April 19, 2021

Adir International, LLC v. Starr Indemnity and Liability Co. (9th Cir. 19-56320, Apr. 15, 2021)

Under California Insurance Code section 533.5, an insurance policy may not cover any financial losses resulting from a false advertising law (FAL) or unfair competition law (UCL) claim brought by the Attorney General and an insurer has no duty to defend an action in which FAL or UCL penalties or restitution are sought.

When the California Attorney General brought FAL and UCL claims against a retailer, the retailer’s insurer initially defended the retailer under a reservation of rights but then withdrew the defense after the Attorney General accused the insurer of violating section 533.5. The retailer brought a coverage action and the district court granted summary judgment for the insurer.

The insured appealed, arguing that section 533.5 deprives FAL and UCL defendants of their right to counsel of their choice in violation of the federal Due Process Clause. The Ninth Circuit disagreed: “[T]he due process right to retain counsel in civil cases appears to apply only in extreme scenarios where the government substantially interferes with a party’s ability to communicate with his or her lawyer or actively prevents a party who is willing and able to obtain counsel from doing so.” The court held section 533.5 did not prevent the retailer from obtaining or communicating with defense counsel; it merely made it harder. The court declined “to enlarge the limited due process right to retain counsel to include a constitutional right to use insurance proceeds to pay for legal fees.”