (b), to apply to actions other than UCL and FAL actions brought by state and local agencies.
Mt. Hawley's primary argument on the issue of legislative intent is that "there is no indication that the Legislature intended to distinguish federal from state criminal prosecutions and to permit an insurer-funded defense or indemnity for federal [crimes] while barring it for those brought by the State." As Lopez concedes, Mt. Hawley is correct: there is nothing in the
As noted above, section 533.5, subdivision (b), precludes an insurer from defending "any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to [the UCL or the FAL] in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel." Mt. Hawley argues that the "plain grammatical structure" of section 533.5, subdivision (b), "compels the conclusion that the list of lawyers contained within the second `in any' prepositional phrase qualifies only those types of actions described within that phrase," because of the "or" between "criminal action or proceeding" and "any action or proceeding brought pursuant to" the UCL or FAL.
The human problems that the Legislature was seeking to solve with section 533.5 were first that insurers were providing their business insureds with an indemnity and a defense in UCL and FAL actions brought by state and local public entities, and then later that insurers were using section 533.5 to argue that they did not have to pay for environmental cleanup costs. The appearance in the 1990 amendment of the second "or any" phrase does not definitively show that the Legislature intended section 533.5, subdivision (b), to apply to all criminal actions, including federal criminal actions. The legislative history is bursting with manifestations of intent to bar indemnity and defense for UCL and FAL actions brought by state and local agencies, and devoid of any indications that the bar would apply to criminal actions brought by federal agencies. We cannot allow technical rules of grammar and construction to defeat the clear legislative intent behind section 533.5. (See Payless Shoesource, Inc. v. Travelers Companies, Inc. (10th Cir. 2009) 585 F.3d 1366, 1371-1372 ["while the rules of English grammar often afford a valuable starting point to understanding a speaker's meaning, they are violated so often by so many of us that they can hardly be safely relied upon as the end point of any analysis"].)
Mt. Hawley places considerable reliance on the last antecedent rule. The last antecedent rule provides that "`"qualifying words, phrases and clauses
Both of these exceptions to the last antecedent rule apply here. The clause "in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel" applies "as much to" "any criminal action or proceeding" as to "action or proceeding brought pursuant to [the UCL and FAL]." (See Lickter v. Lickter (2010) 189 Cal.App.4th 712, 726 [118 Cal.Rptr.3d 123] [last antecedent rule did not apply because qualifying phrase "is just as applicable to the more remote [words] ... as it is to the immediately preceding term"].) With the exception of county counsel (which we discuss below), the named public entities can bring both criminal actions and civil actions under the UCL and FAL, and can seek fines and restitution in criminal actions and penalties in civil actions. (See Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 950 [119 Cal.Rptr.2d 296, 45 P.3d 243] ["[i]n a suit under the UCL, a public prosecutor may collect civil penalties ..."]; People v. Pacific Land Research Co. (1977) 20 Cal.3d 10, 17 [141 Cal.Rptr. 20, 569 P.2d 125] [prosecutors can seek
In addition, the goal of the legislation that enacted and amended section 533.5, subdivision (b), was to bar insurers from providing a defense in UCL and FAL actions but not in environmental actions brought by state agencies seeking fines, penalties, and restitution. In light of this goal, the "sense" of the entire statute requires that the phrase "in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel" apply to the words "any criminal action" and "not be restricted to" civil UCL and FAL actions and proceedings. (See Costco Wholesale Corp. v. Workers' Comp. Appeals Bd. (2007) 151 Cal.App.4th 148, 154-155 [59 Cal.Rptr.3d 611] ["[t]he last antecedent rule does not trump" considerations of "the spirit of the statute ... as a whole"].) There is no indication or "sense" that the Legislature ever intended the statute to apply to criminal actions brought by federal prosecutors, who do not bring actions seeking recovery of a fine, penalty, or restitution under the UCL or the FAL. The last antecedent rule does not mandate an interpretation that section 533.5, subdivision (b), applies to federal criminal actions.
