9th Circuit: Insurer May Have Duty to Defend and Indemnify under California False Claims Act
In an unpublished opinion, the Ninth Circuit recently held that insurers may have a duty to defend and indemnify suits brought under the California False Claims Act against its insured because the Act requires only recklessness to the “truth or falsity of the information in the claim,” rather than willful conduct.
The facts of this case involved a qui tam suit alleging violations of the California False Claims Act (CFCA) against an insured corporation. The CFCA prohibits recklessly presenting false claims, records, or statements to the state of California or a political subdivision. Here, the corporation sought defense and indemnification from its insurer, but was denied coverage. The CFCA suit settled, and the corporation subsequently filed suit against the insurer for damages, including attorneys’ fees.
In its motion to dismiss, the insurer argued California Insurance Code Section 533 precluded “causes of actions that include the intent to induce reliance.” The district court granted the motion, finding that the CFCA is “one such cause of action.” Section 533 states, “an insurer is not liable for a loss caused by the willful act of the insured.” The district court reasoned that claims under the CFCA necessarily involve willful conduct because a reckless misrepresentation about the “truth or falsity of the information” would cause a government agent to rely on such information, making the act “purposeful rather than accidental.” The district court ultimately held that Section 533 precludes coverage for CFCA suits.
The Court of Appeals, however, was “unpersuaded” by the lower court’s reasoning. The Ninth Circuit panel agreed that Section 533 applies to “willful” conduct. The court explained that Section 533 is an “exclusionary clause” and places the burden on the insurer to prove that the requested claims are uninsurable under the law. The Court of Appeals further explained that the CFCA prohibits “acts in reckless disregard of the truth or falsity of the information,” and that such acts do not necessarily involve “willful conduct.” In other words, CFCA liability does not require the “intent to induce reliance.”
The Court of Appeals held that the insurer failed to meet its burden with respect to the CFCA claims, reversing the lower court’s order. The Ninth Circuit panel remanded the case for further proceedings and instructed the lower court to consider the insurer’s alternative arguments concerning the scope of coverage and exclusions found in its insurance policies.
