Following the June 4, 2018 landmark decision by the California Supreme Court in Liberty Surplus Insurance Corporation v. Ledesma & Meyer Construction Company, 5 Cal. 5th 216 (2018), the insurance industry is not taking the decision to heart—but rather continuing to wage war on their insureds to avoid paying claims for unintended injuries, when caused by “intentional” conduct. In Ledesma, the majority opinion determined that an employee’s molestation of a third party, Doe, “may be deemed an unexpected consequence of L&M’s independently tortious acts of negligence (in hiring, maintaining and supervising the employee.) “ The Court also noted, as stated in Minkler (49 Cal. 4th at p 327, fn4), “the public policy against insurance for one’s own intentional sexual misconduct does not bar liability coverage for others whose mere negligence contributed in some way to the acts of abuse…” A concurring opinion by Justice Liu would have gone farther to find that an “accident” can include intentional conduct resulting in unintended harm (the policy was an “occurrence” based liability policy, where “occurrence” was defined as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.”)
The concurring opinion noted that “…in a liability insurance policy, an “accident” does not necessarily refer to the conduct of the insured, rather it is an “unexpected, unforeseen, or undersigned happening or consequence … resulting from the conduct of the insured.” Justice Liu noted that: “This understanding of “accident “is consistent with the court’s answer to the question presented.” Justice Liu disagreed with the majority opinion which applied (Delgado, 47 Cal 4th 302, 315) by finding “in determining whether the injury is a result of an accident, taking into consideration acts or events before the insured’s acts would be illogical and contrary to California case law.” Rather, Justice Liu noted there are “myriad situations where we would examine prior events to determine whether an insured’s acts resulted in an accidental injury. For example, suppose an insured driver steps on the accelerator because a passenger spilled coffee on the driver and as a result the car hits another car and causes injury … In determining whether the injury was accidental, we would of course look to the act of the coffee-spilling passenger, even though the passenger was not the insured.” But that was not the onlypoint Justice Liu made in differing with the majority opinion.
Justice Liu would also have overruled the faulty analysis in Merced Mutual Ins. Co. v. Mendez (1989) 213 Cal. App. 3d 41, which held no accident occurred when an insured sexually assaulted a victim, whom the insured claimed to have honestly believed had consented to the sexual activity. The Mendez decision stated there was no accident and thus no coverage because there was no “additional, unexpected, independent or unforeseen act” that occurred. In order to harmonize the Ledesma decision, according to Justice Liu, it is necessary to note the error in the Mendez opinion because it overlooked the fact that the insured claimed he did not realize that the victim was not consenting. Thus, there was an “accident,” and therefore, no requirement of any “additional, unexpected, independent or unforeseen act” if the insured honestly intended no harm.
How then to consider the case now pending in the Ninth Circuit, Cybernet Entertainment LLC v. State Compensation Insurance Fund (Case No. 18-15082)? In Cybernet, the insured appealed a no coverage determination by the trial court where the liability insurer refused to defend its insured against claims of bodily injury made by Cybernet employees. Cybernet is in the business of producing erotic video purveyed on the Internet. It supposedly had established standards of sanitation which allowed its performers to avoid HIV and other sexually transmitted diseases, which might be contracted during the filmed performances. The underlying plaintiffs alleged that they were assured that working for Cybernet would be safe and condoms and other barriers would be required; but, in fact, they were not. The plaintiffs claimed physical injuries and infections followed as a result of that failure. On the basis of those allegations, the plaintiffs alleged counts of Negligence, Negligence per se; Breach of the Implied Covenant of Good Faith and Fair Dealing and Negligent supervision, hiring and retention. The latter three claims are identical to those theories pursued against Ledesma and for which the California Supreme Court found coverage.
Cybernet denied all the allegations, and sought liability coverage from State Fund under the Employers Liability section of the policy.
The issue is whether the Employers Liability side of a workers comp policy, under which Cybernet sought a defense, would be required to defend against these claims, notwithstanding two coverage defenses raised by the insurer: exclusivity of workers compensation (barring any coverage under the Employers Liability side of the policy) and the intentional conduct exclusion.
