Ninth Circuit Revives Office Depot’s Coverage Battle with AIG

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On May 21, 2018, in an unpublished memorandum opinion, Office Depot, Inc.  v. AIG Specialty Ins., Co., FKA American International Specialty Lines Ins. Co., — Fed.Appx. —-, 2018 WL 2296036, the Ninth Circuit reversed a trial court’s grant of summary judgment to an insurer on both the duty to defend and the duty to indemnify a suit brought under California False Claims Act (“CFCA”), Cal. Gov’t. Code § 12650 (“CFCA”).  The Court held that California Insurance Code Section 533 did not preclude insurance coverage of CFCA claims as a matter of law.

 The Ninth Circuit explained that Section 533 bars indemnification of “willful” wrongful conduct and the CFCA requires proof only of “recklessness,” not “specific intent to defraud,” a lower standard than that required for preclusion of coverage.  Further, because Section 533 operates as an exclusion, AIG bore the burden of proof to show that the claim against its insured rose to the level of “willful” misconduct, which it had failed to do.  The Court thus reversed the trial court’s dismissal predicated on the nature of the CFCA claims and remanded the suit to allow the lower court to consider other coverage issues.

 The short opinion adds little to the body of law on applying the implied exclusion of Section 533, since the requirement of “willfulness” is express in the statute.  It does, however, give guidance to insurance practitioners and those who litigate CFCA claims as to the proof of liability under CFCA.  It is also a useful reminder that the Courts strictly construe exclusionary language – whether found in the text of the policy or in public policy statutes like Insurance Code Section 533.