In response to a certified question posed by the Ninth Circuit, the California Supreme Court, in Liberty Surplus Insurance Corporation, et al. v. Ledesma & Meyer Construction Company, Inc., (Supreme Court Case No. S236765) today held that “when a third party sues an employer for the negligent hiring, retention and supervision of an employee, who intentionally injured that third party,” “the suit [can] allege an ‘occurrence’ under the employer’s commercial general liability policy.” After reiterating the “settled meaning” of the term “accident” in a liability insurance policy in California, the Court concluded that an injury allegedly resulting from negligent hiring, retention and/or supervision, may be “accidental” because the focus is on the conduct of the insured – the employer – not on the conduct of the employee.
The Supreme Court stressed that a “cause of action for negligent hiring, retention, or supervision, seeks to impose liability on the employer, not the employee.” While finding it to be “undisputed” that the employee’s sexual misconduct was not an “accident” ” and “beyond the scope of insurance coverage under Insurance Code § 533… [the employee’s] intentional conduct does not preclude potential coverage for [the employer].”
Importantly, the Supreme Court distinguished claims against the employer for purely vicarious or derivative liability from that where the employer is alleged to have committed “independently tortious acts” which form the basis for the claim for defense and indemnity. The Supreme Court acknowledged that, under California law, negligent hiring, retention or supervision may be the basis for a tort claim against the employer if it is a “substantial factor” in bringing about the injury. While the Supreme Court agreed that the intentionally wrongful conduct of the employee was the “immediate cause of injury,” and thus there was no coverage for that employee, the Court rejected the District Court’s conclusion that the acts of hiring, supervision and retention were “too attenuated” from the injury suffered by the underlying Plaintiff to be a contributing cause of the injury. Instead, the Court held that the connection between the employer’s alleged negligence and the injury inflicted was “close enough to justify the imposition of liability” on the employer as an “indirect cause.” Quoting the underlying Plaintiff, the Court explained that the “‘”occurrence resulting in injury”’ began with [the employer’s] negligence and ended with [the employee’s] active molestation.”
In reversing the District Court’s conclusion that there was no “occurrence” and no “accident,” the Supreme Court found each of the cases upon which the District Court relied distinguishable. (Notably, the Concurring Opinion would seemingly have gone much further, finding the case law incorrectly decided in the first instance.) By stressing that the “accident” determination is to be viewed from the perspective of the insured (not the actor involved), the Court explained that “context matters in this area of law.”
Interestingly, the Supreme Court seemed swayed by matters of public policy, which it often rejects as a basis for contract interpretation. Recognizing that public policy precludes the insuring of “one’s own intentional sexual misconduct,” the Court found no similar public policy precluding coverage for those whose negligence indirectly contributes to those acts of abuse. Further, the Court expressed concern regarding the effect on employers who would be without coverage for an employee’s deliberate conduct, given that liability may be imposed upon the employer under such circumstances.
In sum, the Supreme Court held that there can be a duty to defend an employer under a general liability policy that predicates its coverage on an “accident” where negligent hiring, retention and supervision is the basis for alleged liability. The Supreme Court, however, reminded insurers that they have it within their control to avoid such an outcome with an “applicable exclusion.” Indeed, many insurers now include exclusions intended to preclude the outcome presented here. It might be time for all insurers to consider a carefully worded exclusion for an employer’s liability for their employees’ intentional misconduct – especially in the context of sexual misconduct claims.