Section 533 Bars Coverage for Successor’s Liability

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In Certain Underwriters at Lloyd’s London v. ConAgra Grocery Prod. Co., 2022 WL 1164981 (Cal. Ct. App. Apr. 19, 2022), the California Court of Appeal rejected an insured’s attempt to foist onto its insurers a $102 million lead abatement settlement that followed from an underlying class action judgment. The Court broadly applied California Insurance Code Section 533, which provides that insurers are not liable for losses caused by a wilful act of the insured. The Court held that the implied exclusionary clause, which by statute is to be read into all insurance policies, barred indemnity even though the insured was held liable as a corporate successor and there was no evidence directly linking the predecessor’s conduct to specified damage.

In the underlying class action, a number of counties alleged that the presence of lead in paint in California homes and buildings created a public health crisis and that a number of former manufacturers of lead paint were liable for creating this public nuisance by promoting the use of lead paint despite having knowledge that such use was hazardous to humans. The insured played no role in the lead paint business, but was found liable as the corporate successor to one of the former manufacturers. It was ordered to pay approximately $102 million into the abatement fund.

In the coverage case, the insured argued that Section 533 should not apply to corporate successor liability because the insured itself did not engage in any wrongful conduct. The Court disagreed, reasoning that, by virtue of the corporate merger, the insured was on notice that it would be liable as successor for the liabilities of its predecessor. As a result, the Court concluded that the insured “stands in [the predecessor’s] shoes for purposes of Section 533.” Id. at *6.

Under California law, a “wilful act” means “an act deliberately done for the express purpose of causing damage or intentionally performed with knowledge that damage is highly probable or substantially certain to result.” Id. at *4 (citations omitted). The insured argued that this requirement was not satisfied because there was no finding directly linking the predecessor’s promotion activities to any damage specifically caused to the individual homes for which the insured was held liable to fund abatement. The Court rejected this argument, noting that a direct causal link was not required to prove the insured’s liability for creation of a public nuisance and that the same causation analysis used to determine the underlying liability must be employed when analyzing the applicability of Section 533. Id. at *8-10. The Court explained that the test for coverage is the actual basis of liability imposed on the insured. Here, the liability was for public nuisance, which  required proof of a hazard created by knowing promotion of a product for a hazardous use. Id. at *9-11. It did not require proof of specific injury to specific property. Id. at *11. Applying the same causation analysis, the Court concluded that the finding in the class action that the predecessor had actual knowledge of the hazards of lead paint at the time it promoted its use necessarily established that the predecessor knew or was “substantially certain” that a public nuisance would result from its conduct. Id. at *10. Such evidence was sufficient to satisfy the “wilful act” requirement of Section 533. Id.

As a corollary to its argument, the insured asserted that Section 533 could bar coverage only if it was proven that the predecessor’s high-level corporate managers had the requisite knowledge and expectation of damage. The Court also found this position “untenable.” Id. at *12. Citing prior case law, the Court confirmed that the knowledge of all employees acting within the course and scope of their employment is imputed to the corporation for purposes of applying Section 533. Id. at *11-12.

These rulings represent an important clarification of Section 533. ConAgra is significant because it is the first California case explicitly holding that Section 533 bars coverage for successor liability. ConAgra is also novel because prior California cases have required a direct causal connection between the insured’s conduct and specified injury or damage.