If your favorite class in law school was Constitutional Law, and you chose to be a coverage lawyer, then you made the wrong choice.  In the thousands upon thousands of coverage decisions that I have read over the years, I have never seen one where the court addressed an issue of constitutional law.  But, as the adage goes, there is a first time for everything.  The Ninth Circuit’s decision, in Adir Int’l v. Starr Indem. & Liab Co., No. 19-56320 (9th Cir. April 15, 2021), proves the old saying

The case starts out simple enough.  Adir operates a retail chain called Curacao with stores in several western states.  In 2017, the California Attorney General sued Adir and its Chief Executive Officer, for unfair and misleading business tactics that allegedly exploit Curacao’s mainly low-income, Spanish-speaking customer base. The complaint alleged violations of California's Unfair Competition Law (UCL) and False Advertising Law (FAL), and sought restitution, civil penalties, costs of suit, and other equitable relief.

Adair was insured by Starr. The insurer undertook the retailer’s defense under a reservation of rights and then became actively involved in it.  But this all changed in March 2019 when Starr received a written warning, from the California Attorney General’s Office, that Starr violated California Insurance Code § 533.5, which  provides, in part:

(b) No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subdivision (c), any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to [the UCL or FAL] in which the recovery of a fine, penalty, or restitution is sought by the Attorney General . . . notwithstanding whether the exclusion or exception regarding the duty to defend this type of claim is expressly stated in the policy.

(c) For the purpose of this section, “duty to defend” means the insurer's right or obligation to investigate, contest, defend, control the defense of, compromise, settle, negotiate the compromise or settlement of, or indemnify for the cost of any aspect of defending any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to [the UCL or FAL] in which the insured expects or contends that (1) the insurer is liable or is potentially liable to make any payment on behalf of the insured or (2) the insurer will provide a defense for a claim even though the insurer is precluded by law from indemnifying that claim.

(d) Any provision in a policy of insurance which is in violation of subdivision (a) or (b) is contrary to public policy and void.

A few weeks after getting the letter, Starr stopped paying Adir’s defense costs.

Adir sued Starr.  Putting aside what happened at the District Court – Starr won – the case went to the Ninth Circuit.

Adir argued that California Insurance Code § 533.5(b), “which bars insurance companies from paying legal defense fees for certain consumer protection lawsuits brought by the state, violates the Due Process Clauses of the Fifth and Fourteenth Amendments because it interferes with an insured’s ability to fund and retain the counsel of its choice.  As Adir points out, California has stacked the deck against defendants facing these lawsuits filed by the state: Although the Attorney General has yet to prove any of the allegations in his lawsuit, he has invoked the power of the state to deny insurance coverage that Adir paid for to defend itself.”

But the federal appeals court did not see it this way. 

Following a review of choice of counsel law generally, the court observed that “the 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.”  Essentially the court concluded that the right to counsel, in civil cases, is not what it is in criminal cases.

With this in mind, the court turned to whether Adir’s proposed right, “which really boils down to an indirect right to fund and retain the counsel through an insurance contract,” fits into the existing due process right that applies to the retention of counsel in civil cases. 

The court answered that it did not:

“At the end of the day, California’s law only makes it harder, though not necessarily impossible, for a civil litigant to retain the counsel of their choice. Adir has not alleged that the government actively thwarted it from obtaining counsel, or that the law precluded it from communicating with counsel. Indeed, Adir appears to have obtained an able and competent counsel — without the use of insurance proceeds — for this appeal. We thus rule that California Insurance Code § 533.5(b) does not impinge on a due process right to retain counsel.”