California Labor Code Section 1102.5 prohibits retaliation against employees for reporting activity they have reasonable cause to believe is unlawful, or for refusing to participate in activity that is unlawful. Retaliation claims are the most common employment claims in California. California Insurance Code Section 533 states that an insurer is not liable for a loss caused by the willful act of the insured.
In 2015, six officers in the City of Whittier Police Department sued the City. The officer’s alleged that the City had an illegal quota system, and that the City unlawfully retaliated against officers for refusing to participate in the system. The City ultimately settled with the officers for $3 million.
At the time, the City had insurance policies with Everest National Insurance Company and Starr (the Insurers) that provided coverage for employment practice liability for “wrongful acts”, including retaliation. The City tendered the settlement to the Insurers for indemnity. The Insurers denied the request, and the City sued them.
Both the agreed-upon referee, and the trial court, ruled in favor of the Insurers. They reasoned that Insurance Code Section 533 prohibits coverage for loss caused by an insured’s willful act, and whistleblower retaliation under Labor Code Section 1102.5 can only be established by evidence of an employer’s motive and intent to violate or frustrate California’s Whistleblower laws. The trial court ruled that since retaliation claims can be established only through proof of an employer’s willful acts, Insurance Code Section 533 barred indemnity. The City appealed.
The California Court of Appeal reversed. The Court held that some retaliation claims involve willful conduct, but some involve conduct more akin to negligence. Thus, an insured employer is not barred from seeking indemnification simply because the claim alleges retaliation.
The Court reasoned that Labor Code Section 1102.5 is not limited to such obviously intentional misconduct. Instead, an employer could be liable under Labor Code Section 1102.5(c) despite making concerted and reasonable efforts to avoid violating the law. For example, an employer may be liable for disciplining an employee who refuses to participate in conduct that the employer believes is legal, but the employee reasonably believes is illegal. In that example, the employer’s conduct is closer to negligence than intentional misconduct because the employer intends the act—the adverse employment action—but not the consequence—a violation of the employee’s Labor Code rights. Those rights do not become clear until a court has decided the legality of the conduct in which the employee refused to participate.
City of Whittier v. Everest National Insurance Co, Et Al, 97 Cal.App.5th 895 (2023).