A California state court of appeals, applying California law, has held that, as a matter of first impression, a provision in the California insurance code excluding insurance coverage for loss caused by an insured’s willful acts did not bar coverage for an underlying lawsuit alleging retaliation in violation of the California labor code. City of Whittier v. Everest Nat’l Ins. Co., 315 Cal.Rptr.3d 856 (Dec. 26, 2023).

Police officers brought suit against the insured, a municipality. In the complaint, the police officers alleged that the insured subjected them to retaliatory discipline in violation of Labor Code Section 1102.5 after they objected to – and refused to comply with – a purported illegal citation and arrest quota system used to evaluate their performance. The insured ultimately settled the lawsuit and tendered the settlement for coverage under its EPL policies. The EPL policies provided coverage “for loss arising out of [the insured’s] employment practice liability wrongful act,” which included “retaliation.” However, the insurers denied the insured’s request for indemnity on the ground that retaliation claims under Labor Code Section 1102.5 can be established only through proof of an employer’s willful acts and that Insurance Code Section 533 bars coverage for such acts.

In the ensuing coverage litigation, the trial court granted summary judgment for the insurers. In so holding, the trial court reasoned that Section 533 prohibits coverage for loss caused by an insured’s willful act and that claims for whistleblower retaliation under Labor Code Section 1102.5 “can only be established by the evidence of an employer’s motive and intent to violate or frustrate” the state’s whistleblower laws.

The appeals court disagreed. The appellate court assessed several cases applying Section 533 to bar coverage for underlying retaliation or wrongful termination claims, but concluded that those cases should not be read broadly to assert that any alleged retaliation is per se willful under Section 533. The court noted that Labor Code Section 1102.5 is not limited to obviously intentional misconduct, and that an employer could conceivably violate the law by negligently attempting to prevent business harm from a recalcitrant employee. The court found that the police officers in the underlying lawsuit could succeed on their claims without proving that the insured knew that its policy was illegal or that the insured acted maliciously, punitively, or in bad faith. Because the court determined that the police officers could prevail without proof of willful conduct, it held that Section 533 did not preclude coverage for the underlying lawsuit in the absence of any further finding that the insured’s conduct was in fact willful or that some or all of the settlement was in fact allocable to willful conduct.

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