Insurance Law

• Publication year: 2018
• Author: By Stephen Raucher and Michael Sohigian

Insurance Law

By Stephen Raucher and Michael Sohigian

Introduction

While 2018 saw fewer published insurance cases than in recent years, the California Supreme Court did issue a landmark opinion on the definition of "occurrence" under general liability policies, significantly expanding the potential for coverage to include claims like negligent hiring and supervision. And, in typical Hollywood fashion, a pair of opinions from the Court of Appeal could lead to Supreme Court sequels that could substantially expand insurance company liability to regulators and policyholders.

Third Party Policies

Supreme Court holds that a claim for negligent hiring or supervision alleges an "occurrence" under general liability policy

In Liberty Surplus Ins. Corp. v. Ledesma &Meyer Construction Co.,¹ the Supreme Court determined that a claim for negligent hiring, retention, or supervision falls within the definition of an "occurrence" under the typical general liability policy. Therefore, it must be defended absent an applicable exclusion. The policyholder in Ledesma & Meyer was a contractor hired by a school district to manage a construction project. The contractor was then sued for negligent supervision by a student who alleged that a contractor's employee had sexually abused her. The contractor tendered the defense to its insurer, Liberty Surplus, which sought declaratory relief in federal court, contending that it had no obligation to defend or indemnify the contractor. The district court granted summary judgment in favor of Liberty Surplus. On appeal, the Ninth Circuit posed the following question to the California Supreme Court: 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? The Supreme Court answered the question.

Liberty Surplus' commercial general liability policy covered bodily injury caused by an "occurrence," which was defined as "an accident." The Supreme Court noted that the definition of the term "accident" in California is settled; it is "an unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause."² The key question was therefore whether the alleged negligent supervision of the contractor could be considered an accident, even though the actions of its employee clearly could not. In order to answer this question, the Court turned to the tort principles governing causation.

A cause of action for negligent hiring, retention, or supervision seeks to impose liability on the employer, not the employee. The district court had found that the contractor's alleged negligence was "too attenuated" from the employee's acts of molestation to trigger coverage. The Supreme Court disagreed, noting that "causation is established for purposes of California tort law if the defendant's conduct is a 'substantial factor' in bringing about the plaintiff's injury," and that the district court's reasoning ran counter to the California cases expressly recognizing that negligent hiring, retention, or supervision may indeed be a substantial factor in molestation perpetrated by an employee.³ Accordingly, the alleged negligence of the contractor fell within the definition of an "occurrence."

The Supreme Court also clarified an issue in Ledesma & Meyer, which had bedeviled policy-holders since its landmark decision in Delgado v. Interinsurance Exchange of Automobile Club of Southern California:⁴ Can a deliberate act, such as hiring an employee who turns out to be a child molester, ever constitute an "accident"? The Court confirmed that it could, where the molestation was an "additional, unexpected, independent and unforeseen happening . . . that produce[d] the damage."⁵ Any other result "would be inconsistent with California law, which recognizes the cause of action [of negligent hiring, retention, or supervision] even when the employee acted intentionally."⁶ Accordingly, insurers can no longer avoid the potential for coverage simply by asserting that the insured committed a deliberate act; instead, a deeper causation analysis is required.

[Page 59]

Fourth District holds claims against pharmaceutical companies for deceptive marketing of opioids do not constitute an "occurrence" and are barred by products exclusions

Travelers Property Casualty Co. of America v. Actavis, Inc.,⁷ decided in late 2017, also grappled with the definition of "occurrence," but - under very different facts than Ledesma & Meyer - found no potential for coverage. The case arose out of a lawsuit filed by two California counties against various pharmaceutical companies, including Actavis, seeking compensation for the financial burdens created by the opioid epidemic. The counties alleged that the pharmaceutical companies had engaged in a deceptive marketing campaign "designed to expand the market and increase sales of opioid products."⁸ The complaint alleged claims for false advertising, unfair competition, and public nuisance.