Prosecutors, however, do seek recovery of fines and restitution as a result of a conviction in general, and in UCL and FAL cases in particular. (See, e.g., Bus. & Prof. Code, § 17500 [violation punishable by imprisonment in county jail not to exceed six months, a fine not to exceed $2,500, or both]; People v. Holmberg (2011) 195 Cal.App.4th 1310, 1324 [125 Cal.Rptr.3d 878] [prosecutor sought victim restitution].) Indeed, prosecutors can waive the imposition of a fine if they do not request it or do not object when the trial court fails to impose it. (See People v. Tillman (2000) 22 Cal.4th 300, 302-303 [92 Cal.Rptr.2d 741, 992 P.2d 1109].) And restitution hearings in criminal cases cannot proceed in the absence of the prosecutor, even if the victim is present with counsel. (See People v. Dehle (2008) 166 Cal.App.4th 1380, 1386, 1389 [83 Cal.Rptr.3d 461] ["[r]estitution hearings held pursuant to section 1202.4 are sentencing hearings and are thus hearings which are a significant part of a criminal prosecution," and the "goals of a restitution hearing ... can only be accomplished with the participation of the district attorney acting in accordance with his responsibilities to the criminal justice system"]; see also People v. Smith (2011) 198 Cal.App.4th 415, 434 [129 Cal.Rptr.3d 910] ["[t]he restitution hearing, whether for economic or noneconomic damages, is a criminal sentencing hearing, not a civil trial"].)
Moreover, the phrase "in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel" cannot modify only "any action or proceeding brought pursuant to [the UCL and FAL]," because fines are not recoverable in civil UCL and FAL actions. Only public entities can prosecute a violation of the UCL and FAL as a misdemeanor and seek a fine pursuant to Business and Professions Code section 17500. (See Kasky v. Nike, Inc., supra, 27 Cal.4th at p. 950 ["[i]n a suit under the UCL ... a private plaintiff's remedies are `generally limited to injunctive relief and restitution'"], quoting Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 179 [83 Cal.Rptr.2d 548, 973 P.2d 527]; Lavie v. Procter & Gamble Co. (2003) 105 Cal.App.4th 496, 503 [129 Cal.Rptr.2d 486] ["Attorney General and district attorneys ... are authorized to prosecute violations of the UCL criminally (see [Bus. & Prof. Code, ]§ 17500) and may also seek redress through the bringing of civil law enforcement cases seeking equitable relief and civil penalties beyond those available to private parties (see [Bus. & Prof. Code, ]§§ 17203, 17206, 17535, 17536)."]; People v. Municipal Court (Bishop) (1972) 27 Cal.App.3d 193, 201-202 [103 Cal.Rptr. 645] ["crimes are considered to be offenses against the body politic for which the punishment is fine or imprisonment as distinguished from civil wrongs where private redress is obtained through individually prosecuted lawsuits for damages"].) Because fines can only be sought in criminal cases, the phrase
Again quoting the dissenting opinion in Bodell, Mt. Hawley argues that the interpretation we are adopting "makes no sense because at least one of the lawyers listed (the county counsel) cannot bring criminal charges," that the "circumstance[s] under which `county counsel' was added to the list conclusively undermines the notion that the list has any relevance to criminal prosecutions," and that "the list only includes those lawyers who are authorized to bring unfair competition and false advertising actions, and has nothing at all to do with criminal prosecutions." (Bodell, supra, 119 F.3d at p. 1421 (dis. opn. of Kozinski, J.).) This argument misunderstands the 1991 amendment. The "circumstance[s] under which `county counsel' was added to the list" were that the Legislature was amending the UCL to allow county counsel to file UCL actions, and amended section 533.5, subdivision (b), accordingly. This history supports the conclusion that the Legislature enacted section 533.5 to address the problem of insurers providing indemnification and defense in UCL and FAL actions, and to prevent insurers from litigating against state prosecutors in these kinds of cases, not to prevent insurers from providing a defense to insureds in all criminal cases. (See Wotton v. Bush (1953) 41 Cal.2d 460, 467 [261 P.2d 256] ["`the objective sought to be achieved by a statute as well as the evil to be prevented is of prime consideration in its interpretation'"]; All Angels Preschool/Daycare v. County of Merced (2011) 197 Cal.App.4th 394, 403 [128 Cal.Rptr.3d 349] [where "the plain wording does not answer our question of interpretation, it is appropriate to consider extrinsic aids such as the apparent objective to be achieved and the evils to be remedied by the entire" statute].) Moreover, because county counsel can bring claims, "county counsel" can modify the first "any claim" in section 533.5, subdivision (b). In any event, when the
Although it is not necessary to do so, we confirm our interpretation of section 533.5, subdivision (b), by applying "reason, practicality, and common sense to the language" of the statute. (See Brown v. Valverde (2010) 183 Cal.App.4th 1531, 1552 [108 Cal.Rptr.3d 429] [although "we need not reach [the] second and third steps" in the analysis, "[w]e nevertheless discuss them ... as they lend strong support to our conclusion"]; Ailanto Properties, supra, 142 Cal.App.4th at p. 591 ["[a]lthough our review of the legislative history suffices to support our conclusion, applying `reason, practicality, and common sense to the language at hand' confirms that conclusion"].)
