Every now and then, a court decision catches our attention. That was the case with the Ninth Circuit’s March 20, 2025, opinion, in which the court held that coverage for settlement amounts and defense costs incurred in an underlying employee and client poaching lawsuit was barred by California Insurance Code Section 533. Section 533 bars coverage for loss caused by “the willful act of the insured.” The troublesome thing about this opinion is that the appellate court held coverage was precluded even though the willful conduct involved was merely alleged, not proven.

The Ninth Circuit’s March 20, 2025, opinion in the case can be found here. The Wiley law firm’s April 16, 2025, post about the Ninth Circuit’s opinion on its Executive Summary blog can be found here.

Background

United Talent Agency (UTA) is, as its name suggests, a talent agency. One of UTA’s competitors, Creative Artists Agency (CAA), sued UTA for allegedly stealing CAA’s clients and employees. CAA asserted claims against UTA for inducing breach of contract, intentional interference with prospective economic advantage, conspiracy to breach a fiduciary duty, intentional interference with contractual relations, and aiding and abetting a breach of a fiduciary duty. UTA incurred defense expenses defending against the CAA lawsuit. The underlying litigation ultimately settled.

At relevant times, UTA maintained a management liability insurance policy. UTA submitted the CAA lawsuit to its insurer as a claim under the policy. The insurer denied coverage for the lawsuit on among other grounds that coverage for the claim was precluded by operation of California Insurance Code Section 533. UTA sued the insurer for breach of contract and bad faith.

The district court granted the insurer’s motion for summary judgment, agreeing with the insurer that coverage was precluded by application of Section 533. UTA appealed.

The Ninth Circuit’s Opinion

In a short, five-page March 20, 2025, per curiam opinion designated not for publication, a three-judge panel of the Ninth Circuit affirmed the district court, saying that “there is no genuine dispute that the CAA litigation alleged wilful acts by UTA, thereby triggering Section 533’s exclusionary clause.”

In reaching this conclusion, the appellate court observed that “most of CAA’s claims required proof of UTA’s ‘wilful’ conduct,” and that to the extent UTA allegedly engaged in less culpable acts, such conduct was ‘part and parcel’ of UTA’s wrongful scheme.” The “gravamen” of the underlying complaint is that “UTA conspired to steal and deliberately stole CAA’s clients and employees.”  The appellate court said that “any alleged non-wilful acts were so closely related to UTA’s conspiracy to harm CAA as to constitute the same course of conduct for purposes of Section 533.”

Discussion

I have read the Ninth Circuit’s opinion multiple times. Each time I read it, I have exactly the same reaction – which is, that the appellate court left out part of its opinion. You know, the part where, as logic, reason, and simple common sense dictate, the court says the following:

Of course, CAA’s allegations in the underlying action were exactly that: mere allegations. The underlying case was settled, so the wilful misconduct alleged was never proven. The statute does not preclude coverage for alleged wilful acts, it only precludes coverage for wilful acts. Mere alleged wilful acts are not wilful acts sufficient to trigger the statute. If mere alleged willful acts were sufficient to preclude coverage, coverage under any liability policy would be rendered illusory, as almost every professional liability dispute involves allegations of wilful acts. Because there was no finding in the underlying lawsuit that UTA committed wilful acts, Section 533 is irrelevant, and therefore the district court’s opinion is reversed.

The absence of this language or its equivalent still puzzles me. A little digging helped me to understand a little bit better what may be going on here.

The Ninth Circuit’s March 2025 opinion doesn’t mention it, but it turns out the March opinion was this case’s second trip to the Ninth Circuit. The appellate court had previously issued an opinion in the case, in March 2023.

In an earlier ruling in the case, the district court had held that coverage for the underlying settlement and defense expense was precluded by the policy’s professional services exclusion. The district court had also rejected the insurer’s additional argument that Section 533 also precluded coverage, because, the district court found, there had been no final adjudication that the insured had committed a wrongful act. In referring to the absence of a final adjudication, the district court had relied analytically on the provision in the policy specifying that the policy’s misconduct exclusion does not apply in the absence of a final adjudication that the precluded conduct had taken place. The district court’s ruling was appealed to the Ninth Circuit.

In a brief March 2023 per curiam opinion designated not for publication (here), a three-judge panel of the Ninth Circuit held that the final adjudication language professional services exclusion did not control the effect of Section 533 and remanded the case to the district court for further consideration of whether Section 533’s preclusion of coverage for loss from an insured’s wilful act applied.

In reaching its conclusion with respect to Section 533, the appellate court said that the district court erred in relying on an exclusion in the policy – and in particular, on the exclusion’s final adjudication language – to conclude that Section 533 didn’t apply. The appellate court went on to say “California courts have found that Section 533 precludes coverage of litigation when the allegations of the underlying conduct can be established only by showing wilful misconduct.”

So – to pinpoint what I see as the problem here, it was in the case’s earlier trip to the Ninth Circuit that the appellate court said “allegations” of the underlying misconduct can establish wilful misconduct sufficient to trigger Section 533’s preclusive effect.

I have a problem with this conclusion. For starters, the language of Section 533 does not preclude coverage for “loss cause by the alleged wilful act of the insured.” It only precludes coverage for loss cased by the “wilful act of the insured.”

In its March 2023 opinion, the Ninth Circuit cited prior California authority that the purpose of Section 533 is “to deny insurance for wilful wrongs” and that a “wilful act” for purposes of Section 533 means “either an act deliberately done for the express purpose of causing damage or intentionally performed with the knowledge that damage is highly probable or substantially certain to result.”

In other words, according to California authority the appellate court expressly cited, there is a state of mind requirement to trigger the statutory exclusion – in order to trigger the exclusion, the act must have been done with purpose or intent. In the absence of a showing of purpose or intent, the statutory exclusion cannot apply, because it has not been established that the act was wilful, as the statute required.

Given this California authority, which makes obvious sense given the language of the statute, mere allegations alone should not be sufficient to trigger the statutory exclusion. The fact is that many if not most professional liability lawsuits contain allegations of wilful misconduct. If mere allegations alone were sufficient to trigger the statute’s preclusive effect, there would almost never be coverage available under a professional liability insurance policy. Coverage under the policy would be rendered illusory.

I have no idea how the appellate court got from the language in the California cases saying that the statute is triggered by purposeful or intentional misconduct to saying that the statute precludes coverage when mere allegations are sufficient to trigger the statute. It appears (to me, at least) to be an unwarranted logical leap unsupported by the language of the statue itself.

It is entirely possible I am overlooking something fundamental here. Perhaps my California brethren or sistren can help me understand how mere allegations alone are sufficient to preclude coverage under a statute barring coverage NOT for alleged wilful act, but only for wilful acts.

I can hear the objections to my analysis. How on earth, an objector might say, could a company inadvertently or even negligently poach clients and talent? Poaching is an inherently intentional act. To which I say, what if clients and talent were never actually poached at all? Why should coverage be precluded? Again, why should mere allegations alone be sufficient to preclude coverage?

I welcome dissenting opinions, and I encourage readers who disagree to add their thoughts using this blog’s comment feature.