Have you ever wondered whether the liability policy you purchased covers losses you already knew about before you bought the policy? How much do you have to know? What if you knew about certain property damage at a construction project you caused but not about other related damage your policy would otherwise cover? A recent case from the Ninth Circuit sheds light on these issues, and it is good news for policyholders.
What’s a Policyholder to Do? California Court Permits “Conditional Judgment” Awarding Replacement Cost to PolicyholdersDecember 11, 2014 Iris Chou
When a covered property is damaged, the insured may face a quintessential Catch-22—the insured cannot afford to proceed with costly repairs or replacement without insurance money, but until the repairs or replacements are finished, the insured cannot recover under the replacement cost provision of the liability policy. A recent court decision held a policyholder must actually repair or replace the damage in order to claim replacement cost value, but may recover a “conditional judgment” for replacement cost benefits and satisfy the condition after trial. Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Co., 2014 Cal. App. LEXIS 1073, 2014 WL 6679263 (Cal. App. 1st Dist. Nov. 24, 2014) (“Stephens”). Stephens fashions a pragmatic approach whereby insurers can condition payment on actual replacement, while policyholders preserve their rights to benefits after proving coverage.
General liability insurers and their agents often lure commercial clients with grandiose promises of coverage for business operations, but upon receiving a notice of a claim, interpret their policy exclusions liberally to limit what they consider covered business operations so as to deny coverage. A recent case from the California Court of Appeal, Baek v. Continental, 2014 Cal App. LEXIS 893 (2d Dist. Oct. 6, 2014) (“Baek”), expanded on an insurer’s broad duty to defend wherever there is a potential for coverage but in this case denied a duty to defend.
Baek involved a Heaven Massage Wellness Center (“HMWC”) client, “Jaime W.,” who brought suit against HMWC and her massage therapist (“Jaime W. action”), Luiz Baek (“Baek”), for sexual assault during a massage, alleging Baek handled the “Plaintiff’s breasts, buttocks, inner thighs and genitals.” HMWC had a general liability insurance policy with Continental Casualty Co. (“Continental”) which covered employees or partners “only for acts within the scope of their employment” or committed “while performing duties related to the conduct of [HMWC’s] business.” Continental asserted there was no coverage, and HMWC sued for breach of contract and bad faith. The trial court granted summary judgment for Continental. Subsequently, Baek filed suit against Continental, alleging it had a duty to defend and indemnify him in the Jaime W. action as a covered employee of HMWC. Continental demurred on the ground that Baek was acting beyond his scope of employment. Baek then amended his complaint to include a breach of contract, breach of the implied covenant of good faith and fair dealing and fraud against Continental. Once again, Continental demurred and trial court again sustained the demurrer, finding there was no coverage, and no potential for coverage, because Baek’s actions did not fall within his scope of his employment. Baek filed a timely appeal.
The California Court of Appeal first addressed whether Baek qualified as an “employee” of HMWC eligible for coverage. Baek argued Continental owed him a duty of defense because the complaint in the Jaime W. action alleged that Baek was either a partner or employee of HMWC and the alleged sexual assault occurred within the scope of his employment, or while performing his duties related to HMWC’s business. Conversely, Continental argued that Baek did not qualify for coverage because his complaint alleged he was an independent contractor, and thus he did not qualify as an employee or partner of HMWC. As an initial matter, the court explained an insurer’s duty to defend was triggered when the insured becomes aware of, or a third party suit pleads, facts sufficient to give rise to the potential for coverage under the policy. This duty to defend is broader than the duty to indemnify, and an insurer may have a duty to defend if there is a potential of coverage, even if no damages are awarded and any doubts concerning the potential for coverage and a duty to defend were resolved in favor of the insured. Continental knew the plaintiff in the Jaime W. action would attempt to prove Baek was HMWC’s employee or partner under the HMWC policy. However, Continental argued Baek’s complaint alleged he signed an independent contractor agreement, and thus did not qualify as an employee or partner of HMWC. The court disagreed, noting that although Baek signed an independent contractor agreement with HMWC, he did not allege he was an independent contractor so as to preclude coverage. The court clarified that an insurer’s duty to defend arises if allegations by the third party, rather than the potential insured, taken as true, reveal a potential for coverage. Here, the complaint in the Jaime W. action alleged that Baek was, at all relevant times, an employee, owner or partner of HMWC. The court explained that in its coverage determination, Continental was bound to accept these allegations as true unless extrinsic facts established otherwise. Therefore, for coverage purposes, Continental had to assume Baek’s status as an employee under HMWC’s policy to determine whether there was a duty to defend.
