Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. Co.

• Court: California Supreme Court
• Writing for the Court: CORRIGAN, J.
• Citation: Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. Co., 5 Cal. 5th 216, 418 P.3d 400, 233 Cal.Rptr.3d 487 (Cal. 2018)
• Decision Date: 04 June 2018
• Docket Number: S236765
• Parties: LIBERTY SURPLUS INSURANCE CORPORATION et al., Plaintiffs and Respondents, v. LEDESMA & MEYER CONSTRUCTION COMPANY, INC., et al., Defendants and Appellants.

5 Cal.5th 216

418 P.3d 400

233 Cal.Rptr.3d 487

LIBERTY SURPLUS INSURANCE CORPORATION et al., Plaintiffs and Respondents,

v.LEDESMA & MEYER CONSTRUCTION COMPANY, INC., et al., Defendants and Appellants.

S236765

Supreme Court of California.

Filed June 4, 2018

As Modified July 25, 2018

Shernoff Bidart Echeverria, Michael J. Bidart, Ricardo Echeverria, Claremont; The Ehrlich Law Firm and Jeffrey I. Ehrlich for Defendants and Appellants.

Steven W. Murray, Sherman Oaks as Amicus Curiae on behalf of Defendants and Appellants.

Kasowitz Benson Torres and Brian P. Brosnahan, San Francisco for Franciscan Friars of California, Inc., and Province of the Holy Name, Inc., as Amici Curiae on behalf of Defendants and Appellants.

Weinstein & Numbers, Barron L. Weinstein, Charles H. Numbers, Larkspur and Shanti Eagle, San Francisco for California Catholic Conference and Association of Christian Schools International as Amici Curiae on behalf of Defendants and Appellants.

Andrade Gonzalez, Sean A. Andrade, Stephen V. Masterson ; Jones Day, David W. Steuber and Tara C. Kowalski, Los Angeles for the Los Angeles Unified School District as Amicus Curiae on behalf of Defendants and Appellants.

IP Business Law and Antonio R. Sarabia II, Rolling Hill Estates for National Center for Victims of Crime as Amicus Curiae on behalf of Defendants and Appellants.

Covington & Burling, David B. Goodwin, Michael S. Greenberg and Marienna H. Murch, San Francisco for United Policyholders as Amicus Curiae on behalf of Defendants and Appellants.

McCormick, Barstow, Sheppard, Wayte & Carruth, Patrick Fredette and Christopher Ryan for Plaintiffs and Respondents.

Crowell & Moring and Brendan V. Mullan, San Francisco for Complex Insurance Claims Litigation Association and American Insurance Association as Amici Curiae on behalf of Plaintiffs and Respondents.

CORRIGAN, J.

Here we consider a question of California insurance law posed by the United States Court of Appeals for the Ninth Circuit: When a third party sues an employer for the negligent hiring, retention, and supervision of an employee who intentionally injured that third party, does the suit allege an "occurrence" under the employer's commercial general liability policy? ( Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. Co. (9th Cir. 2016) 834 F.3d 998, 1000.)¹ The answer turns on whether the injury can be considered "accidental." We conclude that it can.

I. BACKGROUND

Appellants Ledesma & Meyer Construction Company, Inc. and its principals, Joseph Ledesma and Kris Meyer (collectively, L&M) contracted with the San Bernardino Unified School District to manage a construction project at a middle school. In 2003, L&M hired Darold Hecht as an assistant superintendent and assigned him to the project. In 2010, Jane Doe, a 13-year-old student at the school, sued in state court alleging that Hecht had sexually abused her. Doe's claims include a cause of action against L&M for negligently hiring, retaining, and supervising Hecht.

L&M tendered the defense to its insurers, Liberty Surplus Insurance Corporation and Liberty Insurance Underwriters, Inc. (collectively, Liberty). Liberty defended L&M under a reservation of rights. It also sought declaratory relief in federal court, contending it had no obligation to defend or indemnify L&M. The commercial general liability policy at issue provided coverage for " 'bodily injury' " "caused by an 'occurrence.' " "Occurrence" was defined as "an accident."² The district court granted summary judgment to Liberty on its claim for declaratory relief.

The court reasoned that Doe's injury was not caused by an "occurrence" because the "alleged negligent hiring, retention and supervision were acts antecedent to the sexual molestation .... While they set in motion and created the potential for injury, they were too attenuated from the injury-causing conduct committed by Hecht." The court was not persuaded by the argument that L&M's supervision and retention of Hecht continued until the time of the molestation. "First, the supervision and retention are still not the injury-causing acts. Second, courts have rejected the argument that the insured's intentional acts of hiring, supervising, and retaining are accidents, simply because the insured did not intend for the injury to occur."

On appeal, L&M argued that the district court misapplied California law. The Court of Appeals sought our opinion. As we explain, L&M's position is correct.

