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Mt. Hawley Insurance Company v. Richard R. Lopez

May 1, 2013

MT. HAWLEY INSURANCE COMPANY, PLAINTIFF AND RESPONDENT,
v.
RICHARD R. LOPEZ, JR., DEFENDANT AND APPELLANT.



APPEAL from a judgment of the Superior Court of Los Angeles County, Robert L. Hess, Judge. (Los Angeles County Super. Ct. No. BC434879)

The opinion of the court was delivered by: Segal, J.*fn23

CERTIFIED FOR PUBLICATION

Reversed.

INTRODUCTION

Insurance Code section 533.5, subdivision (b),*fn1 precludes insurers from providing a defense for certain kinds of claims. The statute provides: "No policy of insurance shall provide, or be construed to provide, any duty to defend . . . any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to" California's unfair competition law under Business and Professions Code sections 17200 and 17500 "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." In Bodell v. Walbrook Ins. Co. (9th Cir. 1997) 119 F.3d 1411 (Bodell), the Ninth Circuit held that section 533.5, subdivision (b), applies to criminal actions brought by the four listed state and local agencies but does not apply to criminal actions brought by federal prosecutors. The dissenting judge in Bodell and the trial court in this case concluded that section 533.5, subdivision (b), applies to any criminal action, including federal criminal actions. We agree with the Ninth Circuit and hold that section 533.5, subdivision (b), does not preclude an insurer from agreeing to provide a defense for criminal actions against its insured brought by federal prosecutors. Therefore, the insurer in this case, which had agreed to provide its insureds with a defense in "a criminal proceeding . . . commenced by the return of an indictment" "even if the allegations are groundless, false or fraudulent," cannot avoid its contractual duty to defend an insured against federal criminal charges by relying on section 533.5, subdivision (b).

FACTUAL AND PROCEDURAL BACKGROUND

1. The Indictment

On January 6, 2010 the United States Attorney for the Central District of California filed a grand jury indictment charging Dr. Richard Lopez 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's Medical Center 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.*fn2

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, and then covered up his diversion. The indictment alleges that Lopez initially notified the United Network for Organ Sharing (UNOS) that the second patient had received the liver, but later falsely told UNOS that the first patient had received the liver. The indictment further alleges that as a result the first patient never received a liver, "was removed from the liver transplant wait list," was "thereafter deprived of the opportunity to have this life-saving operation," and subsequently died. The indictment alleges that Lopez engaged in a cover-up by directing his co-conspirators to restore the second patient's name to the transplant waiting list (even though the second patient had received the liver designated for the first patient), create a false pathology report for the first patient based on data in the second patient's pathology report, and alter medical reports to support a claim "that the transplant program had made an honest mistake confusing the names." The eight-count indictment included alleged violations of title 18 United States Code sections 18 (conspiracy), 1001 (making false statements), and 1519 (destruction, alteration, or falsification of evidence in federal investigations).

2. The Policy

Daughters of Charity Health Systems, Inc. (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.*fn3

3. The Action

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."*fn4 Mt. Hawley sought a declaration that it did not owe Lopez a duty to defend or indemnify in connection with the indictment. Lopez filed a cross-complaint against Mt. Hawley for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief.

4. The Demurrer and the Motion for Summary Judgment

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 fromproviding a defense to federal criminal charges brought by U.S. 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.

Mt. Hawley subsequently filed a motion for summary judgment or in the alternative for summary adjudication. Mt. Hawley argued that it had no duty to defend Lopez against the grand jury indictment "because any defense obligation is excluded by California Insurance Code section 533.5 (b)." Mt. Hawley also argued that it was entitled to summary judgment on its declaratory relief causes of action and on Lopez's cross-complaint because under section 533.5 Mt. Hawley had no duty to defend or indemnify Lopez. Although both Mt. Hawley and Lopez argued that section 533.5, subdivision (b), was unambiguous and supported their respective proposed interpretations, both sides submitted portions of the legislative history of the statute in support of their positions.

