California Court of Appeal Emphasizes Just How Broad the Duty to Defend Is, which Includes Suits Alleging Even RapeApril 01, 2015 Robert McKennon
A liability insurer’s duty to defend its insured against lawsuits is extremely broad, much broader than its duty to indemnify its insured for a judgment entered against it. That has been the law in California for decades. But just how broad is the duty to defend? Does it extend to civil lawsuits alleging the insured raped and sexually assaulted the plaintiff? Does it extend to lawsuits alleging intentional acts by the insured? You bet it does if the policy contains the right language.
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.
Policyholder Wins Handed Down in Insurance Decisions. Daily Journal Publishes McKennon Law Group PC Article.February 12, 2014 Scott Calvert
The February 10, 2014 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “Policyholder Wins Handed Down in Insurance Decisions.” In it, Mr. McKennon discusses six insurance decisions handed down in California and federal courts in 2013 that were favorable to policyholders.
The Reasonable Expectations of the Covered Party, Even an Additional Insured, Determines the Interpretation of Ambiguous Policy LanguageJanuary 27, 2014 Robert McKennon
In California, courts have long held that where a policy provision is ambiguous because it is susceptible to multiple interpretations, the reasonable expectation of the covered party governs. But which parties’ objectively reasonable expectations should govern where there are both a named insured and an additional named insured claiming coverage? In its significant decision in Transport Insurance Company v. Superior Court of Los Angeles County, __ Cal. App. 4th __, 2014 Cal. App. LEXIS 28 (Jan. 13, 2014), the Court of Appeal of California held that it is the objectively reasonable expectation of each party seeking coverage that is applied in determining the meaning of language within an insurance contract as it applies to that party, even where it is an additional insured who is not a party to the contact.
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 Forfeit Their Protections Under Civil Code Section 2860 (Cumis Statute) When They Fail to Meet Their Duty to Defend ObligationsJune 27, 2013 Robert McKennon
If you want to read an important case on Cumis counsel and the consequences to insurers who fail to fulfill their obligations relating thereto, we have one for you. J.R. Marketing LLC v. The Hartford Cas. Insurance Co., __ Cal.App.4th __ (May 17, 2013). This case has a lot to offer: Cumis counsel, attorneys’ fees, Buss allocations, duty to defend, and insurance bad faith issues. In this case, the California Court of Appeal for the First District handed down a very important decision that is highly beneficial to insureds and their independent counsel (i.e., Cumis counsel). Significantly, the court expanded upon the limitations on the ability of insurers to impose upon their insureds’ choice of defense counsel when they do not properly defend their insureds, most likely committing insurance bad faith. Specifically, the Court found that insurers who wrongfully refuse to defend their insureds are barred from maintaining suits against their insureds’ independent counsel for reimbursement of fees and costs charged by such counsel and are barred from relying on the protections afforded insurers under Civil Code section 2860.
Reasonable Interpretation of Statute Does Not Preclude Triable Issue of Fact on Insurance Bad Faith ClaimMay 10, 2013 Sean Crane
A recent California Court of Appeals decision sought to clarify the application of California Insurance Code Section 533.5(b) concerning the statute’s preclusion of an insurer’s duty to defend its insured in criminal actions. In Mt. Hawley Insurance Co. v. Richard Lopez, Jr.,__Cal.App.4th___, 2013 Cal. App. LEXIS 346 (May 1, 2013) the Court of Appeals held that Section 533.5 (b) is not applicable to criminal actions brought by federal prosecuting authorities, and thus is limited to precluding the insurer’s duty to defend its insured in state criminal actions brought by the Attorney General, any district attorney, any city prosecutor, or any county counsel. The Court importantly held that the insurer’s Motion for Adjudication of the insured’s bad faith claim should be denied given the insurer’s potentially unreasonable actions even though the insurer gave a reasonable interpretation to an insurance code section.
California Court of Appeal Upholds Insurance Coverage for Health Net Finding The "Dishonest Acts" Exclusion Did Not Preclude CoverageMay 29, 2012 Robert McKennon
In Health Net, Inc. v. RLI Insurance Company, et al., the California Court of Appeal, Second District, reversed a trial court’s entry of judgment on a Motion for Summary Judgment finding some coverage for Health Net, Inc. (“Health Net”) in connection with numerous lawsuits filed against it arising under the Employee Retirement Income Security Act of 1974 (“ERISA”). Health Net brought suit against four of its insurers (one primary and three excess carriers) seeking a declaratory judgment that the insurers had a duty to defend and indemnify Health Net in over 20 underlying actions involving Health Net’s insurance plans provided by employers, which plans were subject to the requirements of the ERISA. The parties, however, directed their attention to two specific underlying actions, as the amount of indemnity sought in those actions would far exceed the combined policy limits of the defendant insurers. Relying on a policy exclusion for “dishonest acts,” the trial court granted summary adjudication to the insurers with respect to Health Net’s claim for reimbursement of its defense costs and the costs of settling the specified underlying actions. The parties subsequently settled their dispute regarding the remaining underlying actions, and summary judgment was granted in favor of the insurers. Health Net appealed the ruling.
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.