Questions in coverage: Intentional tort by an employee

Do claims of negligent supervision, hiring, and retention of an employee who commits an intentional tort trigger an occurrence under a standard CGL Policy?

2016 September

The issue is common enough. An employee commits some form of intentional tort – be it assault, molestation, fraud, or some other act – and the victim, in an effort to reach any possible recovery, sues the employer on claims of negligent hiring, retention, and supervision. The employer, who had dutifully and responsibly purchased Commercial General Liability insurance (“CGL”) that did not include a specific exclusion for the intentional tort at issue, tenders the lawsuit to its insurer. Despite procuring a CGL policy without a relevant exclusion, the insurer still denies coverage for the employer’s alleged negligence, claiming that the actions do not constitute an “occurrence” under the CGL policy so as to trigger coverage. The employer – despite being accused only of negligent acts – is deprived of coverage because the insurer contends that the victim’s injuries do not arise out of an “accident.”

Does this really fall outside of the basic coverage provisions inherent in a CGL policy? Published California decisions have not directly addressed the issue, leaving it open to interpretation. Part of the confusion stems from Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315, 322, where the Court stated:

“The policies defined an ‘occurrence’ as ‘an accident, including exposure to conditions which results, during the policy period, in bodily injury or property damage.’ (Italics added.) Safeco does not assert that Scott’s claims related to his alleged molestations by David are beyond the scope of this basic coverage because the molestations were not ‘accident[s],’ and we have not been asked to address that issue. We therefore do not do so. (But see Delgado v. Interinsurance Exchange of Automobile Club of Southern California (2009) 47 Cal.4th 302, 308-317, 97 Cal.Rptr.3d 298, 211 P.3d 1083; Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 560, 91 Cal.Rptr. 153, 476 P.2d 825.)” (Id. at fn. 3.)

Yet the meaning of that “But see” citation has remained open to insureds and insurers to interpret alike, to the point that the question may be certified soon (see Liberty Surplus Insurance Corporation, et al. v. Ledesma & Meyer Construction Company, Inc, et al. (9th Cir. Case No. 14-56120)). This article addresses the basic coverage provision, the arguments raised by both sides, and some helpful tips in seeking coverage from the insurer.

The basic coverage provision

Most CGL policies, including the Insurance Services Office’s CGL Coverage Form used by many insurers, generally provide that they will “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” Further, the insurance purports to only apply if “the ‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory.’” Finally, the term “occurrence” is commonly defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” But how then, is an “accident” defined? Generally, it is given a commonsense interpretation, such as “an unexpected, unforeseen, or undersigned happening or consequence from either a known or unknown cause.” (Geddes & Smith, Inc. v. St. Paul-Mercury Indem. Co. (1959) 51 Cal.2d 558, 563-564.)

Yet this definition still leaves an open question when it comes to an insured’s negligent supervision, hiring, or retention of another’s unexpected intentional act. How is the “accident” evaluated in that instance? Is it from the standpoint of the insured? The injured party? The last cause of the victim’s injury? Unfortunately, the policy language does not further elaborate. Instead, various courts during the last several decades have defined an “accident,” and often in varying fashion.

Focusing on the acts of the insured

The most recent pronouncement by the California Supreme Court on the issue of an “accident” came in 2009, in the case of Delgado v. Interinsurance Exchange of the Auto. Club of Southern Calif. (2009) 47 Cal.4th 302. In a case dealing with the insured’s direct assault and battery of another, the Court rejected the insured’s three contentions: (1) that an accident should be evaluated from the standpoint of the injured party (the victim); (2) an accident could exist due to that injured party’s provocation; and (3) the insured’s motives or beliefs that his conduct was justified could constitute an accident. (Id. at 302-303, 306, 308.) Instead, an accident had to be evaluated from the nature of the insured’s actions, with the Court stating 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 on the insured.” (Id. at 304.) Furthermore, “the term ‘accident’ in the policy’s coverage clause refers to the injury-producing acts of the insured, not those of the injured party.” (Id. at 315 (emphasis added).)