Actavis tendered the defense to its commercial general liability policies insurer, Travelers, which denied the tender of defense and filed suit for declaratory relief. The trial court found that the claims alleged did not constitute an "occurrence" under the policies, and that coverage would in any event be barred by so-called "products exclusions" within the policies. The Court of Appeal affirmed on both grounds.

The claims against Actavis did not constitute an "accident" so as to satisfy the definition of "occurrence" under the policies; they were based on deliberate conduct. Actavis nonetheless argued that the injuries alleged were "indirect unintended results" caused by "mere negligence or fortuities" outside its control.⁹ The Court of Appeal rejected this argument, noting that the injuries alleged in the complaint were, among other things, a nationwide public health epidemic and a resurgence in heroin use. None of those injuries were "additional, unexpected, independent, or unforeseen" that would constitute an accident.

In addition, the claims fell within the "products exclusions," which barred coverage for bodily injury arising out of "any goods or products . . . manufactured, sold, handled, distributed or disposed of by . . . [the insured]," as well as bodily injury arising out of "warranties or representations made at any time, or that should have been made, with respect to the fitness, quality, . . . safety, or use of such goods or products."¹⁰ The alleged opioid epidemic clearly arose out of Actavis' products, as well as its statements and representations, triggering the exclusions. Similarly, the resurgence of heroin, although not necessary caused by an Actavis product, allegedly resulted from Actavis' warranties and representations regarding its opioid products. Thus, alleged injury too was excluded.

The Supreme Court actually granted review in the Actavis case, but later dismissed it following issuance of the Ledesma & Meyer opinion. Because grant of review no longer results in automatic depublication pursuant to California Rule of Court 8.1105(e)(1)(B), the Actavis decision remains good law.

Second District Finds No Duty to Defend Claim Subject to Impaired Property Exclusion

An electrical contractor sued its commercial general liability insurer in All Green Electric, Inc. v. Security National Insurance Co.¹¹ The insured had done electrical work on a doctor's MRI and X-ray facility that did not operate correctly due to a magnetic field, which was caused by a loose bolt in an electrical cabinet the insured installed. The doctor sued All Green for negligence, and All Green tendered the defense to Security National, which denied the claim based on the "impaired property" exclusion.

"The impaired property exclusion 'bars coverage for liability arising out of a defect in a contractor's work or failure to perform a contract that renders other property useless or less usable.' It does not apply when property has been physically injured."¹² The exclusion in All Green's policy, entitled, "Damage To Impaired Property Or Property Not Physically Injured," provided that the policy did not apply to: "'Property damage' to 'impaired property' or property that has not been physically injured, arising out of: [¶] (1) A defect, deficiency, inadequacy or dangerous condition in 'your product' or 'your work;' or [¶] (2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms."¹³

[Page 60]

The policy defined "impaired property" as "tangible property, other than '[insured's] product' or '[insured's] work,' that cannot be used or is less useful because: (a) it incorporates the insured's product or work that is known or thought to be defective, deficient, inadequate or dangerous; or (b) the insured has failed to fulfill the terms of a contract or agreement; if such property can be restored to use by the repair, replacement, adjustment or removal of the insured's product or work or the insured's fulfilling the terms of the contract or agreement."¹⁴ The insured's work includes "[w]ork or operations performed by [the insured or on the insured's behalf]" as well as "[m] aterials, parts or equipment furnished in connection with such work or operations."¹⁵

In denying All Green's tender, the insurer contended the malfunctioning facility was "'impaired property' in that it 'could not be used because All Green failed to fulfill the terms of its contract (by tightening the bolt and/or meeting the standard of care),' but could be 'restored to use by simply tightening the bolt, i.e., by "adjustment" of All Green's work.' Alternatively, the unit was 'property that was not physically injured.' The exclusion applied because '[t]he failure to tighten the bolt was a "defect, deficiency, inadequacy . . . in . . . [the insured's work]."¹⁶

The exclusion was subject to an exception - that it did "not...