Next, the court addressed whether Baek’s alleged sexual assault fell within the scope of his employment so as to trigger coverage by reviewing two cases involving similar issues. First, the court reviewed Lisa M. v. Henry Mayo Newhall Memorial Hospital, 12 Cal. 4th 291 (1995) which involved an ultrasound technician who sexually molested a patient during an ultrasound exam by inserting the ultrasound wand and his fingers into her vagina. There, the court held the technician’s employment did not motivate or engender the sexual molestation; rather, the technician took advantage of his work environment and consciously committed an assault for reasons unrelated to his work. In addition, the court clarified that although the technician’s job involved examining or physical contact with a patient’s otherwise private areas, his assault on the ultrasound patient was not a foreseeable consequence of that contact. Accordingly, the sexual assault was an independent decision unrelated to his duties. Next, the Court of Appeal examined Farmers Ins. Group v. County of Santa Clara, 11 Cal. 4th 992 (1995) where a deputy sheriff’s lewd propositioning and offensive touching of others at a county jail were found to fall outside the scope of employment, despite the proximity to the workplace. The ruling court noted that where an employee’s tort was “‘personal in nature, mere presence at the place of employment and attendance to occupational duties prior or subsequent to the offense’” did not “bring the tort within the scope of employment.” The Court of Appeal explained that like the ultrasound technician in Lisa M., Baek’s employment as a massage therapist gave him the opportunity to be alone with Jaime W., but nothing in the facts suggested the alleged assault was “‘engendered by’ or an ‘outgrowth’ of his employment,” and his motivation for committing the sexual assault was unrelated to his work. Hence, his action did not occur within the scope of his employment contemplated under the Continental policy.
The Court of Appeal determined Baek’s alleged touching of Plaintiff’s breasts, buttocks, inner thighs and genitals “indisputably were not ‘duties related to the conduct of [HMWC’s] business’” or the acts he was hired to perform, but constituted a “stepping away” from HMWC’s business, as the acts were performed for Baek’s own benefit, rather than HMWC’s. Accordingly, the court concluded Baek’s acts were not related to, and did not occur, with respect to the conduct of HMWC’s business so as to trigger coverage.
Finally, the Court of Appeal rejected Baek’s arguments that even if Continental had no duty to defend the sexual assault allegations, it had a duty to defend Jaime W.’s claims of negligence and false imprisonment. Briefly, the court explained the duty to defend depended on whether the alleged facts reveal a possibility of coverage, not the labels given to the causes of action. The complaint in the Jaime W. action alleged the massage was negligent, each defendant was negligent in hiring, training and supervising Baek and Baek deprived Plaintiff of her freedom of movement by use of deceit in setting up the massage room. First, the court explained that sexual fondling is an intentional act such that Baek could not be found to liable for negligence or failing to use due care in performing the massage or supervising his own actions. Second, the court stated the false imprisonment allegations were “inextricably intertwined” with the alleged assault, for which there was no coverage. Accordingly, Continental had no duty to defend these allegations.
The good holding in Baek for insureds is that persons who work under an independent contractor agreement may be eligible for coverage under the employer’s general liability policy because a third party complaint alleges he or she was a covered “employee.” Although the court ultimately held there was no coverage, this decision is significant for policyholders as it explains that even though the insured executed an independent contractor agreement, the acts by its so-called independent contractor may be within the scope of coverage under such a policy.
Insurers Have a Duty to Defend Where a Complaint Could Be Fairly Amended to State a Covered Liability; California Supreme Court Clarifies Duty to Defend Disparagement Claims Under Advertising Injury CoverageJune 20, 2014 Robert McKennon
An insurer has a duty to defend even if the causes of action in a lawsuit are not expressly covered by a liability policy if the factual allegations may support a potentially covered claim. This was expansive interpretation of the duty to defend adopted by the United States District Court Southern District of California in Millennium Laboratories, Inc. v. Darwin Select Insurance Company, __ F. Supp. 2d ___ (S.D. Cal. May 13, 2014). This highly significant decision further buttresses the now well-established position of courts in California that all of the facts and allegations in a lawsuit, not just the stated causes of action and facts stated in the complaint, must be considered in determining whether there exists a potentially covered claim triggering an insured’s duty to defend.
Policyholders often face a formidable challenge proving causation on property damage claims, particularly when insurance companies insist on deferring to their own experts and adjustors. Of course, insurance companies must conduct reasonable investigations and review and evaluate all of the evidence before making a claim decision. The Ninth Circuit Court of Appeals held in an insurance action where the policyholder provides admissible evidence showing a genuine dispute as to coverage, the evidence should be evaluated by a trier of fact. Pyramid Technologies Inc. v. Hartford Casualty Insurance Co., 2015 DJDAR 6205 (Cal. App. May 19, 2014).