In addition, an accident may exist “when any aspect in the causal series of events leading to the injury or damage was unintended by the insured and a matter of fortuity.” (Merced Mut. Ins. Co. v. Mendez (1989) 213 Cal.App.3d 41, 50.) An “accident” is present even when the insured performs a deliberate act as long as some additional, unexpected, independent, and unforeseen happening occurs that produces the damage. (Delgado, 42 Cal.4th at 315.) For example, Merced Mutual provided the following example: “When a driver intentionally speeds and, as a result, negligently hits another car, the speeding would be an intentional act. However, the act directly responsible for the injury – hitting the other car – was not intended by the driver and was fortuitous. Accordingly, the occurrence resulting in injury would be deemed an accident.” (Merced Mut., 213 Cal.App.3d at 50.) The focus is on the conduct of the insured and from the standpoint of the insured whether the ultimate injury, and the act causing it, was intentional.

In the case of an employer’s negligent supervision, hiring, or retention, the insured’s conduct is rooted in negligence. The insured did not intend, expect, or anticipate that, by their actions or inactions, harm would come to another through their employee’s intentional act. Instead, that intentional act operated as an “additional, unexpected, independent and unforeseen happening . . . that produces the damage.” (Ibid.) At minimum, when looking at the insured’s conduct for which liability was sought to be imposed, the negligence, and the injury to the victim, constitutes an “accident.”

A number of cases have found that negligent supervision of an intentional act can constitute an occurrence under a CGL policy. (Howard v. American National Fire Ins. Co. (2010) 187 Cal.App.4th 498 (finding duty to defend for negligent retention of molesting priest, and thus a covered “occurrence”); Fireman’ s Fund Ins. v. Nat. Bank for Cooperatives (N.D. Cal. 1994) 849 F.Supp. 1347, 1367-68 (finding negligent supervision for employee misrepresentations a covered occurrence – where negligent supervision “does not require intent and therefore can qualify as an accident”); State Farm v. Westchester Investment (C.D. Cal. 1989) 721 F.Supp. 1165, 1168 (negligent supervision of the property managers committing race discrimination – “possible liability against [the insured] under a negligent supervision of the property managers. This type of recovery does not require intent and can therefore constitute an ‘accident’ that is entitled to coverage.”); Westfield Ins. Co. v. TWT (N.D. Cal. 1989) 723 F.Supp. 492 (negligent supervision concerning financial dealings with a failed savings and loan association); Keating v. National Union (C.D. Cal 1990) 754 F.Supp. 1431, rev’d on other grounds, 995 F.2d 154 (corporate bonds fraudulently sold to customers of a savings and loan association).)

Looking at the actions of the insured is also consistent with at least one case from the Ninth Circuit: State Farm Mut. Auto Ins. Co. v. Davis (9th Cir. 1993) 7 F.3d 180 (applying California law). In Davis, the court was called upon to determine whether the conduct in question constituted an “accident” within the meaning of the coverage provision. (Id. at 183.) There, the insured (Painter) was the driver of a vehicle from which a drive-by shooting occurred. Coverage was sought by the victim under the vehicle’s auto policy. While Painter did not perform the actual shooting that caused the claimant’s injury, Painter was convicted of assault with a deadly weapon under an aiding and abetting theory of liability for driving the automobile. In the subsequent civil case, the claimant (as assignee of Painter’s rights) argued that the actions of Painter, as the driver of the vehicle, were accidental and thus covered under the policy.

Although Davis could have merely concluded that the shooting itself was intentional and thus no accident occurred – essentially the argument carriers make in only looking at the employee’s intentional act – it instead looked at Painter’s conduct and intent in light of the criminal conviction. The court focused on the insured’s actions and the insured’s intent in finding no coverage for Painter’s actions because his actions were intentional (and established by his criminal conviction).

