Companies facing lawsuits involving alleged claims of willful acts have had a rude awakening following the ruling in The Wonderful Co. LLC et al. v. Starr Indemnity & Liability Co.[i] by a California federal court that came at the end of October 2023, and now will find themselves solely financially responsible for company conduct involving such acts.

While the ruling came about because of the matter between Starr Indemnity & Liability Co. and Wonderful (jointly The Wonderful Co. LLC and subsidiary, Wonderful Citrus Packing LLC), the initial matter involved a complaint brought by former employee, James Jordan, against Wonderful in March 2018 alleging defamation and breach of contract.  In his complaint, Mr. Jordan alleged Wonderful had made defamatory statements about him to several individuals claiming he was not only involved in activities of a criminal nature but had also stolen from Wonderful.  Mr. Jordan’s case was heard before a jury in October 2019, and the jury determined Wonderful was liable for defamation, awarding Mr. Jordan more than $4.9 million. Wonderful ultimately paid him the entire judgment amount.

Wonderful was indemnified for $1 million dollars, and thereafter, turned to Starr for additional indemnification on the other $3.9 million dollars based on an employment liability insurance policy it had obtained from Starr, especially given that the policy also encompassed “employment-related torts against Wonderful companies.”[ii]  Following Starr’s refusal to provide indemnification, Wonderful brought a suit against Starr in November 2022 claiming “the insurer wrongfully denied coverage for the judgment ‘despite the clear evidence of coverage’.”

However, the court sided with Starr on the matter.  According to U.S. District Judge Fernando L. Aenile-Rocha’s nine-page order, California’s Insurance Code does not allow for indemnification coverage when it comes to willful acts, including defamation.  Additionally, per the court’s order, Wonderful would not be able to amend its complaint, and even if Wonderful had been allowed to do so, the court indicated that doing so “would be ‘futile’.”[iii]

Here, Wonderful did in fact have a valid employment liability insurance policy issued by Starr that included “employment-related torts.”[iv]  Furthermore, Mr. Jordan’s claims pertained to torts concerning his previous employment with Wonderful; however, the determining factor was the type of tort being alleged – defamation.  Although the California Insurance Code would permit a company to request reimbursement from its insurer, the indemnification sought by Wonderful was barred because of the alleged conduct giving rise to the award.  The defamatory behavior of Wonderful against Mr. Jordan was considered a willful act as Wonderful actively took steps in disseminating the statements to third parties.  Under the code and as interpreted by the court, this conduct was a willful act, and Wonderful was precluded from indemnification.

Takeaway

As always, insurers are wise to ensure policy language is consistent and clear. Where an indemnification issue arises, that language coupled with the facts of the case and the carveouts articulated by the Insurance Code will dictate the result. The court’s analysis of the definition of “willful acts” in this case may prove helpful for other insurers facing claims for indemnification in similar matters.

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Sources

[i] The Wonderful Company LLC, et al. v. Starr Indemnity and Liability Company, No. 2:22-cv-08249-FLA, 2023 U.S. District Court, C.D. California WL 7803331

[ii] Id.

[iii] Id.

[iv] Id.