To the contrary, courts have held that section 533, a similar but much older statute (enacted in 1935) that prohibits indemnification "for a loss caused by the wilful act of the insured," does not extinguish an insurer's duty to defend an insured accused of those wilful actions. (See Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 277-278 [54 Cal.Rptr. 104, 419 P.2d 168] ["a contract to defend an assured upon mere accusation of a wilful tort does not encourage such wilful conduct"]; State Farm General Ins. Co. v. Mintarsih (2009) 175 Cal.App.4th 274, 287 [95 Cal.Rptr.3d 845] [although "section 533 precluded
Moreover, the Legislature has enacted statutes authorizing insurance that provides a defense to individual defendants in various kinds of proceedings, including criminal proceedings. For example, Corporations Code section 317 authorizes a corporation to indemnify certain of its agents against "expenses, judgments, fines, settlements, and other amounts," including "expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action...." (Corp. Code, § 317, subds. (b), (c).)
Similarly, Government Code section 990 provides that a local public entity may "[i]nsure, contract or provide against the expense of defending a claim against the local public entity or its employee ... where such liability arose from an act or omission in the scope of his employment, and an insurance contract for such purpose is valid and binding notwithstanding Section 1668 of the Civil Code, Section 533 of the Insurance Code, or any other provision of law." (Gov. Code, § 990, subd. (c).) Government Code section 995.8 provides that "a public entity may provide for the defense of a criminal action or proceeding ... brought against an employee or former employee if" the "criminal action or proceeding is brought on account of an act or omission in the scope of his employment as an employee of the public entity...."
Our interpretation of section 533.5 allows insurers to contract to provide a defense to certain kinds of criminal charges, as the Legislature has said insurers can do in the cases of corporate agents and government employees charged with crimes. Interpreting section 533.5, subdivision (b), as Mt. Hawley proposes and as the trial court did, would create a potential conflict with statutes in the Corporations Code and the Government Code. (See Broughton v. Cigna Healthplans (1999) 21 Cal.4th 1066, 1086 [90 Cal.Rptr.2d 334, 988 P.2d 67] ["[w]hen we construe potentially conflicting statutes, our duty is to harmonize them if reasonably possible"]; Walters v. Weed (1988) 45 Cal.3d 1, 9 [246 Cal.Rptr. 5, 752 P.2d 443] ["[s]tatutes that are apparently in conflict should, if reasonably possible, be reconciled [citation], even when the court interprets provisions in different codes ..."]; Ailanto Properties, supra, 142 Cal.App.4th at p. 591 [refusing to adopt an interpretation of Gov. Code section that "would negate other statutory provisions" in the Wat. Code]; In re Marriage of Paddock (1971) 18 Cal.App.3d 355, 359 [95 Cal.Rptr. 652] ["[s]tatutes should be construed so as to harmonize the various sections, and wherever possible seemingly conflicting provisions should be reconciled to avoid the declaration of an irreconcilable conflict"].)
Our interpretation that insurers may pay for defense costs in federal and some state criminal actions is also consistent with the principle that insureds charged with crimes begin with a presumption of innocence. (See Wiley v. County of San Diego (1998) 19 Cal.4th 532, 541 [79 Cal.Rptr.2d 672, 966 P.2d 983] [presumption of innocence is "`that bedrock "axiomatic and elementary" principle whose "enforcement lies at the foundation of the administration of our criminal law"'"], quoting In re Winship (1970) 397 U.S. 358, 363 [25 L.Ed.2d 368, 90 S.Ct. 1068]; Gong v. Firemen's Ins. Co. (1962) 202 Cal.App.2d 686, 691 [21 Cal.Rptr. 110] [insured accused of criminal acts enters "upon the trial clothed with the presumption of innocence," "one of the strongest disputable presumptions known to the law"]; see also United States v. Stein (2d Cir. 2008) 541 F.3d 130, 156 ["the Sixth Amendment protects against unjustified governmental interference with the right to defend oneself using whatever assets one has or might reasonably and lawfully obtain"]; Associated Electric & Gas Ins. Services v. Rigas (E.D.Pa. 2004) 382 F.Supp.2d 685, 700 [insureds under director and officer policy involved in a criminal prosecution "[u]ntil and unless they are found guilty, they are presumed innocent and must enjoy the constitutionally-based prerogatives of any citizen who stands merely accused, but not convicted, of a crime"]; CGU Ins. v. Tyson Assoc. (E.D.Pa. 2001) 140 F.Supp.2d 415, 421 [public policy precluding insurance coverage for wilful criminal acts or for intentional torts "is not appropriately considered during the duty to defend analysis," particularly where insureds "have not been found guilty of any wrongdoing"].) The law punishes individuals convicted of crimes, not those accused of crimes.
