Whistleblower Suit Alleging Violations of California False Claims Act Uninsurable Under California Law

The United States District Court for the Central District of California, applying California law, has held that liability under the California False Claims Act is uninsurable as a matter of law. Office Depot Inc. v. AIG Specialty Ins. Co., No. 2:15-cv-02416 (C.D. Cal. July 21, 2016).

A whistleblower filed suit against the insured office supply company alleged violations of the California False Claims Act. The suit asserted that the office supply company knowingly presented false and fraudulent claims in order to obtain payment from California public entities by overcharging them under a supply contract for office and stationery supplies. The office supply company’s insurer denied coverage, and the office supply company initiated coverage litigation seeking reimbursement of $30 million of the $68.5 million it paid to settle the whistleblower suit.

The court held that the insurer did not have a duty to indemnify the office supply company and was statutorily precluded from doing so pursuant to California Insurance Code § 533, which states that an “insurer is not liable for a loss caused by the willful act of the insured.” The office supply company argued that the scienter required by the California False Claims Act includes not only the “willful” conduct precluded by § 533, but also reckless conduct that is insurable. The court found persuasive a line of cases holding that causes of action that include the intent to induce reliance are precluded from insurance coverage under § 533 as a matter of law, even if those causes of action do not require more than recklessness with respect to the truth or falsity of the statement made. The court concluded that the California False Claims Act creates such a cause of action because, by requiring that a false claim be submitted for payment and approval, it necessarily requires the intent to induce reliance.

Accordingly, the court granted the insurer’s motion to dismiss with respect to its duty to indemnify. The court initially also granted the insurer’s motion with respect to the duty to defend. However, on the office supply company’s motion for reconsideration, the court limited the holding to the duty to indemnify because the insurer’s motion papers had not specifically addressed the duty to defend.