The second jurisdiction we will discuss pertaining to coverage issues arising out of claims for wrongful incarceration is California, which, like New York, has two pertinent decisions involving coverage for malicious prosecution cases. Unlike New York, however, the case law in California stems from civil cases, not criminal cases. Nonetheless, the Court of Appeal in California held that it makes no difference whether the case is civil or criminal in determining whether a claim for malicious prosecution implicates insurance coverage.
The first case is Harbor Insurance Company v. Central National Insurance Company, 165 Cal. App.3d 1029, 211 Cal. Rptr. 902 (1985), in which the insured, A.J. Industries, Inc. (“A.J.”) unsuccessfully prosecuted an action between 1971 and 1978 against its former president and chairman. When A.J. filed the action, it was insured by Zurich Insurance Company (“Zurich”) for a limit of $300,000 and by Harbor Insurance Company (“Harbor”) for $5,000,000. While the malicious action was pending (and until April 1, 1975), A.J. switched insurers and had primary insurance with Argonaut Insurance Company (“Argonaut”) and excess insurance with Midland Insurance Company (“Midland”).
On April 16, 1976, the former president and chairman filed an action against A.J. for malicious prosecution. By that point in time, A.J. was insured by Central National Insurance Company (“Central National”). A.J. nonetheless tendered its defense to Zurich. Zurich accepted the tender and turned the matter for handling to Harbor, the concurrent excess carrier. Harbor defended the malicious prosecution action under reservation of rights, and also tendered the claim to Central National, Midland and Argonaut. After those insurers denied coverage, Harbor filed suit.
The issue addressed by the California Court of Appeal, Second Appellate District, was whether Argonaut’s or Midland’s policies provided coverage for the malicious prosecution lawsuit against A.J.
Argonaut’s policy provided coverage for damages because of “personal injury” sustained by any person arising out of an offense committed in the conduct of the named insured’s business. The term “offense” included false arrest, detention or imprisonment, or malicious prosecution, if such offense is committed during the policy period. The Court of Appeal ruled that the “offense” of malicious prosecution is “committed” upon institution of the malicious action against the defendant. The court noted that the “gist of the tort is committed when the malicious action is commenced and the defendant is subjected to process or other injurious impact by the action.” In other words, “from both the tortfeasor’s and the victim’s standpoint the ‘offense’ is ‘committed’ upon initial prosecution of that action. At that point the tortfeasor has invoked the judicial process against the victim maliciously and without probable cause, and the victim has thereby suffered damage.” Because the malicious action was commenced before the Argonaut policy came into effect, the court held that there was no coverage under the policy.
The court rejected Harbor’s argument that the offense of malicious prosecution is a “continuing occurrence,” which is “committed” throughout the prosecution of the malicious action because it continues to cause damage until the action is terminated. The Court of Appeal noted that such an argument was a theoretical misunderstanding of the elements of the tort in that “[a]lthough continued proceedings after commencement of the action will increase and aggravate the defendant’s damages, the initial wrong and consequent harm have been committed upon commencement of the action and the initial impact thereof on the defendant.”
The Court then addressed the two Midland policies, one of which agreed to indemnify A.J. against such ultimate net loss in excess of the primary limits by reason of liability for damages because of personal injury caused by an occurrence. This excess policy defined “personal injury” as “injury arising out of false arrest, false imprisonment, wrongful eviction, detention, malicious prosecution, … which occurs during the policy period.” The Court of Appeal held that the definition of “personal injury” required the malicious prosecution to “occur” during the policy period. For the reasons discussed pertaining to the Argonaut policy, the Court of Appeal held that malicious prosecution did not “occur” during this Midland policy, so Midland had no obligations under the policy.
The second Midland policy agreed to indemnify A.J. for all sums that it became obligated to pay by reason of liability for damages on account of “personal injuries” caused by an “occurrence.” The term “personal injuries” was defined, in part, as malicious prosecution, and the term “occurrence” was defined as “an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the Insured.” In order to avoid a self-defeating construction of the policy that would render “personal injuries” being excluded from coverage, the court deemed as an oversight the use of the term “bodily injury” in the definition of “occurrence” and inserted “personal injuries” in the place of “bodily injury” in the definition.
