La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co.

CourtUnited States State Supreme Court (California)
Citation36 Cal.Rptr.2d 100,9 Cal.4th 27,884 P.2d 1048
Decision Date19 December 1994
Docket NumberNo. S036170,S036170
Parties, 884 P.2d 1048, 63 USLW 2492, 10 IER Cases 233, 10 IER Cases 608 LA JOLLA BEACH AND TENNIS CLUB, INC., et al., Plaintiffs and Appellants, v. INDUSTRIAL INDEMNITY COMPANY, Defendant and Respondent.

H. Paul Kondrick, Seltzer, Caplan, Wilkins & McMahon and Michael H. Riney, San Diego, for plaintiffs and appellants.

Craig R. Berne, Oakland, James T. Linford, San Francisco, Adleson, Hess, Christensen & Kelly, Randy M. Hess, Duane W. Shewaga, San Jose, Brobeck, Phleger & Harrison, David M. Halbreich, David E. Weiss, Los Angeles, Farella, Braun & Martel, William R. Friedrich, Dennis M. Cusack, Kathryn Oliver, San Francisco, Luce, Forward, Hamilton & Scripps, George S. Howard, Jr., and Albert T. Harutunian, III, San Diego, as amici curiae on behalf of plaintiffs and appellants.

Morris, Polich & Purdy, Lawrence E. Picone, Gerald P. Schneeweis, San Diego, Sonnenschein, Nath & Rosenthal, Paul E.B. Glad, San Francisco, John Leland Williams, Rhonda V. Magee and Andre Hassid, San Francisco, for defendant and respondent.

Craig A. Berrington, Bruce Wood, Washington, DC, Patrick J. McNally, Ipswich, MA, Monika Lussnig, Des Plaines, IL, Crosby, Heafey, Roach & May, Raoul D. Kennedy, Ezra Hendon, Oakland, Chernow & Lieb, Diane Heidenreich, Van Nuys, Victor Rabinowitz, Woodland Hills, McCormick, Barstow, Sheppard, Wayte & Carruth, James P. Wagoner, James H. Wilkins, Wendy S. Lloyd, Fresno, Buchalter, Nemer, Fields & Younger, Roxani M. Gillespie, Richard de Saint Phalle, Marie G. Quashnock, Charles W. Savage, Barbara Gallios-Lee, William P. Molmen, Lewis, D'Amato, Brisbois & Bisgaard, Duane C. Musfelt, San Francisco, Horvitz & Levy, Ellis J. Horvitz, Daniel J. Gonzalez, Julie L. Woods, Encino, Hancock, Rothert & Bunshoft, Ray L. Wong, Paul J. Killion and Monica M. Slakey, San Francisco, as amici curiae on behalf of defendant and respondent.

ARABIAN, Justice.

This case presents a convergence of two distinct but related areas of law: insurance and workers' compensation. In particular, we determine whether a workers' compensation insurer has a duty to defend a former employee's civil suit alleging wrongful termination in violation of public policy. We conclude that no reasonable construction of the workers' compensation insurance contract provides coverage for such a suit, and hence there is no duty to defend. We therefore reverse the Court of Appeal.


On April 24, 1986, Adnan Saleh filed a complaint against the Sea Lodge, the F.W. Kellogg Trust and Estate (Trust), the then owner of the lodge, and Robert Kellogg, manager of the lodge. Saleh alleged that he had been employed at the Sea Lodge as the restaurant manager for approximately six years until his termination on April 1, 1986. According to the complaint Saleh "was terminated in whole or in part because he was not 'white'. Prior to plaintiff's termination, he was told not to hire any more of 'his own kind', i.e. Palestinian or Arabic ancestried [sic] persons, and not to hire any 'foreigners.' " Saleh further alleged that Robert Kellogg told various employees of the Sea Lodge that "they were not to hire any foreigners except for some Mexicans, who should be kept in back."

Saleh alleged this conduct gave rise to claims for breach of an employment The Trust also tendered defense to its comprehensive general and excess liability carrier, American National Fire Insurance Company (American). Industrial refused to provide the Trust with a defense. American initially accepted the tender under a reservation of rights but later withdrew its defense.

agreement,[884 P.2d 1050] breach of the implied covenant of good faith and fair dealing, wrongful termination, intentional infliction of emotional distress, and violation of the Fair Employment and Housing Act. On May 9, 1986, the Trust tendered defense of the Saleh complaint to its workers' compensation carrier, defendant Industrial Indemnity Company (Industrial). 1

In responding to Saleh's complaint, the Trust raised as an affirmative defense the exclusive jurisdiction of the Workers' Compensation Appeals Board. It also took the position that Saleh had not been terminated but had voluntarily resigned. The Trust denied it had engaged in any discriminatory conduct. The parties eventually settled. Saleh was paid $16,500.

