Starr initially denied coverage, but in a response to a letter from Adir, Starr withdrew the denial and agreed to defend Adir in the underlying action, subject to a full reservation of rights. Starr later received a later from California's Attorney General which noted that California Insurance Code (CIC) section 533.5 prohibited coverage because the Attorney General sought fines, penalties, or restitution pursuant to the UCL or the FAL. Starr then withdrew its defense.

Adir and its CEO sued Starr arguing that the policy provided coverage notwithstanding section 533.5 because injunctive relief was sought in addition to fines and penalties, and the action alleged liability based on more laws than just the UCL or the FAL. Starr responded by filing a counterclaim for the reimbursement of the defense costs paid before withdrawing the defense.

The court denied the motions filed by Adir and its CEO, stating that section 533.5 plainly applied to actions that included fines, penalties, or restitution pursuant to the UCL or the FAL, even if the action also involved other claims. Also, allowing Starr to defend the claim would undermine the goals of section 533.5. The court granted Starr's motion seeking reimbursement of defense costs. The court held that there was no potential for coverage because the claims did "not even possibly embrace any triggering harm." Adir argued that Starr was not entitled to reimbursement because the reservation of rights letter did not specifically reserve the right to seek reimbursement, or even mention section 533.5. The court, however, held that the policy itself depicted that Adir would reimburse Starr "[in] the event and to the extent that [Adir] shall not be entitled to payment of [] Loss." So, Adir was responsible for repayment of all amounts that Starr had paid in its defense.

Editor's Note: In this case, Starr Indemnity and Liability Company found themselves in a tight spot, maneuvering between potential bad faith allegations resulting from a failure to defend, and acting in compliance with the California Insurance Code's prohibitions on insurance coverage for damages resulting from allegations of unfair competition and false advertising. The court, in this case, chose to interpret section 533.5 of the California Insurance Code broadly and in doing so allowed Starr to recover the costs of defending Adir.