5. The Ruling

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.

DISCUSSION

1. Standard of Review

We review a grant of summary judgment de novo. (Wiener v. Southcoast Childcare Centers, Inc. (2004) 32 Cal.4th 1138, 1142; see Culver Center Partners East # 1, L.P. v. Baja Fresh Westlake Village, Inc. (2010) 185 Cal.App.4th 744, 749.) "On appeal from the granting of a motion for summary judgment, we examine the record de novo, liberally construing the evidence in support of the party opposing summary judgment and resolving doubts concerning the evidence in favor of that party." (Miller v. Department of Corrections (2005) 36 Cal.4th 446, 460.) The de novo standard of review applies to issues of statutory and insurance policy interpretation. (See Bruns v. E-Commerce Exchange, Inc. (2011) 51 Cal.4th 717, 724 (Bruns) ["[s]tatutory interpretation is a question of law that we review de novo"]; County of San Diego v. Ace Property & Casualty Ins. Co. (2005) 37 Cal.4th 406, 414 ["[w]e apply a de novo standard of review to an order granting summary judgment when, on undisputed facts, the order is based on the interpretation or application of the terms of an insurance policy"]; Sacks v. City of Oakland (2010) 190 Cal.App.4th 1070, 1082 [where the pertinent facts are undisputed and the issue is one of statutory interpretation, "the question is one of law and we engage in a de novo review of the trial court's determination"].)

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.) "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; see Boy Scouts of America National Foundation v. Superior Court (2012) 206 Cal.App.4th 428, 438 ["[t]he reviewing court accepts as true all facts properly pleaded in the complaint in order to determine whether the demurrer should be overruled"].)

2. The Trial Court Erred in Granting Mt. Hawley's Motion for Summary Judgment a. Section 533.5

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 or proceeding 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."*fn5

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.)

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."

No California court has addressed the issue raised by this appeal of whether section 533.5, subdivision (b), precludes an insurer from providing a defense in all criminal actions, including federal criminal actions.*fn6 In Bodell, supra, 119 F.3d 1411, the Ninth Circuit held that "the phrase '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],' and that the statute therefore only precludes the tender of a defense in all criminal actions and certain civil actions brought by state, county or city officials." (Id. at p. 1416.) The dissent in Bodell argued that the phrase "sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel" modifies only civil actions or proceedings brought under the UCL and FAL, not criminal actions. (Id. at p. 1421 (dis. opn. of Kozinski, J.).) The dissent noted that "the phrase 'any criminal action or proceeding' is separated by the disjunctive 'or' from actions brought pursuant to" the UCL and the FAL. (Ibid.) Neither the majority nor the dissent in Bodell discussed or engaged in the three-step analysis for statutory interpretation under California law.

b. California law for interpreting statutes

"We begin with the fundamental rule that our primary task is to determine the lawmakers' intent." (Delaney v. Superior Court (1990) 50 Cal.3d 785, 798.) "In construing statutes, we aim 'to ascertain the intent of the enacting legislative body so that we may adopt the construction that best effectuates the purpose of the law.'" (Klein v. United States of America (2010) 50 Cal.4th 68, 77 (Klein), quoting Hassan v. Mercy American River Hospital (2003) 31 Cal.4th 709, 715.) California courts "have established a process of statutory interpretation to determine legislative intent that may involve up to three steps." (Alejo v. Torlakson (2013) 212 Cal.App.4th 768, 786-787 (Alejo).) The "key to statutory interpretation is applying the rules of statutory construction in their proper sequence . . . as follows: 'we first look to the plain meaning of the statutory language, then to its legislative history and finally to the reasonableness of a proposed construction.'" (MacIsaac v. Waste Management Collection & Recycling, Inc. (2005) 134 Cal.App.4th 1076, 1082 (MacIsaac), quoting Riverview Fire Protection Dist. v. Workers' Comp. Appeals Bd. (1994) 23 Cal.App.4th 1120, 1126.)

"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."' 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.] [ΒΆ] '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 ...


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