ALF Files Joint Amicus Brief Challenging California Statute That Invalidates Corporate Liability Insurance When The State Alleges Unfair Competition Or False Advertising
California Insurance Code § 533.5 bars insurance companies from paying legal defense costs whenever the California Attorney General files an Unfair Competition Law or False Advertising Law suit against a company that does business in the State. Under this California statute—unique among the States—insurance contracts providing corporations with liability coverage are invalidated if the State merely alleges wrongdoing under its broad unfair competition or false advertising consumer protection statutes. The deprivation-of-insurance provision stacks the deck in favor of the State by forcing many defendants, especially small businesses, to settle State-initiated consumer protection suits that they otherwise would contest and litigate. The certiorari petition filed in this case presents the question of whether § 533.5 violates the Fourteenth Amendment’s guarantee of due process.
Adir Int’l, LLC v. Starr Indemnity & Liability Co., No. 21-537 (Supreme Court) (petition stage)
Read the Amicus Brief:
Whether the Due Process Clause of the Fourteenth Amendment permits a State to prohibit private par-ties from using untainted funds, such as otherwise lawful insurance, to defend themselves against law-suits only where the State itself is the opposing party, without providing a hearing or requiring any evidentiary showing of wrongdoing.
Petitioners Adir International, which owns a small chain of California retail stores, and Adir’s CEO were sued by the California Attorney General under the State’s unfair competition and false advertising laws. Under the liability insurance policy that Starr Indemnity had issued to Adir— a policy which included Directors and Officers (D&O) coverage—Starr had paid $2 million in defense costs when the State informed Starr that its payments violated California Insurance Code § 533.5. Starr ceased payments and demanded reimbursement from Adir, which then sued Starr for specific performance of its insurance obligations.
ALF’s Amicus Brief:
The joint amicus brief was authored by the Landmark Legal Foundation. ALF, along with the National Federation of Independent Business Small Business Legal Center. the Young America’s Foundation, and the Hispanic Leadership Fund joined the brief as co-amici. The brief argues that the Supreme Court should review the case in order to protect small businesses’ ability to mount a defense in civil ligation, and to avoid discouraging individuals from serving as officers or directors of both for-profit and nonprofit corporations.
The Petition For a Writ of Certiorari was denied on January 18, 2022.
Date Originally Posted: November 13, 2021