Horace Mann Ins. Co. v. Barbara B., S025417

• Decision Date: 11 March 1993
• Docket Number: No. S025417,S025417
• Citation: 17 Cal.Rptr.2d 210,4 Cal.4th 1076,846 P.2d 792
• Court: California Supreme Court
• Parties: , 846 P.2d 792, 81 Ed. Law Rep. 329 HORACE MANN INSURANCE COMPANY, Plaintiff and Respondent, v. BARBARA B. et al., Defendants and Appellants.

Page 210

17 Cal.Rptr.2d 210

4 Cal.4th 1076, 846 P.2d 792, 81 Ed. Law Rep. 329

HORACE MANN INSURANCE COMPANY, Plaintiff and Respondent, v. BARBARA B. et al., Defendants and Appellants.

No. S025417.

Supreme Court of California,

In Bank.

March 11, 1993.

As Modified on Denial of Rehearing May, 13, 1993.

Kinkle, Rodiger & Spriggs, and James W. Parker, Santa Ana, for defendants and appellants.

Latham & Watkins, David L. Mulliken, Kristine L. Wilkes, Daniel E. Butcher, San Diego, Brobeck, Phleger & Harrison, Tom M. Freeman, Nossaman, Guthner, Knox & Elliott, Kurt W. Melchior and Jared E. Peterson, San Francisco, as amici curiae on behalf of defendants and appellants.

Kegel, Tobin, Hamrick & Truce, Hamrick & Garrotto, and Charles H. Carpenter, Glendale, for plaintiff and respondent.

Thelen, Marrin, Johnson & Bridges, Curtis A. Cole, Anthony J. Barron, Los Angeles, Horvitz & Levy, David M. Axelrad, Mitchell C. Tilner and Ellis Horvitz, Encino, as amici curiae on behalf of plaintiff and respondent.

PANELLI, Justice.

We granted review in this case to address the question of whether an insurer may owe a duty to defend a teacher who is insured under an educator's liability policy in a minor student's action seeking damages resulting from the teacher's sexual and other misconduct. Relying on our decision in J.C. Penney Casualty Ins. Co. v. M.K. (1991) 52 Cal.3d 1009, 1019, 278 Cal.Rptr. 64, 804 P.2d 689, the Court of Appeal concluded that the insurer had no duty to The lower courts erred. Because the evidence adduced in the summary judgment proceedings demonstrated the existence of unresolved factual issues as to the insurer's potential liability under the policy based on misconduct separable from the sexual molestation, the insurer remained under a duty to defend the underlying action. The judgment of the Court of Appeal is, accordingly, reversed.

[846 P.2d 794] defend, and affirmed the decision of the trial court awarding summary judgment to the insurer in its declaratory relief action.

FACTUAL AND PROCEDURAL BACKGROUND

During the 1986-1987 school year, Barbara B. was a 13-year-old student at Kramer Junior High School in the Placentia Unified School District (the District). Barbara B. and her parents sued her seventh grade band teacher, Gary Lawrence Lee, alleging she had suffered injuries caused by Lee's intentional and negligent conduct toward her. ¹ The conduct was alleged to have consisted of sexual molestation and other harassing conduct. ²

Lee, who pleaded nolo contendere to one count of violating Penal Code section 288, subdivision (a), arising out of his molestation of Barbara, was insured under an educator's liability policy issued by Horace Mann. The policy covered damages "which the insured shall become legally obligated to pay as a result of any claim arising out of an occurrence in the course of the insured's educational employment activities, and caused by any acts or omissions of the insured...." The policy excluded coverage of civil suits arising from criminal acts other than corporal punishment. It contained a promise to defend Lee in "any civil suit against the insured seeking damages which are payable under the terms of Horace Mann accepted tender of defense in Barbara B.'s suit against Lee, reserving its rights to disclaim coverage or an obligation to defend. In its reservation-of-rights letter, Horace Mann took the position that in light of Lee's criminal conviction, the allegations of the complaint did not fall within policy coverage of educational activities. ³ Horace Mann also cited the policy's exclusion for civil suits arising out of an act, other than corporal punishment, that has been held to be a crime and the exclusion for occurrences involving damages that are the intended consequence of action taken by the insured.

this [846 P.2d 795] policy even if such suit is groundless, false or fraudulent...."

Horace Mann filed a declaratory relief action, seeking a determination of its duty to defend or indemnify Lee in Barbara B.'s suit. Contending that as a matter of law its policy provided no coverage because Lee's conduct was intentional within the meaning of Insurance Code section 533 ⁴ and unrelated to educational activities, Horace Mann moved for summary judgment. In support of the motion, it submitted a copy of Lee's plea of nolo contendere in the felony case. Barbara B. opposed the motion, submitting a proposed second amended complaint--alleging that Lee "negligently, carelessly, recklessly, and wantonly engaged in sexual and nonsexual acts with the minor plaintiff"--and a letter written by her attorney, detailing acts of misconduct by Lee not amounting to molestation (ante, fn. 2). Before the trial court issued its ruling, the proposed second amended complaint was filed in the underlying action.

