Learn Spanish (Latin America): En la historia, el diablo es malo.

The adjective malo changes meaning depending on the verb. With ser (like es malo), it describes a core characteristic, meaning "evil" or "bad by nature." If you used estar (está malo), it would mean "sick" or (for food) "spoiled."

Does historia mean "story" or "history"?

It can mean both! You have to rely on context to know which one is meant. Here, it clearly means "story." If you want a word that specifically means a fictional tale or short story without the double meaning, you can use the word cuento.

Could I say es mal instead of es malo?

No, because malo only drops its final "o" (becoming mal) when it is placed directly before a masculine singular noun, like in un mal día (a bad day). Because it comes after the verb here, it must stay malo.