No coverage for federal jury indictment, California court says

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http://newsandinsight.thomsonreuters.com/California/Insight/2011/08_-_August/No_coverage_for_federal_jury_indictment,_California_court_says/

No coverage for federal jury indictment, California court says


In a decision of first impression, a California judge has ruled that the state’s insurance law explicitly precludes coverage related to any criminal action, including federal grand jury indictments.

The law, Cal. Ins. Code § 533.5, eliminates coverage for criminal actions even when a policy promises coverage, according to the opinion by Judge Robert L. Hess of the Los Angeles County Superior Court.

While the statute does not reference whether it applies to state or federal criminal actions, previous courts have concluded that it only applies to state and local actions.

This case involves a doctor who was indicted for allegedly performing an unauthorized liver transplant and conspiring to cover it up.

Dr. Robert J. Lopez Jr. worked at St. Vincent Medical Center as a transplant surgeon.

St. Vincent is a member of the United Network for Organ Sharing, a nonprofit organization that operates the National Organ Procurement and Transplantation Network for the federal government.

When one patient awaiting a liver transplant was unavailable on the day of his scheduled operation, Lopez allegedly performed an unauthorized transplant on a different patient in exchange for money from the Saudi Arabian government.

To cover up his violation, Lopez allegedly reported that he performed the scheduled operation on the original patient.  This precluded the patient from receiving any liver transplant, and the patient died, court documents say.

A federal grand jury indicted Lopez in 2010 for conspiracy, concealment and records falsification.

Lopez’s attorney asked St. Vincent’s insurer, Mt. Hawley Insurance Co., for funds to cover his defense costs.  Mt. Hawley then filed a declaratory judgment action.

Judge Hess granted the insurer’s summary judgment motion and ruled that it had no duty to defend or indemnify Lopez under the state’s insurance statute.

On its face, Judge Hess said, Section 533.5 bars coverage for all criminal actions.  Even assuming the statute was ambiguous, he said, the legislative history does not indicate that it “was intended to apply to state and local criminal actions only as opposed to all criminal actions, including federal proceedings.”

Judge Hess noted that other courts have interpreted Section 533.5 differently.  In Bodell v. Walbrook Insurance Co., 119 F.3d 1411 (1997), the 9th U.S. Circuit Court of Appeals held that it only applied to state court actions.

Without ruling on the issue, the California Supreme Court in AIU Insurance Co. v. Superior Court, 51 Cal. 3d 807 (1990), also assumed that Section 533.5 only applied to state court actions.

Judge Hess pointed out that Bodell is not binding precedent and that “AIU is at most persuasive authority.”

The judge also dismissed a counterclaim by Lopez alleging breach of contract.

Although Judge Hess ruled in Mt. Hawley’s favor, he limited his order to the allegations in the insurer’s complaint and Lopez’s counterclaim.  He did not rule on whether Lopez is entitled to a defense for non-criminal proceedings or the criminal investigation.

Mt. Hawley Insurance Co. v. Lopez, No. BC434879 (Cal. Super. Ct., L.A. County June 21, 2011).

(Reporting by Melissa Sachs, Westlaw Journal Insurance Coverage)