The trial court granted Mt. Hawley's motion for summary adjudication on Lopez's second cause of action for breach of the implied covenant of good faith and fair dealing on the ground that section 533.5 precluded a duty to defend. The trial court ruled: "Having found that Mt. Hawley did not breach the insurance contract by refusing to defend against the Indictment because Insurance Code section 533.5 bars coverage for his defense, the Court holds that Dr. Lopez's claim for breach of the implied covenant of good faith and fair dealing fails as a matter of law." The trial court did not reach Mt. Hawley's alternative argument that it was entitled to summary adjudication on Lopez's bad faith claim because "Mt. Hawley's denial was reasonable and based on a genuine dispute" regarding its duty to defend Lopez against the criminal charges and the application of section 533.5, subdivision (b). Mt. Hawley argues on appeal that, even if section 533.5, subdivision (b), does not preclude it from providing Lopez with a defense, it is still entitled to summary adjudication on Lopez's bad faith "because its position has been at least reasonable."
Lopez also alleged and presented evidence that Mt. Hawley refused to provide Lopez with a defense based on an exclusion, the medical incident exclusion, that according to Lopez was not part of the policy. (See Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1281-1282 [31 Cal.Rptr.2d 433] [insurer's continued reliance on endorsement insureds claimed they never received was "indicia of bad faith" and "one for the jury to decide"]; Logan v. John Hancock Mut. Life Ins. Co. (1974) 41 Cal.App.3d 988, 992 [116 Cal.Rptr. 528] [insurer may "not rely on uncommunicated exclusions in a policy not yet issued"].) A jury could reasonably infer from this evidence that Mt. Hawley's conduct toward its insured Lopez was unreasonable and without proper cause. Indeed, Mt. Hawley's motion for summary adjudication did not even address Lopez's allegation that Mt. Hawley breached the implied covenant of good faith and fair dealing by "[d]enying coverage based on an exclusion that cannot be found in the Policy." (See Code Civ. Proc., § 437c, subd. (f)(1); McCaskey v. California State Automobile Assn. (2010) 189 Cal.App.4th 947, 975 [118 Cal.Rptr.3d 34] ["there can be no summary adjudication of less than an entire cause of action"]; Hindin v. Rust (2004) 118 Cal.App.4th 1247, 1259 [13 Cal.Rptr.3d 668] [summary judgment must dispose of an entire cause of action].) Mt. Hawley is not entitled to summary adjudication on Lopez's claim for breach of the implied covenant of good faith and fair dealing.
Mt. Hawley's first amended complaint asserted two causes of action for declaratory relief, one on the issue of Mt. Hawley's duty to defend and the other on Mt. Hawley's duty to indemnify. Both causes of action were based on Mt. Hawley's allegations that it had no coverage obligations because of
Finally, Lopez argues for the first time in his reply brief that issue preclusion bars Mt. Hawley's declaratory relief cause of action. We decline to address this issue. (See Habitat & Watershed Caretakers v. City of Santa Cruz (2013) 213 Cal.App.4th 1277, 1292, fn. 6 [152 Cal.Rptr.3d 888] ["[a]rguments presented for the first time in an appellant's reply brief are considered waived"]; Holmes v. Petrovich Development Co. (2011) 191 Cal.App.4th 1047, 1064, fn. 2 [119 Cal.Rptr.3d 878] ["argument is forfeited" where "it is raised for the first time in [appellant's] reply brief without a showing of good cause"].)
The June 21, 2011 order granting Mt. Hawley's motion for summary judgment is reversed. The October 18, 2010 order overruling Lopez's demurrer
Woods, Acting P. J., and Zelon, J., concurred.