The trial court granted the motion for summary judgment, determining that all of Lee's acts were either sexual or intentional in nature, and entered judgment for Horace Mann. Barbara B. appealed, and the Court of Appeal affirmed.

DISCUSSION

It is by now a familiar principle that a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168 (Gray ).) As we said in Gray, "the carrier must defend a suit which potentially seeks damages within the coverage of the policy." (Id. at p. 275, 54 Cal.Rptr. 104, 419 P.2d 168, emphasis in original.) Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded. (Id. at p. 278, 54 Cal.Rptr. 104, 419 P.2d 168; Signal Cos. v. Harbor Ins. Co. (1980) 27 Cal.3d 359, 367, 165 Cal.Rptr. 799, 612 P.2d 889; Saylin v. California Ins. Guarantee Assn. (1986) 179 Cal.App.3d 256, 263, 224 Cal.Rptr. 493.)

The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy. (Gray, supra, 65 Cal.2d at p. 276, 54 Cal.Rptr. 104, 419 P.2d 168.)

Once the defense duty attaches, the insurer is obligated to defend against all of During the pendency of the appeal in this case, we addressed the question whether a liability insurer owes a duty to indemnify an insured in an action for damages arising out of child molestation. We answered in the negative. In J.C. Penney Casualty Ins. Co. v. M.K., supra, 52 Cal.3d 1009, 278 Cal.Rptr. 64, 804 P.2d 689 (J.C. Penney), the liability insurer sought a declaratory judgment that it was not required to indemnify its insured, who had pleaded guilty to violation of Penal Code section 288, subdivision (a), in the child victim's action seeking damages for sexual molestation. We held that as a matter of law Insurance Code section 533 precludes coverage in such a case. (Id. at pp. 1019, 1021, 278 Cal.Rptr. 64, 804 P.2d 689.) Because child molestation is inherently harmful, we rejected the argument that a molester's lack of subjective intent to harm the victim can avoid the bar of Insurance Code section 533. We emphasized the narrowness of our holding, stressing we were addressing only child molestation and no other type of wrongdoing. (Id. at p. 1028, 278 Cal.Rptr. 64, 804 P.2d 689.)

                [846 P.2d 796] the claims involved in the action, both covered and noncovered, until the insurer produces undeniable evidence supporting an allocation of a specific portion of the defense costs to a noncovered claim.  (Hogan v. Midland National Ins. Co.  (1970) 3 Cal.3d 553, 564, 91 Cal.Rptr. 153, 476 P.2d 825;  Republic Indemnity Co. v. Superior Court (1990) 224 Cal.App.3d 492, 498, 273 Cal.Rptr. 331;  California Union Ins. Co. v. Club Aquarius (1980) 113 Cal.App.3d 243, 248, 169 Cal.Rptr. 685.)  (Horace Mann has not attempted to establish such an allocation.)   Any doubt as to whether the facts give rise to a duty to defend is resolved in the insured's favor.  (CNA Casualty of California v. Seaboard Surety Co.  (1986) 176 Cal.App.3d 598, 607, 222 Cal.Rptr. 276.)
                

Horace Mann relies heavily on J.C. Penney, supra, 52 Cal.3d 1009, 278 Cal.Rptr. 64, 804 P.2d 689, to support its position in this case. Reduced to its essence, Horace Mann's argument runs thus: Barbara B. alleges that Lee's sexual and other misconduct injured her; the evidence of Lee's plea of nolo contendere to one count of violating Penal Code section 288, subdivision (a), establishes that he sexually molested her; under J.C. Penney, supra, Horace Mann has no duty to indemnify Lee for claims arising out of that sexual molestation; Lee's other alleged misconduct was directly related to the uninsurable molestation and was not in the course of his educational employment activities; therefore, under this scenario, Horace Mann has no duty to defend or indemnify Lee against the other allegations of misconduct.

The flaw in Horace Mann's reasoning is its unsupported assumption that the other alleged misconduct necessarily was part of the molestation and not in the course of Lee's educational activities. The evidence presented in support of the summary judgment motion fails to clearly establish the inferences necessary to sustain the ruling. Indeed, the evidence supported the potential for liability apparent on the face of the complaint and, with it, Horace Mann's duty to defend.

As noted above, Gray teaches that when facts extrinsic to the complaint, gathered from the insured or other sources, suggest that the claim may be covered under its policy, the insurer is held to a duty to defend the action. (Gray, supra, 65 Cal.2d 263, 276, 54 Cal.Rptr. 104, 419 P.2d 168.) The courts of appeal have expressed varying views on the question of whether the insurer must defend when...