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(USA Herald) - In a recent ruling, the Ninth Circuit upheld that an excess insurer is not responsible for the costs incurred by a California county in defending a retaliation lawsuit against employees in the sheriff's department. The court agreed that a state law, California Insurance Code Section 533, which prohibits carriers from covering a policyholder's willful misconduct, applies in this case.

The panel of three judges held that the county of Sacramento was found liable for violating the state's Fair Employment and Housing Act (FEHA), making California Insurance Code Section 533 applicable. Under FEHA, an employer can only be found directly liable for violating the statute. The panel further stated that the jury's liability finding triggered the application of Section 533 and relieved Everest National Insurance Co. of covering the county's defense costs.

The county of Sacramento's argument that direct liability was not established by the jury was not accepted by the appeals court. The verdict forms did not indicate that the county was held strictly or vicariously liable for the retaliatory conduct. The county's trial counsel conceded that the jury was not instructed on vicarious liability. As a result, the County was directly liable for the FEHA violations, and the district court properly granted summary judgment in favor of Everest because California Insurance Code 533 barred indemnity of the retaliation claims.

The county argued that an exception should be made in Section 533 for "certain public employers," but the panel rejected the argument, stating that such a request is better directed to the legislature.

The case was initiated in November 2010, when four police officers sued the sheriff's department, alleging retaliation after they made protected complaints about harassment and discrimination in the workplace. The county replaced the sheriff's department as a defendant in the action as it employs the sheriff and other individuals named in the case.

Everest, which provided an employment practices liability insurance policy to the county, initially provided a defense, but reserved its right to later challenge its coverage obligations. In 2016, a jury found in favor of the four officers and awarded them more than $3.5 million for the county's FEHA violations. Everest later withdrew its defense, citing Section 533.

The county appealed the verdict, and the parties later reached a settlement. The county then sued Everest in California federal court, asserting breach of contract and bad faith claims. The carrier moved for summary judgment, arguing that Section 533 bars indemnification for the retaliation claims. U.S. District Judge Morrison C. England Jr. of the Eastern District of California granted the motion.

The county asked the Ninth Circuit to review the ruling, arguing that Judge England misapplied Section 533. During oral arguments, the county contended that the focus of the dispute should be on insurability rather than liability. The policyholder argued that the county cannot control the conduct of the sheriff, who is subject to constitutional immunity from liability as an elected official.

Alternatively, the county asked the Ninth Circuit to certify a question to the California Supreme Court on whether insurers can sell insurance to counties for violations of the FEHA for conduct by constitutionally immune officers. However, the panel stated that there is no reason to certify the question, explaining that "the language of the statute is clear and has been interpreted consistently by California courts."

This case's ruling has significant implications for policyholders who believe their insurance companies are acting in bad faith. Investigative reporter Samuel Lopez of the USA Herald believes that policyholders may become less likely to pursue bad faith claims against their insurers after this ruling. The fact that insurance companies are now less likely to cover the policyholder's costs could deter them from making claims against their insurers. Nevertheless, policyholders should remain aware of their rights and seek legal advice when dealing with bad faith conduct by insurance companies.