David E. Weiss and Kerry Roberson | ReedSmith | June 11, 2018
On Monday, June 4, 2018, the California Supreme Court ruled that an insurance company must provide liability coverage to its corporate insured against claims of negligent hiring, retention, and supervision of its employee, who allegedly sexually assaulted a 13-year-old child. The case is Liberty Surplus Ins. Corp. v. Ledesma & Meyer Construction Co., Inc., Case No. S236765 (June 4, 2018). This decision is “of exceptional importance to injured parties, employers, and insurance companies doing business in California,” wrote the U.S. Court of Appeals for the Ninth Circuit, in an order certifying the issue to the California Supreme Court.
In 2002, Ledesma & Meyer Construction Co. (L&M) entered into a contract with the San Bernadino School District for a construction project at a local middle school. L&M hired Darold Hecht to work on the project. In 2010, a 13-year-old student at the school (Jane Doe), filed suit asserting numerous claims against L&M, alleging that she was sexually abused by Hecht. One of Doe’s claims against L&M alleged negligent hiring, retention, and supervision of Hecht. L&M’s insurer, Liberty Surplus Insurance Corporation, agreed to defend L&M under a reservation of rights.
Liberty sought declaratory judgment in federal court that Liberty was not obligated to defend or indemnify L&M against Doe’s lawsuit, arguing that L&M’s negligence did not constitute an “occurrence” under the commercial general liability policy. The policy provided L&M coverage for liabilities arising from “bodily injury” caused by an “occurrence.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The District Court held that Liberty was not obligated to defend or indemnify L&M in the underlying action because L&M’s negligent hiring, retention, and supervision of Hecht was “too attenuated from the injury-causing conduct” of Hecht to fit the policy definition of “occurrence.”
L&M appealed to the United States Court of Appeals for the Ninth Circuit, which then issued an order certifying the issue to the Supreme Court of California. The Ninth Circuit sought guidance because “California law [wa]s unsettled in this area,” and because of the “significant precedential and public policy importance” of the outcome. The Supreme Court of California agreed to answer the following question: “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?”
The Court explained that the term “accident” in liability insurance policies in California is a settled matter. “[A]n accident is ‘an unexpected, unforeseen, or undersigned happening or consequence from either a known or unknown cause” and refers to the conduct of the insured. Additionally, the term “includes negligence,” which indicates that a policy that provides coverage to the insured for injuries caused by an “accident” includes coverage for injuries resulting from the insured’s negligent actions.
The Court also analyzed the District Court’s decision and determined that the court engaged in faulty reasoning both in terms of causation and its reading of the relevant case law. The District Court determined that L&M’s alleged negligent actions were “too attenuated” from Hecht’s actions to be considered the “cause” of Doe’s injuries. However, this line of reasoning runs contrary to California cases that have recognized that negligent hiring, retention, or supervision can be a substantial factor in causing the harm to a third party due to the actions of an employee.
Additionally, the District Court misplaced reliance on a number of cases to support its proposition that L&M’s allegedly negligent actions do not qualify as “accidents” simply because they did not anticipate the injury to occur. However, the cases that the District Court cited were distinguishable from the case at hand in various critical ways and thus did not support the District Court’s proposition.
Minkler v. Safeco Ins. Co. of America is the controlling authority on this issue (Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315.) In Minkler, a Little League coach was sued by a player for sexual molestation. The player also sued the coach’s mother for negligent supervision and failure to prevent the molestations in her home. The coach and the mother committed independent torts, but the coach’s intentional actions did not preclude the mother from coverage. Although insurance does not usually cover intentional injuries, the Court stated, “[t]here is no overriding policy reason why a person injured by sexual abuse should be denied compensation for the harm from insurance coverage purchased by the negligent facilitator.”
If the Court had decided in Liberty’s favor, employers would not be covered for claims of negligent hiring, retention, or supervision in situations where employees engage in intentional actions, a result that would be fundamentally inconsistent with existing California case law. For that reason, the court ruled in favor of L&M, stating that, “absent an applicable exclusion, employers may legitimately expect coverage for [claims of negligent hiring, retention, or supervision whenever the employee’s conduct is deliberate] under comprehensive general liability insurance policies, just as they do for other claims of negligence.” This holding protects the reasonable expectations of policyholders and makes clear that the coverage analysis should be focused on the conduct alleged against the particular insured seeking coverage. Thus, if there are claims against multiple actors, the specific claims against each individual actor need to be analyzed separately.
The California Supreme Court’s decision will have implications beyond the employment situation dealt with in the case; for instance, the Court ordered briefing deferred in Travelers Property Casualty Co. of America v. Actavis, Inc., Case No. S245867, pending this decision. In that case, the Court will consider whether Travelers owed its pharmaceutical company insured a duty to defend or indemnify in an action involving underlying claims involving liabilities arising from the sale and marketing of opioids. We will report on that decision as soon as it comes down.