In Liberty Surplus Ins. Corp. v. Ledesma & Meyer Construction Co., Inc. (No. S236765, filed 6/4/18) (L&M), the California Supreme Court ruled that the liability insurance requirement that injury be caused by an “occurrence,” defined as an “accident,” does not preclude coverage of an employer’s independent tort liability for injury deliberately caused by its employee.
In L&M, Liberty insured a construction company that contracted to manage a construction project at a middle school in San Bernardino, California. A 13-year-old student subsequently sued the company in state court, alleging that she had been sexually molested by a company employee, Hecht. Among others, she alleged a cause of action for negligent hiring, retention and supervision of the employee. The construction company tendered to Liberty, which defended the employer under a reservation of rights while seeking declaratory relief in federal court. The district court granted summary judgment for Liberty, ruling that the injury was not caused by an “occurrence.” On appeal, the 9th Circuit Court of Appeals certified the question to the California Supreme Court as a matter of state law.
The Supreme Court concluded that the accident/occurrence requirement does not bar coverage for an employer sued on theories of vicarious liability or negligent hiring and supervision. This issue had been left open by the Supreme Court in Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315, “[b]ut our reasoning there establishes that L&M may be covered even though Hecht’s intentional acts were beyond the scope of its policy.”
The L&M Court noted that “[u]nder 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….” (Quoting Delgado v. Interinsurance Exchange of Automobile Club of Southern California (2009) 47 Cal.4th 302, 308.) However, the L&M Court stated that:
“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.  However, Hecht’s intentional conduct does not preclude potential coverage for L&M.” The L&M Court said that: “[I]nsurance is a contract between insurer and insured, and the policy is read in light of the parties’ expectations, the relevant viewpoint is that of the insured rather than the injured party.”
In granting summary judgment, the district court had concluded that coverage was barred since the cause of the injury was the non-accidental molestation, and any negligent hiring or supervision was “too attenuated from the injury-causing conduct committed by Hecht.” Plus, the district court felt that other 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.”
The California Supreme Court disagreed on both points: “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.  The district court … reasoned that L&M’s actions set the chain of events in motion but did not legally cause Doe’s injuries. That reasoning runs counter to California cases expressly recognizing that negligent hiring, retention, or supervision may be a substantial factor in a sexual molestation perpetrated by an employee, depending on the facts presented.”
The L&M Court then distinguished Merced Mutual Ins. Co. v. Mendez (1989) 213 Cal.App.3d 41, which held that “[a]n accident … is never present when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.” In Merced, “[a]ll of the acts, the manner in which they were done, and the objective accomplished occurred exactly as [the insured] intended. No additional, unexpected, independent or unforeseen act occurred.” According to the L&M Court, however, “Even though the hiring, retention, and supervision of Hecht may have been ‘deliberate act[s]’ by L&M, the molestation of Doe could be considered an ‘additional, unexpected, independent, and unforeseen happening … that produce[d] the damage.’”
The L&M Court went on to distinguish a number of cases cited by the district court as supporting a conclusion that negligent hiring or supervision is not an accident, including Foremost Insurance Co. v. Eanes (1982) 134 Cal.App.3d 566; American Empire Surplus Lines Ins. Co. v. Bay Area Cab Lease (N.D.Cal. 1991) 756 F.Supp. 1287; State Farm Mut. Auto. Ins. Co. v. Longden (1987) 197 Cal.App.3d 226; and Maples v. Aetna Cas. & Surety Co. (1978) 83 Cal.App.3d 641, to arrive at the conclusion that “we have long recognized that ‘[n]o all-inclusive definition of the word ‘accident’ can be given.’” (Citing Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co. (1959) 51 Cal.2d 558, 563; and Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 559.)
Ultimately, the L&M Court concluded with a statement of public policy that “as noted in Minkler, ‘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. In such cases … there is no overriding policy reason why a person injured by sexual abuse should be denied compensation for the harm from insurance coverage purchased by the negligent facilitator.’”
In a separate concurring opinion, Justice Liu sought to clarify 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 undesigned happening or consequence’ resulting from the conduct of the insured.” In addition, Justice Liu also questioned whether a causation analysis absolutely precludes consideration of events prior to the injury-causing act, arguing instead that it is a fact question. And he stated that a mistaken belief in sexual consent should not categorically rule out an accident, but might constitute the sort of “unexpected, independent or unforeseen” intervening event contemplated by the Merced court.
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