Intentional And Inherently Or Predictably Harmful Conduct Cannot Be Covered

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Markel American Insurance Company (“Markel”) issued a management liability policy to United Talent Agency (“UTA”). UTA was sued by a competitor, Creative Artists Agency (“CAA”) for allegedly stealing its clients and employees. Markel declined coverage for the action, based on the policy’s professional liability exclusion and California Insurance Code § 533, which provides that “[a]n insurer is not liable for a loss caused by the wilful act of the insured.” UTA sued Markel for breach of contract and bad faith. The district court held that § 533 did not apply but concluded that coverage was precluded by the policy’s professional liability exclusion, and entered judgment in favor of Markel.

United Talent Agency, LLC, a Delaware limited liability company v. Markel American Insurance Company, a Virginia company, Nos. 22-55205, 22-55357, United States Court of Appeals, Ninth Circuit (March 15, 2023)

The Ninth Circuit disagreed with the district court’s conclusion that CAA’s allegations that UTA illegally stole clients and agents from CAA come within the purview of the policy’s professional liability exclusion.

The allegations by CAA that UTA stole clients and agents from CAA does not bring the conduct within the meaning of rendering professional services.

Application of § 533 is a matter of statutory construction, not of contract interpretation. Section 533 reflects a fundamental public policy of denying coverage for willful wrongs and discouraging willful torts. Liability arising from intentional and inherently or predictably harmful conduct cannot be covered by liability insurance. The Ninth Circuit concluded that the legislative purpose is both clear and unequivocal. It is to deny insurance coverage for wilful wrongs.

Section 533 creates a statutory exclusion which is read into every insurance policy. The policy’s requirement of a judgment establishing a wilful act for the exclusion to apply is not pertinent to the § 533 analysis. A wilful act for purposes of § 533 means either 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. A wilful act also includes an intentional and wrongful act in which the harm is inherent in the act itself.

Section 533 precludes coverage of litigation when the allegations of the underlying complaint can be established only by showing wilful misconduct. The court must examine the allegations in the underlying complaint to determine whether those allegations necessarily involve a wilful act within the meaning of § 533. The district court did not do so. The Ninth Circuit, therefore remanded the case for the district court to make a determination that § 533 applies to the allegations of wilful misconduct.

In light of the remand, the Ninth Circuit declined to consider the parties’ other contentions on appeal and reversed the grant of Markel’s summary judgment motion on the professional liability exclusion, reversed the denial of Markel’s summary judgment motion as to § 533, and remanded the case for the district court to make the appropriate determination on Markel’s summary judgment motion as to the application of § 533 because the allegations of the underlying complaint could only be proved if CAA proves the conduct of UTA was wilful.

Liability insurance protects the insured from suits seeking damages for its liability due to the insured’s negligent acts. Most liability insurance policies exclude intentional acts like assault or battery. California, by statute, compels the existence of an exclusion not written in the policy that states there is no coverage for a: “loss caused by the wilful act of the insured.” That section applies and cannot be changed by the wording of the policy even if the insured and the insurer wish to insure against such wilful acts, they cannot do so in California although other states that do not have a similar statute may require coverage.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com

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