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On March 3, 2015, six officers in the Whittier Police Department, including Joseph Rivera filed a complaint against the City of Whittier in the Los Angeles County Superior Court. The complaint alleged the police department instituted ‘an unlawful citation and arrest quota in violation of California Vehicle Code sections 41600 et seq. on its officers, and illegally compared officers using shift averaging as a means of determining a benchmark for performance.” The complaint further alleged the police department “retaliated against those [who] refused to participate in and/or reported the unlawful citation and arrest quota,” including, inter alia, “negative language and/or documentation being placed in [plaintiffs’] personnel packages about their refusal to comply with the unlawful quota, unwarranted counseling sessions, unwarranted increased scrutiny, unwarranted transfers, [and] disparaging comments made about them.”

The City notified Everest National Insurance Company and Starr Indemnity and Liability Company about the Rivera action, advising that the plaintiffs sought damages exceeding $1 million and there was a potential for coverage under the insurers’ policies. Everest issued four public entity excess liability insurance policies to the California Insurance Pool Authority (CIPA), and included the City of Whittier as a named insured and member agency. The policies provided coverage for employment practice liability of $10 million per “wrongful act” in excess of a retained limit of $1 million. The Starr policies provided coverage for employment practice liability of $10 million per “wrongful act” in excess of a retained limit of $1 million.

Prior to trial, the City’s counsel notified the insurers of an upcoming mediation session and demanded that they attend. Everest’s and Starr’s coverage counsel attended the mediation, at which the City negotiated a settlement with the Rivera plaintiffs and agreed to pay $3 million to resolve the action. Neither Everest nor Starr consented to the settlement.

The City paid the $3 million, and the Rivera action never went to trial or resulted in a judgment. On December 24, 2019, counsel for CIPA and the City tendered the Rivera settlement to Everest and Starr for indemnity under their respective policies. The insurers denied the request for indemnity. The City filed a civil action against Everest and Starr, asserting causes of action for declaratory relief, breach of contract, and bad faith.

The insurers each moved for summary judgment, and the City moved for summary adjudication. The insurers contended retaliation claims under Labor Code section 1102.5 can be established only through proof of an employer’s willful acts, and Insurance Code section 533 therefore barred indemnity. Starr argued in the alternative that its policy required indemnification only of “damages” which did not include amounts paid in prejudgment settlement. In its motion, the City contended section 533 did not bar indemnity and therefore the insurers were in breach of the insurance contracts.

The trial court agreed with the insurers, after an agreed upon referee found no triable issue existed as to whether the insurers owed the City indemnification of the Rivera settlement. The referee reasoned that section 533 prohibits coverage for loss caused by an insured’s willful act, and whistleblower retaliation under Labor Code section 1102.5 an only be established by evidence of an employer’s motive and intent to violate or frustrate’ California’s Whistleblower laws. The referee granted the insurers’ motions for summary disposition and denied the City’s motion. The trial court adopted the referee’s statement of decision as its own.

The Court of Appeal reversed as to Everest in the partially published case of City of Whittier v. Everest Nat. Ins. Co. -B321450M (December 2023). In the unpublished portion of this opinion, the Court of Appeal agreed with Starr’s alternative argument that its specific policy language does not obligate it to indemnify the City for the settlement, and affirmed the judgment as to Starr under Starr’s alternative argument.

This appeal presents a question of first impression: whether Insurance Code section 533 under which “[a]n insurer is not liable for a loss caused by the wilful act of the insured,” bars indemnification for claims under Labor Code section 1102.5. Labor Code section 1102.5 prohibits, inter alia, retaliation against employees for reporting activity they have reasonable cause to believe is unlawful, or for refusing to participate in activity that actually is unlawful. Section 533 reflects a fundamental public policy of denying coverage for willful wrongs and discouraging willful torts.

However the Court of Appeal “found no case in California or elsewhere addressing whether section 533 bars coverage of claims under Labor Code section 1102.5. The trial court and the insurers analogize to B & E Convalescent Center v. State Compensation Ins. Fund (1992) 8 Cal.App.4th 78 and federal district court cases applying it, all of which address retaliation claims in contexts other than Labor Code section 1102.5.”

Here, the parties rely on jurisprudence, first developed in underlying sexual molestation and assault cases, that equates “willful” with inherently harmful or intentional. The Court of Appeal concluded that not all Labor Code section 1102.5 claims involve necessarily willful conduct, but rather some involve conduct more akin to negligence, the trial court erred when it found to the contrary in granting summary judgment in favor of Everest and Starr.

The Court noted “This is an important question whose answer will influence enforcement of our employment laws. How so? Retaliation claims are the most common employment claims in California. For fiscal years 2016 through 2022, retaliation claims of all types were the majority of charges filed in California with the United States Equal Employment Opportunity Commission. (See EEOC, FY 2009-2022 EEOC Charge Receipts for CA.) In 2019, retaliation was the most common basis for right-to-sue requests filed with the California Department of Fair Employment and Housing. (DFEH, 2019 Annual Report, at p. 9.)”

And after reading state federal case authorities it went on to say “Given the significant number of retaliation cases in our courts and importance of insurance in resolving those cases and securing compensation for injured employees, we tread carefully in applying the above jurisprudence to a new category of claims.”  

“The employer’s conduct in our scenario is not comparable to that in B & E Convalescent Center, where the employer retaliated against the employee for refusing to engage in activity that was illegal under clearly established law. Although whistleblower protections themselves are clearly established, the illegality of the underlying conduct the whistleblower is resisting may not be.”

“Doctrinally, the employer’s conduct in our scenario is closer to negligence than intentional misconduct.  The employer intends the act – the adverse employment action – but not the consequence – a violation of the employee’s rights under Labor Code section 1102.5, rights that do not become clear until a court has decided the legality of the conduct in which the employee refused to participate.”