II. DISCUSSION

As a general matter, the meaning of the term "accident" in a liability insurance policy is settled in California. "[A]n accident is ' "an unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause." ' [Citations.] 'This common law construction of the term "accident" becomes part of the policy and precludes any assertion that the term is ambiguous.' " ( Delgado v. Interinsurance Exchange of Automobile Club of Southern California (2009) 47 Cal.4th 302, 308, 97 Cal.Rptr.3d 298, 211 P.3d 1083 ( Delgado ).) "Under California law, 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 ...." ( Id . at p. 311, 97 Cal.Rptr.3d 298, 211 P.3d 1083, italics added.) "[T]he term 'accident' is more comprehensive than the term 'negligence' and thus includes negligence (Black's Law Dict. [ (5th ed. 1979) ] at p. 14, col. 2) ...."³ ( Safeco Ins. Co. v. Robert S. (2001) 26 Cal.4th 758, 765, 110 Cal.Rptr.2d 844, 28 P.3d 889 ( Safeco ).) Accordingly, a policy providing a defense and indemnification for bodily injury caused by " 'an accident' " "promise[s] coverage for liability resulting from the insured's negligent acts." ( Ibid , italics added.)⁴

Here, the question is whether Liberty had a duty to defend L&M against Doe's lawsuit. "To prevail in an action seeking declaratory relief on the question of the duty to defend, 'the insured must prove the existence of a potential for coverage , while the insurer must establish the absence of any such potential . In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot .' [Citation.] The duty to defend exists if the insurer 'becomes aware of, or if the third party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement.' " ( Delgado , supra , 47 Cal.4th at p. 308, 97 Cal.Rptr.3d 298, 211 P.3d 1083, quoting Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 19, 44 Cal.Rptr.2d 370, 900 P.2d 619.)

It is important to keep in mind that a cause of action for negligent hiring, retention, or supervision seeks to impose liability on the employer, not the employee. The district court appeared to recognize that in analyzing the potential for coverage, the focus is properly on the alleged negligence of L&M as the insured employer. It is undisputed that Hecht's sexual misconduct was a "wilful act" beyond the scope of insurance coverage under Insurance Code section 533. ( J. C. Penney Casualty Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, 1025, 278 Cal.Rptr. 64, 804 P.2d 689.) However, Hecht's intentional conduct does not preclude potential coverage for L&M. We noted the distinction between an intentional act of molestation and merely negligent supervision in Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315, 110 Cal.Rptr.3d 612, 232 P.3d 612 ( Minkler ). There the plaintiff sued his Little League coach for sexual molestation. He also sued the coach's mother, whom he accused of negligent supervision for failing to prevent molestations that occurred in her home. The coach was listed as an additional insured on his mother's homeowners insurance policy. We held that an exclusion for injuries arising from an insured's intentional acts did not apply to the mother's liability for negligence. "[T]his is not a situation where the only tort was the intentional act of one insured, and where the liability of a second insured, who claims coverage, is merely vicarious or derivative . On the contrary, [the plaintiff's] claim against [the mother] clearly depends upon allegations that she herself committed an independent tort in failing to prevent acts of molestation she had reason to believe were taking place in her home. Under such circumstances, she had objective grounds to assume she would be covered, so long as she herself had not acted in a manner for which the intentional acts exclusion barred coverage." ( Id . at p. 325, 110 Cal.Rptr.3d 612, 232 P.3d 612.)

In Minkler we did not consider whether the claims involved were "accidents" under the applicable insurance policies, because the issue was not raised. ( Minkler , supra , 49 Cal.4th at p. 322, fn. 3, 110 Cal.Rptr.3d 612, 232 P.3d 612.) But our reasoning there establishes that L&M may be covered even though Hecht's intentional acts were beyond the scope of its policy. L&M's allegedly negligent hiring, retention, and supervision were independently tortious acts, which form the basis of its claim against Liberty for defense and indemnity. The district court's ruling was consistent with Minkler . It did not rely on the fact that Hecht's conduct was intentional, but on two other grounds: a causation analysis, and the court's reading of case law. Both lines of reasoning were faulty.

As to liability insurance coverage, tort principles govern the question of causation. "In analyzing coverage under a liability policy, a 'tort approach' [citation] to causation of damages is precisely what is called for .... When the insurer has promised to indemnify the insured for all 'sums which the Insured shall become obligated to pay ... for damages ... because of' nonexcluded property damage, or similar language, coverage necessarily turns on whether the damages for which the insured became liable resulted—under tort law —from covered causes." ( State of California v. Allstate Ins. Co. (2009) 45 Cal.4th 1008, 1035, 90 Cal.Rptr.3d 1, 201 P.3d 1147 ( Allstat...