Adir International, LLC, et al. v. Starr Indemnity and Liability Company

California Insurance Code § 533.5 prohibits private parties from using insurance proceeds to defend themselves against a wide range of claims brought by the State. The statute requires no hearing or showing of probable cause or reasonable suspicion. Parties who face such claims may thus be stripped of a standard means of funding their defense, even if purchased with untainted funds, based on the State’s mere allegation of wrongdoing. Moreover, the statute’s history reveals that California enacted the statute for the sole purpose of discouraging parties from mounting a vigorous defense in cases in which the State was experiencing a “specific problem”—namely, that such cases were proving “impossible to settle.” Mt. Hawley Ins. Co. v. Lopez, 215 Cal. App. 4th 1385, 1402, 1403 (2013), as modified (May 29, 2013). In the decision below, the Ninth Circuit recognized that, in enacting § 533.5, “California has stacked the deck against defendants facing these lawsuits filed by the state” without having “prove[d] any of [its] allegations,” but held that the law was not sufficiently “extreme” to violate due process because petitioners were able to hire counsel using other resources. App. 9a, 12a. The question presented is: Whether the Due Process Clause of the Fourteenth Amendment permits a State to prohibit private parties from using untainted funds, such as otherwise lawful insurance, to defend themselves against lawsuits only where the State itself is the opposing party, without providing a hearing or requiring any evidentiary showing of wrongdoing.