California High Court to Address Occurrence Caused by Accident

June 19, 2017 by and

The California Supreme Court is set to address the issue of whether there is an “occurrence” under an employer’s commercial general liability policy when an injured third party brings a claim against an employer for the negligent hiring, retentionor supervision of an employee who sexually abused a student.

The Ninth Circuit Court of Appeals, in certifying the issue, explained it is unsettled under California law, and is of exceptional importance to injured parties, employers, and insurance companies doing business in California.

The Ninth Circuit further noted a deep division of the federal district courts of California exists given the absence of a controlling decision. The ruling could extend beyond the employment context, potentially affecting many allegedly injured by the willful acts of individuals supervised by an insured.

Ledesma & Meyer Construction Company Inc., Joseph Ledesma, and Kris Meyer (collectively “L&M”) entered into a construction contract with the San Bernardino County Unified School District (the “District”) to complete construction work at a middle school. The contract specified L&M would defend and indemnify the district from all claims resulting from L&M’s negligence, errors, acts or omissions.

L&M hired Darold Hecht as assistant superintendent of the project. L&M received notice of a tort claim filed against the district arising out of allegations Hecht sexually abused a 13-year-old student. Plaintiff Jane Doe’s complaint alleged Ledesma, who hired Hecht, had knowledge Hecht was a registered sex offender previously convicted twice of sexual abuse. The district tendered its defense to L&M pursuant to the contract.

Doe’s complaint named L&M, the district, Hecht, Joseph Ledesma, Kris Meyer and others as defendants. Doe’s complaint alleged claims for negligence; negligent hiring, retention and/or supervision; violation of the California education code; violation of California civil and penal codes; intentional infliction of emotional distress; violation of 42 U.S.C. ยง 1983; and battery.

L&M and the district tendered their defense to Liberty Surplus Insurance Corp. and Liberty Insurance Underwriters Inc. (collectively “Liberty”). Liberty defended L&M under a reservation of rights, and denied a defense to the district on the ground it was not an insured. L&M defended and indemnified the district against Doe’s claims pursuant to the contract.

Liberty filed a declaratory relief action in the Central District of California, seeking an order it was under no obligation to defend or indemnify L&M or the district in the underlying action.

L&M filed a counterclaim, and argued the policy at issue required Liberty to defend and indemnify L&M and the district.

In relevant part, the Liberty policy insuring agreement provided Liberty would pay sums it became legally obligated to pay as damages because of bodily injury. The insuring agreement also provided Liberty would have no duty to defend L&M against any suit seeking damages for bodily injury to which the insurance did not apply. The insurance applied to “bodily injury” if caused by an “occurrence.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The parties filed cross-motions for summary judgment, and the district court entered summary judgment in Liberty’s favor.

Relying on Delgado v. Interinsurance Exchange of Automobile Club of Southern California, 211 P.3d 1083 (Cal. 2009), it found L&M’s negligent hiring, retention, and supervision of Hecht was too attenuated from the injury-causing conduct committed by Hecht to constitute an “occurrence” — defined as an accident — under the policy.

The Ninth Circuit explained that the California Supreme Court, in Minkler v. Safeco Ins. Co. (Cal. 2010), signaled the unsettled nature of whether such intentional abuse constitutes an “occurrence” under a liability policy that defined “occurrence” as an “accident.”

Although the California Supreme Court declined to address the issue in Minkler, it referenced Delgado v. Interinsurance Exchange of Automobile Club of Southern California (Cal. 2009) and Hogan v. Midland National Ins. Co. (Cal. 1970), which contemplate the definitions of “occurrence” and “accident” as used in insurance policies.

The California Supreme Court’s opinion in Delgado may be instructive on the issue of whether there was an “occurrence” under the Liberty policy in Ledesma. Delgado provides in the context of liability insurance, an “accident” is an “unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause… It is the unexpected, undesigned, and unforeseen nature of the injury-causing event that determines whether there is an ‘accident’ within the policy’s coverage… A deliberate act causing an injury is not an accident.” The word “accident” in the coverage clause of a liability policy refers to the conduct of the insured for which liability is sought to be imposed on the insured.

In Hogan, the California Supreme Court explained that an all-inclusive definition of the word “accident” cannot be given where the occurrence is unexpected, unforeseen, or undesigned regardless of whether it comes from a known or unknown cause.

The Ninth Circuit explained that while Delgado and Hogan provide general guidance on the issue of whether deliberate conduct constitutes an “accident” under a liability policy, neither address the issue of whether claims of negligence in hiring, retaining and/or supervising an employee who commits a sexual assault fall within a policy’s coverage for an “occurrence,” which is defined as an “accident.”

The Ninth Circuit noted L.A. Checker Cab Co-op., Inc. v. First Specialty Insurance Co., an unpublished California Court of Appeal decision, in which the court ruled the alleged negligent supervision of a cab driver who intentionally shot a passenger did not constitute an “occurrence” under the insurance policy.

The Ninth Circuit also recognized the “deep division” at the district court level as to what constitutes an “occurrence” under an insurance policy. It explained certification to the California Supreme Court was particularly appropriate to determine the “consequential matter of state law.”

Applying the standards articulated in Delgado and Hogan, the parties will likely focus both on Hecht’s acts as well as L&M’s hiring of Hecht for the purpose of arguing their respective positions as to whether there was an “occurrence,” defined as an “accident,” and thus coverage under the Liberty policy.

If the California Supreme Court determines Hecht’s acts were both intentional and the “occurrence,” it could conclude there is no basis for coverage. However, it could also reach the conclusion that L&M’s hiring of Hecht constituted the “occurrence” — the “accident” — which could ultimately result in a determination coverage should have been extended.

The California Supreme Court’s decision will have a far-reaching impact on California law. Insurers, employers, and insureds should monitor the decision in this matter, and obtain advice from insurance counsel regarding the potential implications from this decision.