On March 5, the U.S. Court of Appeals for the Ninth Circuit declined to broaden the reach of California’s Section 533 — which generally prohibits insurance for willful wrongful conduct — when it ruled that Hartford Casualty Insurance Co. must cover a California-based lender’s costs to defend a suit over its alleged practice of charging illegal fees for mortgage modification services.

The panel said a California federal court erred when it ruled in March 2017 that Hartford doesn’t have to cover First One Lending Corp.'s legal costs in a now-settled suit filed by nonprofit organization Neighborhood Assistance Corp. of America.

In its opinion, the Ninth Circuit panel said neither the law nor the exclusion entirely forecloses coverage for the nonprofit’s suit because, for instance, the nonprofit’s complaint included a count for trademark infringement — which does not require a showing of intentional conduct and does not concern First One’s financial services, the panel noted.

According to Pillsbury senior counsel Joan Cotkin, Hartford’s arguments represented a continuing effort by the insurance industry “to expand the reach of Section 533 far beyond what its original intent was supposed to be.” Cotkin said insurers have increasingly cited the law to try to extinguish coverage for suits that primary allege willful acts by a policyholder but also contain claims of nonintentional conduct.

“Basically, what it comes down to is that insurers have for decades been trying to expand the scope of Section 533 as a kind of escape valve when no other exclusions apply,” Cotkin said. “I think the Ninth Circuit correctly decided the issue of the duty to defend because these were not circumstances that conclusively eliminated the potential for coverage.”