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In a win for Wiley's client, a California superior court, applying California law, held that California Insurance Code Section 533 ("Section 533") barred all indemnity coverage for a retaliation claim against a county and certain county employees. San Bernardino Cnty. v. Everest Nat'l Ins. Co., No. 23STCV02336 (Cal. Super. Ct. Sept. 12, 2025). Although the court determined that part of the underlying settlement fell within an exception to Section 533, it declined to apply the larger settlement rule.
The insured California county became involved in a dispute over flood control casements on land owned by a local developer. The developer sued the county and became increasingly involved in local politics. The county settled the lawsuit with the developer after a divided vote by its Board of Supervisors. Following the settlement with the developer, the county began investigating the developer and his political activity. The county filed criminal charges against the developer and his political associates in what was touted as a major corruption scandal. However, the criminal prosecutions ended with acquittals and dismissals. The developer and his associates then sued members of the District Attorney's office for retaliatory investigation, supervisory liability, and fabrication of evidence. The lawsuit also asserted claims against the county under Monell v. Department of Soc. Servs., 436 U.S. 658 (1978) (imposing liability where an employee's unconstitutional actions resulted from an official municipal policy, a widespread unofficial custom or practice, or a failure to train or supervise employees). The county settled the retaliation lawsuit and sought coverage from its municipal liability insurers.
The court granted the insurers' motion for summary adjudication, finding that Section 533 barred all coverage for the settlement of the retaliation action. Section 533 bars coverage for willful conduct as a matter of California public policy. It has a limited exception for vicarious liability. The court held as follows:
First, the court concluded that the Monell claims against the county implicated Section 533. The court rejected arguments that Monell claims can be proven by a showing of deliberate indifference, which the county argued was less than the willfulness required under Section 533. The court noted that, while Monell claims based on deliberate indifference are hypothetically possible, deliberate indifference was not the basis for the Monell claims in the retaliation action. Rather the county was alleged to have acted willfully.
Second, the court ruled that the settlement fell within the vicarious liability exception and thus Section 533 did not apply to the claims against the county employees. The court reasoned that the county had an obligation to indemnify its employees for these claims pursuant to California statute. The court found this obligation to be akin to vicarious liability.
Third, the court concluded that the larger settlement rule did not apply. The court described the larger-settlement rule as allowing an insured to be reimbursed for the entirety of a settlement that includes both covered and non-covered claims where the liability for the non-covered claim is "purely derivative" of the liability for the covered claim. The court decided that the larger settlement rule should not apply in a situation where coverage for the settlement is barred in part by Section 533, which reflects a strong public policy. In any event, the court determined that the claims against the county were not merely derivative of the claims against its employees—the county faced separate Monell claims asserting that it was the "moving force" behind its employees' constitutional violations.
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