The Current Action

On or about August 29, 1990, plaintiff La Jolla Beach and Tennis Club, Inc., the Trust's successor in interest, and Kellogg (La Jolla) brought this action against Industrial and American. 2 La Jolla sought declaratory relief regarding Industrial's obligation to defend and indemnify it in the Saleh action. La Jolla further alleged that Industrial's failure to provide it with a defense or indemnity in that action gave rise to claims for breach of contract and tortious breach of the implied covenant of good faith and fair dealing.

Industrial moved for summary judgment asserting it had no duty to defend or indemnify La Jolla under either Part 1 or Part 2 of the policy. (See ante, fn. 1.) The trial court granted Industrial's motion, and judgment was entered. La Jolla appealed solely on the ground that Industrial had a duty to defend under Part One of the policy, or the workers' compensation coverage.

The Court of Appeal reversed. Relying on a recent Court of Appeal opinion, Wong v. State Compensation Ins. Fund (1993) 12 Cal.App.4th 686, 16 Cal.Rptr.2d 1, the court concluded that Saleh's complaint set forth facts that would support a potential claim covered by Part One. The court noted that Industrial "defines its workers' compensation coverage in terms of amounts payable under the workers' compensation law. Thus, when our Supreme Court defined the scope of the workers' compensation remedy, of necessity the court also defined the scope of Industrial's workers' compensation coverage."

The Court of Appeal further noted that this court has held, "that, in general, workers' compensation is the exclusive remedy for emotional distress caused by a termination of employment." Accordingly, the court reasoned, "where an employee claims he suffered emotional distress as a result of his termination, he has made a claim which comes within the workers' compensation provisions of policies like Industrial's."

The Court of Appeal rejected Industrial's argument that Saleh's choice of a civil forum precluded coverage or defense under the workers' compensation policy. It stated that the policy language did not expressly exclude defense of civil actions. "Moreover, it is well established that while the superior court does not have jurisdiction to grant relief for injuries suffered within the course and scope of employment, it does have, concurrently with the Workers' Compensation Appeals Board (WCAB), the jurisdiction to determine jurisdiction. [Citation.] 'Thus, if there is a final determination as to the matter of coverage (i.e., of jurisdiction) in either the [WCAB] or the superior court proceedings, such determination will be res judicata in subsequent proceedings before the other tribunal between the same parties or those privy to them.' [Citation.] In our view the undisputed jurisdiction of the civil courts to determine the existence of WCAB jurisdiction lends considerable support to the conclusion ... that insured employers 'could reasonably expect an appropriate defense to any claim based on injuries potentially covered by the policy ... regardless of whether the plaintiff's choice of forum was appropriate.' "

Applying these principles, the Court of Appeal concluded that "Insofar as Saleh alleged he suffered emotional distress upon his termination, his claim" was potentially "within the scope of the workers' compensation act.... Thus it had the potential for coming within the coverage provisions of part 1 of the Industrial policy," and this potential gave "rise to a duty to defend."

The court noted, however, that Saleh alleged "discriminatory termination" had caused his emotional distress. "Because liability on discrimination claims falls outside the scope of our workers' compensation law, it also falls outside the scope of a workers' compensation insurance policy." Nonetheless, the court concluded Saleh's claims might still fall within Part 1 of the policy. It reasoned, "If La Jolla was able to establish it had not terminated Saleh because of his Palestinian ancestry and that his termination did not otherwise violate public policy, Saleh would still have a remedy under the workers' compensation law for the emotional distress he suffered upon his termination." "Given this potential, La Jolla was entitled to a defense under part 1 of the policy." Industrial's petition for rehearing was denied.

We granted Industrial's petition for review. 3


The question before us is whether Part 1 of Industrial's workers' compensation policy potentially provided coverage for the claims asserted in Saleh's complaint, and thus gave rise to a duty to defend those claims.

A. Background
1. Workers' Compensation

Pursuant to constitutional mandate, the Legislature has vested the Workers' Compensation Appeals Board (WCAB) with exclusive jurisdiction over claims for workers' compensation benefits. (Cal. Const., art. XIV, § 4, Lab.Code, § 5300.) Accordingly, the superior court and the WCAB in this "[T]he legal theory supporting such exclusive remedy provisions is a presumed 'compensation bargain,' pursuant to which the employer assumes liability for industrial personal injury or death without regard to fault in exchange for limitations on the amount of that liability. The employee is afforded relatively swift and certain payment of benefits to cure or relieve the effects of industrial injury without having to prove fault but, in exchange, gives up the wider range of damages potentially available in tort.... The...

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