Insurers providing general liability insurance cannot shirk their duty to defend insureds at the outset of litigation by relying on self-insured retention (SIR) provisions in those policies unless the policies expressly and unambiguously make the insurer’s duty to defend contingent upon the SIR. So held the Fourth District Court of Appeals in American Safety Indemnity Company v. Admiral Insurance Company, __ Cal. App. 4th ___, 2013 Cal. App. LEXIS 779 (2013). The court’s decision in American Safety is highly favorable to insureds because it substantially limits the ability of insurers to circumvent their obligation to pay first-dollar for the defense of their insured by arguing that the SIR has not been exhausted.
In a recent ruling, the California Court of Appeal held that an insurer’s general reservation of rights to deny coverage of damages outside its policy does not create a conflict of interest with the insured, such that the insured in entitled to Cumis counsel. The decision in Federal Insurance Co. v. MBL, Inc. __ Cal. App. 4th __, 2013 Cal. App. LEXIS 679, 2013 WL 4506149 (August 26, 2013) follows California precedent denying insureds the right to select independent counsel at the insurer’s expense absent an actual conflict of interest.
Insurers May Intervene and Assert the Same Rights as Their Insured's to Contest Both Liability and DamagesOctober 14, 2011 Robert McKennon
Under certain circumstances, an insurer has the right to intervene in a case against its insured to protect its own rights and to avoid harm to the insurer. These circumstances usually involve cases where an insured is either prevented from appearing and defending, or simply chooses not to and a default is taken against the insured. The recent case Western Heritage Insurance Company v. Superior Court, __ Cal. App. 4th __ (Oct. 11, 2011), addresses the second set of circumstances, and provides an examination of California intervention law and holds that an insurer has the right to intervene in a case and take over in litigation if an insured is not defending the action, and may contest both liability and damages while doing so.
Why Does The Pollution Exclusion in California Insurance Policies Exclude Asbestos Building Contamination But Not Pesticide Building Contamination?August 22, 2011 Eric Schindler
According to a recent California appellate court decision, a contractor’s negligent release of asbestos fibers during the removal of asbestos-containing acoustical spray in a condominium complex is excluded by the pollution exclusion in a homeowner association’s property and liability policy, despite a 2003 California Supreme Court ruling that a contractor’s negligent spraying of pesticide in an apartment complex is not excluded by a similar pollution exclusion in an apartment owner’s policy. The Villa Los Alamos Homeowners Association v. State Farm General Insurance Company, __ Cal. App. 4th __, 2011 WL 3586475 (August 17, 2011). How can that be?
New ED CA Decision is a Feast of First-Party and Third-Party Insurance Coverage and Bad Faith PrinciplesMarch 15, 2011 Eric Schindler
Every now and then a court decision comes along that is a virtual one-stop shop for basic insurance coverage and bad faith principles—a primer for newbie insurance attorneys and a refresher for seasoned litigators. Chief Judge Anthony Ishii’s recent decision granting in part and denying in part an insurer’s motion for summary judgment on a farm-owners insurance policy is one. Ted Gaylord, et al. v. Nationwide Mutual Insurance Company, et al., 2011 U.S. Dist. LEXIS 21736 (Eastern District of California, March 4, 2011). The Gaylord decision also sounds a cautionary note to policyholder attorneys to be mindful that first-party and third-party claims in a single action may be subject to different limitations periods.
Gaylord owns and operates a livestock operation, raising his own cattle and raising cattle for others. In June 2008 some of the cattle die suddenly. By September and October 2008 cattle begin dying at an alarming rate. Gaylord suspects feed poisoning. Autopsies and feed testing confirm that the cattle are dying from liver failure caused by toxic plants in the alfalfa feed. There is no known cure, so Gaylord gets permission from the Department of Agriculture to sell the cattle off for early slaughter—but at a financial loss for Gaylord and the other cattle owners.
Nationwide issued a farm-owners insurance policy to Gaylord in March 2008. One part insures against physical loss to covered property (first-party); one part insures against third-party liability claims. Gaylord says he moved his farm-owners insurance from Fireman’s Fund to Nationwide because his long-trusted insurance agent told him that Nationwide had better coverage, including coverage for cattle loss from poisoned feed. But Gaylord’s agent says he told Gaylord that a “custom feeding of livestock” endorsement was necessary to cover cattle loss from poisoned feed, and that Gaylord declined it because it was too expensive.