The view that “accidents” should be determined based on the insured’s actions for which liability is sought to be imposed is also consistent with the scope of third-party liability insurance policies in California. Namely, those policies must draw on traditional tort concepts of fault, proximate cause, and duty. (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 407.) And tort liability can be imposed for negligent conduct that was a substantial factor in causing the harm alleged, where even an “indirect” cause can be a substantial factor on which liability can be predicated. (CACI 430; Bockrath v. Aldrich Chemical Co., 21 Cal.4th 71, 79 (Cal. 1999) (“The substantial factor standard is a relatively broad one, requiring only that the contribution of the individual cause be more than negligible or theoretical”).) Indeed, the law looks for purposes of a causation analysis “to those causes which are so closely connected with the result and of such significance that the law is justified in imposing liability.” (Delgado, at 315.)

It is a common refrain by insurers that the negligent supervision, retention, and hiring of an employee are “too attenuated” from the employee’s intentional act to trigger an occurrence. Yet this would divorce the third-party tort liability concepts from the coverage actually provided by third-party liability policies. It is logically inconsistent that an action can be both a substantial factor in causing an injury (subjecting the insured to liability) while at the same time too attenuated from that injury to constitute an “accident” (and depriving the insured of coverage). Instead, the import of this rule is that the policyholder’s coverage for tort liability should be the same as the scope of liability that may be imposed under tort-causation principles.

Reflecting that the scope of coverage under third-party liability policies overlaps with tort principles of causation is also wholly consistent with Delgado. (Delgado, 47 Cal.4th at 311.) The actions of the insured are the “starting point” for evaluation of the causal series of events. (Id. at 315.) It is that focus on the acts of the insured that is crucial. Additionally, the coverage analysis must look to the case asserted against the insured for the scope of the causal chain. (Ibid.) In Delgado, the allegations against the insured were for assault and battery – i.e., “the use of force on another . . .” The case against an employer will instead be related to their negligence, negligent supervision, and negligent hiring, in failing to protect the injured party from harm. By their very nature, those actions are unintentional and accidental, yet closely related enough to impose tort liability. They are also independent torts from the intentional act of their employee. (Minkler, 49 Cal.4th 315, 325 (claims of negligent supervision are not “vicarious” or “derivative” and are instead based on the insured’s “independent tort in failing to prevent” intentional acts).) Thus, an “accident” should be found.

Finally, evaluating an accident from the standpoint of the insured’s acts is consistent with the “severability” provision found in many insurance policies. These clauses generally provide that a policy applies: “As if each Named Insured were the only Named Insured” and “separately to each insured.” “[W]hen a multiparty liability insurance policy contains a severability provision, the effect is to extend both the policy’s coverage, and its exclusions, individually to each insured, as if he or she were the only insured, subject to policy limits.” (Safeco Ins. Co. of America v. Robert S. (2001) 26 Cal.4th 758, 771, 778) (J. Baxter, concurring and dissenting) (Justice Baxter would also write the 2010 Minkler decision cited above).) The employer’s actions should be evaluated individually – and those actions are based on negligence. An “accident” should surely follow.

Focusing solely on the intentional nature of the employee’s act

Insurers commonly focus on the nature of the employee’s intentional act − ignoring the insured’s actions in causing the injury – to deny coverage for lack of an occurrence resulting from an “accident.” Namely, a “seemingly unbroken line of authority” in California indicates that “the term ‘accident’ unambiguously refers to the event causing damage, not the earlier event creating the potential for future injury.” (Maples v. Aetna Casualty & Surety Co. (1978) 83 Cal.App.3d 641, 647-648 (examining case law in relation to limitation of coverage to “injury to or destruction of property ... caused by accident”).) Although Delgado would incorporate this language, it did so for a different purpose. (Delgado, 47 Cal.4th at 316.)

Maples was primarily concerned with the proposition that the phrase “accidents which occur during the policy period,” in an insurance policy “refers not to the time the wrongful act was committed, but the time when the complaining party was actually damaged.” (Maples at 642.) There, the negligent maintenance of a boiler during the policy period would result six years later in a fire outside of the policy period. Maples thus dealt with the timing of when an occurrence occurs for purposes of the policy period, not whether it constitutes an occurrence. This differs from a case involving negligent supervision and retention, in that the insured’s actions caused the injury and occurred during the time of the injury to the victim, presumably causing the insured to file a claim under the correct policy period.