The underlying plaintiffs had pursued workers compensation which State Fund also disputed. Those claims were pending before the WCAB.
The insured, Cybernet, did attempt to have the trial Court dismiss the plaintiffs’ civil lawsuits under the exclusive remedy doctrine, but the court refused, relying on assertions that the plaintiffs were independent contractors, not employees, and on other exceptions to the exclusive workers comp remedy—such as “unprovoked physical act of aggression of another employee.” Initially, State Fund defended, but later withdrew, the defense, relying on Exclusion 4 (workers comp benefits) and Exclusion 5 (intentional injury.)
Cybernet argues the plaintiffs’ lawsuit alleges claims of intentional employer conduct, which bring the employer beyond the boundaries of the compensation bargain (thus they are not subject to the exclusive remedy exclusion). However, this does not mean the claims are that the employer intended to harm the employees. Indeed, Cybernet faced potential liability in the civil action without (or outside of) the plaintiffs having to prove their employer intended to harm them. The claims included that the employer failed to provide a safe working environment and included, in particular, allegations of negligent hiring and supervision of others who allegedly harmed the plaintiffs. Relying on the exclusions to bar coverage required State Farm to prove that the exclusion “applies in all possible worlds”—conclusive, undisputed evidence that supports no potential for coverage [Atlantic Mutual Ins. Co. v. Lamb 100 Cal App 4th 1017 (2002) Montrose Chem. Corp. v. Sup Crt. 6 Cal 4th 287, 300 (1993)]. If there is any potential for coverage under the Employers Liability side of the policy, there is an obligation to defend. The Policy specifically covered “bodily injury by accident” and defined “accident” as “an event that is neither expected nor intended from the standpoint of the insured.” To avoid coverage, State Fund must prove that either the entire case belongs in workers compensation (Exclusion 4) or that all damages or bodily injury were “intentionally caused or aggravated” by the insured (Exclusion 5). Cybernet argued that neither exclusion fully applied to bar a defense. The first only applied to negligence acts based claims, whereas the second could not bar the intentional acts claims because Cybernet did not intend any injury. It is important to note that Cybernet sought a dismissal of the pending lawsuits on the basis that they all belonged in workers comp—but the judge overruled the demurrers, refusing to decide whether the plaintiffs were independent contractors (not subject to worker compensation) and whether, in any case, the exception for “unprovoked physical act of aggression of another employee” may apply to keep the civil action from being dismissed, in favor of workers compensation. Under the reasoning in the Ledesma opinion, it appears there should be a defense, as there is a potential for coverage under the Employers Liability portion of the policy.
State Fund argued the exclusive remedy exclusion applied, arguing the conduct of the employer fit within the facts of other opinions that had applied the same remedy. The Fund noted the District Court had distinguished between the negligence based claims for which it applied Exclusion 4 of the exclusive remedy, and those alleging intentional conduct as not fitting within this exclusion. The Fund argued the exclusive remedy exclusion also barred claims relating to intentional conduct and that in any case, intentional conduct was merely alleged, and thus the claims were excluded under Exclusion 5. While its arguments on the scope of the workers compensation exclusion are strong, and thus should result in dismissal of the tort claims, that does not avoid the insurer’s duty to defend these claims. Further, the application of the intentional acts exclusion would likely fail following the Ledesma decision. The Fund argues its employers liability coverage is not a “general liability” policy as it only covers bodily injury—an argument which doesn’t make sense as a coverage defense, as the plaintiffs’ claims are only for bodily injury. The Fund argues the court must look at the “cause” of the alleged injuries—and argues the cause must be intentional, not negligent conduct (to avoid the exclusivity exclusion.) The Ninth Circuit just issued the Ledesma decision on June 4, 2018—a bit over a month ago, and will likely now have to consider its implications in this case.
An easy out may be to apply Exclusion 4 (workers compensation exclusive remedy) to all the claims and avoid the issue altogether. However, as noted above, the court in the civil action refused to apply that remedy to the substantive claims. We shall see what they do with this one!