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No Liberty For Insurers-Negligent Hiring And Supervision Invokes Coverage

By JoLynn M. Scharrer and Jennifer Tung

It’s official: the negligent hiring and supervision of an employee who goes on to intentionally injure a third party may constitute an “occurrence” that triggers coverage under a general liability insurance policy.

Over a year after the Ninth Circuit asked the state’s highest court to weigh in, this week a unanimous seven-judge California Supreme Court sided with Ledesma & Meyer Construction Company, Inc. (“L&M”), and against its insurers Liberty Surplus Insurance Corporation and Liberty Insurance Underwriters, Inc. (collectively, “Liberty”). Readers may recall that, while Liberty defended L&M under a reservation of rights, it also sought a court declaration that it had no obligation to defend or indemnify its insured. Liberty asserted, and the lower court agreed, that L&M’s alleged negligent hiring, retention, and supervision of the bad actor “set in motion and created the potential for injury, they were too attenuated from the injury-causing conduct….”

The state Supreme Court, however, determined that the lower court misapplied California law. It reasoned that: “L&M’s allegedly negligent hiring, retention, and supervision were independently tortious acts, which form the basis of its claim against Liberty for defense and indemnity.” The Supreme Court served a reminder that, “in analyzing the potential for coverage, the focus is properly on the alleged negligence of L&M as the insured employer” and not on the intentional conduct of its employee.

In a strongly worded conclusion, the Supreme Court cautioned that:

“Liberty’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. The requirements for liability of this kind are not easily met, but they are well established. 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.”

As the Supreme Court itself recognized, coverage can be precluded with an applicable exclusion. Thus, while there may be an increased demand for defense of new claims or re-evaluations of prior tenders, insurers will simply modify policies to exclude coverage, or include coverage by endorsement for an additional premium. Accordingly, though this is certainly a victory for insureds, long-term ramifications to coverage will likely be short-lived.

JoLynn M. Scharrer is a Shareholder at Hunt Ortmann who, for 30 years, specializes in the fields of business and insurance counseling and litigation, as well as employment. Ms. Scharrer leads the Firm’s growing Employment Law Group, and also spearheads Hunt Ortmann’s burgeoning Insurance Group.

Jennifer Tung is an associate with Hunt Ortmann who’s practice includes general business litigation and contract disputes. If you would like additional information about the subject matter of this bulletin, please contact Jennifer Tung at tung@huntortmann.com

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