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Unanimous Calif. Supreme Court Finds Negligent Hiring and Supervision Invokes Coverage

By JoLynn M. (Pollard) Scharrer and Jennifer Tung

(as published in The Recorder June 20, 2018)

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, according to Liberty Surplus Insurance v. Ledesma & Meyer Construction Co., 418 P. 3d 400 (2018).

Readers may recall that, in 2010, a 13-year-old plaintiff sued Ledesma & Meyer Construction Co. Inc. (L&M) for its negligent hiring, retention and supervision of an employee that sexually assaulted the plaintiff at one of L&M’s projects. During the relevant time period, Liberty Surplus Insurance Corp. issued L&M a commercial general liability policy providing coverage for “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.”

While Liberty defended L&M under a reservation of rights, it also filed a declaratory relief action, seeking a ruling that it had no obligation to defend or indemnify its insured. Liberty asserted, and the district court agreed, that while L&M’s alleged negligent hiring, retention and supervision of its employee “set in motion and created the potential for injury, [L&M’s acts] were too attenuated from the injury-causing conduct” to trigger coverage.

In granting Liberty summary judgment, the district court stated that “California courts have consistently drawn a distinction between the immediate circumstances that inflict injury, and the preceding negligence that sets in motion the chain of events leading to that injury.” Further, the district court reasoned that L&M’s “supervision and retention are … not the injury causing acts,” and that “courts have rejected the argument that the insured’s intentional acts of hiring, supervision, and retaining are accidents, simply because the insured did not intend for the injury to occur.”

Taken up on appeal, the U.S. Court of Appeals for the Ninth Circuit asked the state’s highest court for guidance. In a resounding rejection of the district court’s ruling and analysis, the unanimous seven-justice California Supreme Court held that the negligent hiring, retention and supervision of an employee who intentionally injures a third party can in fact constitute an accidental “occurrence” that triggers coverage under a general liability insurance policy.

In its nuanced and comprehensive decision, the California Supreme Court relied on principles discussed in Minkler v. Safeco Insurance Co. of America, 49 Cal. 4th 315, 319 (2010)—an insurance coverage matter certified by the Ninth Circuit in 2009—and Delgado v. Interinsurance Exchange of Automobile Club of Southern California, 47 Cal. 4th 302 (2009)—a case cited by the district court to deny L&M coverage.

Minkler held that an exclusion barring coverage for intentional acts did not bar coverage for negligently failing to prevent another insured’s intentional acts, where the insurance applied separately to each insured. Minkler, however, did not raise the issue of whether intentional abuse constitutes an “occurrence” under a liability policy that defined “occurrence” as an “accident”—a question that remained unanswered and unsettled until now.

The California Supreme Court found that “our reasoning [in Minkler] establishes that L&M may be covered even though [the employee’s] intentional acts were beyond the scope of its policy.” Specifically, “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.”

In finding coverage, the California Supreme Court also relied on Delgado—an opinion actually cited by the district court in granting Liberty summary judgment. The Supreme Court rejected the district court’s interpretation and application of Delgado. Instead, it noted that Delgado emphasized that “the acts of the insured ‘must be considered the starting point of the causal series of events,” and that “an injury may be the result of more than one cause.” Accordingly, “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.

The California Supreme Court rejected other cases relied on by the district court as distinguishable (Merced Mutual Insurance v. Mendez, 2013 Cal. App. 3d 41 (1989), inapposite Foremost Insurance v. Eanes, 134 Cal. App. 3d 566 (1982), and American Empire Surplus Lines Insurance v. Bay Area Cab Lease, 756 F. Sup. 1287 (N. D. Cal. 1991)), or incorrectly applied (State Farm Mutual Automobile Insurance. v. Longden, 197 Cal. App. 3d 226 (1987), and Maples v. Aetna Casualty & Surety, 83 Cal. App. 3d 641 (1978)). The Supreme Court explicitly stated that the discussion in dicta in American Empire, subsequently adopted by the district court in Ledesma, that negligent hiring cannot be an “accident” is erroneous.

In a strongly worded conclusion, the California 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.

With Ledesma, the Supreme Court has provided much needed guidance to insurers, insureds, and their attorneys alike regarding what coverage insureds should currently expect from their insurers. As the Supreme Court itself recognized, however, 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. (Pollard) Scharrer is a shareholder at Hunt Ortmann and leads the firm’s employment law group and insurance group. She can be reached at scharrer@huntortman.com.

Jennifer Tung is an associate at the firm. She handles a broad range of commercial and construction litigation matters, and can be reached at tung@huntortmann.com.

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