So construed, however, the policy yet remains limited in coverage to “occurrences” which result in personal injury (here, i.e., malicious prosecution), or property damage, within the policy period. The upshot of this “occurrence” limitation is that the instant incident of malicious prosecution was not subject to this policy. As discussed above, A.J.’s malicious prosecution “occurred” before the policy term began, when the malicious action was commenced against [the former president and chairman] in 1971. The gist of the wrong then was inflicted and complete.
The Court found no coverage under this Midland policy.
The second California case is Zurich Ins. Co. v. Peterson, 188 Cal. App.3d 438, 232 Cal. Rptr. 807 (1986), which involved a lawsuit filed by Tri-Tool against its president to rescind an employment contract. When the complaint was filed, Tri-Tool was insured by Home Insurance Company (“Home”). The Home policy agreed to indemnify Tri-Tool for damages because of injury arising out of the offenses of false arrest, detention, or imprisonment, or malicious prosecution, if such offense is committed during the policy period.
In February of 1980, the Home policy was replaced by a primary policy issued by American Guarantee and Liability Insurance Company (“AGLIC”) and an excess policy issued by Zurich Insurance Company (“Zurich”). The AGLIC policy agreed to pay all sums that the insured becomes legally obligated to pay as damages because of “personal injury,” which, in turn, was defined as an “injury arising out of one or more of the following offenses committed during the policy period” and listed false arrest, detention, imprisonment or malicious prosecution as the offenses. The Zurich policy also provided coverage for personal injury, including “injury resulting from false arrest, detention or imprisonment, … malicious prosecution ….” The policy defined an “occurrence” of malicious prosecution as “an act or series of acts of the same or similar nature, committed during this policy period which causes such personal injury.”
The Court of Appeal, Third Appellate District, noted that a favorable termination of the malicious action might be a prerequisite to the filing a malicious prosecution action, but it was not determinative of coverage because the policies at issue did not contain any reference to a particular date. Rather, to implicate coverage, the policies required the act or offense of malicious prosecution to have been committed during the policy period. The court then reviewed the Harbor Insurance Company case and noted that the Harbor court rejected the continuing occurrence concept and determined that the critical date was the filing of the complaint. The Court ruled,
It makes little difference whether the state or an individual controls the maliciously prosecuted action: an individual is first injured upon the filing of a complaint with malice and without probable cause. While some of the adverse consequences to the injured party will depend on whether a criminal prosecution is begun or a civil suit prosecuted, in each case a party’s reputation is injured and legal expenses are incurred at the initiation of the malicious complaint. The fact that damages increase as the prosecution continues does not transform malicious prosecution into a continuing occurrence. We join the reasoned decisions of the majority in holding that for purposes of an insurance policy which measures coverage by the period within which the “offense is committed,” the tort of malicious prosecution occurs upon the filing of the complaint.
Because the policies issued by Zurich and American came into effect after the date Tri-Tool filed its complaint against the president, neither insurer had an obligation to defend or indemnify Tri-Tool.
The interesting thing about California is the interplay between wrongful incarceration cases and California Insurance Code Section 533 (“Section 533”), which states, in part, that an “insurer is not liable for a loss caused by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.” In short, Section 533 precludes insurance coverage, or indemnity, for a “willful act,” but Section 533 does not apply to the duty to defend or to vicarious liability.
In Downey Venture, et al. v. LMI Ins. Co., 66 Cal. App. 4th 478, 78 Cal. Rptr.2d 143 (1998), the California Court of Appeal, Second Appellate District, held that Section 533 precluded coverage for malicious prosecution, even though such coverage was expressly provided in the policy, because malice is an element for establishing a claim for malicious prosecution. The Court of Appeal noted that in California, “the commission of the tort of malicious prosecution requires a showing of an unsuccessful prosecution of a criminal or civil action, which any reasonable attorney would regard as totally and completely without merit, for the intentionally wrongful purpose of injuring another person.” Id. at 154. The Court of Appeal ultimately held that because the commission of the tort of malicious prosecution constitutes a willful act within the meaning of Section 533, LMI was not obligated to indemnify the insured for such claim.
Ultimately, under California law, an insurer may have a defense obligation in wrongful incarceration cases, but there is a good chance that the insurer will not have an indemnity obligation to the extent that the liability of the insured(s) is based on “willful acts” of malicious prosecution.
The next installment will review the law in New Jersey, a jurisdiction that may have the oldest case law pertaining to insurance coverage for malicious prosecution cases.