Broad high court ruling is a win for insureds

On Monday, the California Supreme Court rendered its decision in the Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., 2018 DJDAR ___. In Liberty, the court addressed the question certified by the 9th U.S. Circuit Court of Appeals: "When a third party sues an employer for the negligent hiring, retention, and supervision of an employee who intentionally injured that third party, does the suit allege an 'occurrence' under the employer's commercial general liability policy?"

How the California Supreme Court should answer that question was the subject of considerable debate, with a substantial number of parties filed amicus briefs, including the Los Angeles Unified School District and the National Center for Victims of Crime (on behalf of the insured) and the Complex Insurance Claims Litigation Association and the American Insurance Association (on behalf of the insurer).

In Liberty, a construction company had been sued by a 13-year-old student who claimed that one of its employees had sexually abused her. She sued the construction for negligently hiring, retaining and supervising the employee.

The construction company tendered its defense to its two insurers. Its primary insurer filed suit in federal court contending that it had no duty to defend or indemnify its insured. A federal district court had accepted the insurer's argument that there was no "occurrence" because the allegedly negligent hiring, retention and supervision were "too attenuated from the injury-causing conduct" committed by the employee. It also held that the insured's intentional acts of hiring, supervising and retaining were not "accidents" simply because the insured did not intend for the injury to occur."

The California Supreme Court started its discussion by noting that an "accident" is "'an unexpected, unforeseen, or undersigned happening or consequence from either a known or an unknown cause.'" It explained that the term "accident" "is more comprehensive than the term 'negligence' and thus includes negligence."

The court acknowledged that the employee's sexual misconduct was a "'wilful act' beyond the scope of insurance coverage." However, it held that the employee's intentional conduct "does not preclude potential coverage" for the employer-insured." As the court explained, "It is important to keep in mind that a cause of action for negligent hiring, retention, or supervision seeks to impose liability on the employer, not the employee."

The court further noted that "[b]ecause liability insurance is a contract between insurer and insured, and the policy is read in light of the parties' expectations, the relevant viewpoint is that of the insured rather than the injured party."

The court also acknowledged and accepted the insured's arguments that "the employee's acts were neither expected nor intended from its perspective." The court's acceptance of this argument is consistent with standard language found in general liability policies, which excludes only claims of "bodily injury" or "property damage" "expected or intended from the standpoint of the insured." Commercial General Liability Coverage Form, Section 1, Coverage A, ¶ 2.a (Insurance Services Office, Inc. 2012).

The court then went on to address the question of whether the hiring of an employee could ever be covered. It rejected earlier holdings that "negligent hiring cannot be an 'accident,' finding them to be 'erroneous.'"

The court then explained in detail why coverage would be afforded. It noted that the insured's "allegedly negligent hiring, retention and supervision were independently tortious acts, which form the basis of its claim against [the insurer] for defense and indemnity." It then pointed out that the employee's molestation "was the act directly responsible for the injury, while [the insured's negligence in hiring, retaining, and supervising him was an indirect cause." But, it reasoned that the insured's acts "must be considered the starting point of the series of events leading to [the plaintiff's] molestation. [The insured] does not rely on any event preceding its own negligence to establish potential coverage. As alleged by [the plaintiff], the 'occurrence resulting in injury' began with [the insured's] negligence and ended with [the employee's] act of molestation."

In so holding, the court discussed various decisions consistent with its holding. And, there are myriad such decisions. See, e.g., Minkler v. Safeco Ins. Co., 49 Cal. 4th 315 (2010) (policy covers mother sued for negligent supervision of son who allegedly molested a boy; her "coverage must be analyzed on the basis of whether she herself committed an act or acts that fell within the intentional act exclusion"); Century-Nat'l Ins. Co. v. Garcia, 51 Cal. 4th 564 (2011) (policy covers insured whose son set fire to their residence; "the standard form fire policy must be construed as including a willful acts exclusion that is protective of innocent insureds"). Furthermore, many liability policies cover an "innocent" insured when it is liable for the acts of another insured under the policy. Indeed, "when a policy covers multiple insureds and the insurer asserts that an exclusion precludes coverage, the fact the exclusion might apply to bar coverage for one of the insureds does not automatically preclude coverage for the other insureds." Smith Kandal Real Estate v. Continental Cas. Co., 67 Cal. App. 4th 406 (1998). See, e.g., Arenson v. Nat'l Auto. & Cas. Ins. Co., 45 Cal. 2d 81 (1995) (intentional conduct exclusion has "no application to a situation where the plaintiff is not personally at fault").

At the end of its decision, the court did not equivocate, and resoundingly rejected the insurers' arguments: "[The insurer's] arguments, if accepted, would leave employers without coverage for claims of negligent hiring, retention, or supervision whenever the employee's conduct is deliberate. Such a result would be inconsistent with California law, which recognizes the cause of action even when the employee acted intentionally. ... Absent an applicable exclusion, employers may legitimately expect coverage for such claims under comprehensive general liability insurance policies, just as they do for other claims of negligence."

In so holding, the California Supreme Court ruled broadly in favor of insureds, reaffirming the substantial protection that has been recognized for decades and that would have been removed had it accepted the insurers' arguments.