In Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., Inc., No. S236765 (Cal. Jun. 4, 2018), the California Supreme Court found that an insured sued on the basis that it negligently hired, retained, and supervised an employee who intentionally sexually abused a minor, may potentially state a covered “occurrence” or “accident” under a commercial general liability policy. The court’s opinion builds on the extensive California law construing the occurrence requirement. It disrupts holdings by lower courts finding that because the abuser’s intentional acts are the immediate cause of injury, no occurrence or accident is stated as to the abuser’s employers.
Facts and Procedure
The insureds, Ledesma & Meyer Construction Company and its principals (Ledesma), contracted with San Bernardino Unified School District to manage a construction project at a middle school. Their employee, Hecht, allegedly sexually abused a 13-year-old student (claimant Jane Doe) during the project. The only cause of action against the insureds was for negligent hiring, retention, and supervision of Hecht.
Plaintiff Liberty defended Ledesma under a reservation of rights on the basis that there was no occurrence. It sued for declaratory relief in federal court. The district court granted Liberty’s summary judgment motion on the occurrence issue, finding that the claim asserted against the insureds’ negligent retention, hiring, and supervision of Hecht was too attenuated from the immediate cause of injury (Hecht’s abuse) to constitute an occurrence. The Ninth Circuit certified the coverage question to the California Supreme Court.
Court’s Analysis and Holding that Negligent Employment Practices May Constitute an Occurrence or Accident
It has been almost a decade since the California Supreme Court last took up the occurrence requirement in CGL policies. The court largely reaffirmed its last, comprehensive examination of the issue, Delgado v. Interinsurance Exchange of Automobile Club of Southern California, 47 Cal. 4th 302 (Cal. 2009).
Under long-settled California law, an accident is “an unexpected, unforeseen, or undersigned happening or consequence from either a known or an unknown cause.” Central to both Ledesma and Delgado is the consideration that the subject conduct must be considered from the insured’s point of view. In Delgado, the claimant’s expectation of an assault by the insured was not dispositive, and here, likewise, the non-insured tortfeasor’s expectation of injury is not dispositive. Further, Ledesma’s liability was not vicarious or derivative of Hecht’s; the negligent employment practices theory was an independent theory of liability. Because Hecht’s abuse of Doe could fairly be an “unforeseen fortuity” from the point of view of Ledesma, an occurrence was potentially stated.
The court’s ruling precludes any argument that negligent employment practices — and hiring in particular — are inherently intentional and non-accidental, as held in American Empire Surplus Lines Insurance Co. v. Bay Area Cab Lease, 756 F. Supp. 1287 (N.D. Cal. 1991).
The court indicated, in dicta, that the term accident is more comprehensive than the term “negligence” and “thus includes negligence.” Opn. at 3. The court’s statement is overly broad and, taken literally, could disrupt the line of cases finding that a negligent misrepresentation cause of action can never constitute an accident because such a cause of action requires that the tortfeasor intended for the claimant to rely upon his or her misrepresentation. Chatton v. Nat. Union Fire Ins. Co., 10 Cal. App. 4th 846, 861 (1992); Miller v. W. Gen. Agency, Inc., 41 Cal. App. 4th 1144, 1150 (1996).
Concurrence: Insured’s Point of View, Intentional Conduct, and Consent
Justice Liu concurred with the result by the majority but concurred separately to grapple with a 1989 California appellate case, Merced Mutual Insurance Co. v. Mendez, 213 Cal. App. 3d 41 (Cal. Ct. App. 1989). Merced also concerned sexual abuse. In Merced, the insured, Mendez, was the alleged abuser. Mendez argued that he believed his victim consented to his conduct. Justice Liu pointed out that the insured’s honestly held belief that the victim consented should mean that the injury resulting from lack of consent was an unforeseen fortuity.
Justice Liu resolved the Merced conundrum by deciding that the Court of Appeal must have “implicitly rejected” that the insured honestly believed his victim consented to the assault. Conc. Opn. at 6. Because Mendez didn’t really believe there was consent, there was no intervening fortuity — Mendez meant to sexually assault the victim and did so.
However, and as the majority notes (Opn. at 4), sexual assault is uninsurable under California Insurance Code section 533, barring coverage for willful acts. Even if, under Justice Liu’s rubric, an insured’s sexual assault could be accidental, it is nevertheless still “willful” as a matter of law and uninsurable. To the extent that Justice Liu’s concurrence raises an issue that should be resolved, i.e., whether something can be simultaneously unforeseen and willful, that is an issue for another day. Opn. at 10 n.8.
Ledesma does not represent a great change in California’s occurrence law. It reiterates the parameters it set forth in Delgado: that if, between the insured’s acts and the alleged injury a fortuity that is unforeseen from the point of view of the insured intervenes, then an occurrence may be stated. To the extent Ledesma adds anything of significance to California occurrence law, it is that each independent cause of action against an insured must be viewed separately from the conduct of others.