Furthermore, in Delgado, Maples is cited only a single time, and only in support of a single proposition – that the injured party’s prior provocative acts could not make the insured’s intentional assaultive conduct an “accident.” Delgado stated: “[i]n determining whether the injury is a result of an accident, taking into consideration acts or events before the insured’s acts would be illogical and contrary to California case law.” (Delgado, at 315.) It focused on the insured’s acts for a causation analysis: “[f]or that reason, the law looks for purposes of causation analysis ‘to those causes which are so closely connected with the result and of such significance that the law is justified in imposing liability.’” (Ibid.)

For assault and battery, “it is the use of force on another that is closely connected to the resulting injury” in imposing liability on the insured. (Id.) Delgado was not relying on Maples to parse between the insured’s negligent conduct, which imposed liability, and another actor’s intentional conduct. Nor could it. Instead, Delgado looked only to the intentional actions of the insured in that case to determine whether the event could constitute an accident. The same is not true for negligent supervision, negligent hiring, and negligence. In those cases, it is not the intentional conduct of the insured that is at issue. Rather, the conduct alleged against the insureds is the failure to use reasonable care “that is closely connected to the resulting injury,” which justifies imposing liability on the insured. Thus, the timing of an accident must be distinguished from whether one occurred.

Some cases have adopted Maples’ language in looking at the issue of negligent supervision, hiring, and retention of intentional acts, but insurers’ reliance on them is misplaced. For example, in Farmer v. Allstate Ins. Co. (C.D. Cal. 2004) 311 F.Supp.2d 884, aff’d 171 Fed. App’ x 111 (9th Cir. 2006), the district court examined coverage for an in-home day care operator (Mrs. Varela) in relation to an alleged molestation by her husband (Mr. Varela). The policy at issue provided coverage to Mrs. Varela for liability arising out of an “occurrence,” which was defined as “an accident … resulting in bodily injury or property damage.” (Id. at 891.) The district court first noted that the alleged molestation “was not an ‘occurrence’ because child molestation cannot be an ‘accident.’” (Ibid.) It then found that the negligence claims only created a potential for injury, and focused on the intentional molestation to find that no accident occurred. Yet that court readily admitted its opinion on an “accident” was dicta, stating: “[w]hile the Court feels that Mrs. Varela’s negligent conduct is not an ‘occurrence’ as defined in the Varela Policy, the Court need not decide this issue because other provisions of the Varela Policy unequivocally preclude coverage. Therefore, the Court assumes, without deciding, that Mrs. Varela’s conduct was an ‘occurrence’ within the meaning of the Varela Policy.” (Id at 893.)

Similarly, in American Empire Surplus Lines Ins. Co. v. Bay Area Cab Lease (N.D. Cal. 1991) 756 F.Supp. 1287, the district court examined liability coverage for a cab company where it was alleged that an employee had molested a child. The court found that “negligent hiring/supervision is not an ‘accident.’” (Id. at 1289.) The Bay Area Cab Lease court reasoned that, “even if it were accepted that the act of ‘negligent hiring/retention’ is the occurrence which gave rise” to the claimant’s injuries, “this is not a risk that is covered by the policy since it is not an ‘accident.’” (Id. at 1290.) The hiring and supervision of the employee “merely created the potential for injury to [the claimant] but was not itself the cause of the injury.” (Ibid.) Again though, American Empire found only that the Landlords, Owners, and Tenants’ policy at issue did not cover injuries occurring away from the premises of the insured, and suggested that a CGL policy – such as the one procured by many employers – would have been the appropriate policy to provide coverage. (Id. at 1289.) The policy in American Empire – unlike many CGL policies – also contained a specific exclusion for the conduct complaint of (assault and battery), with the court finding the real issue was whether the insured “purchased the right insurance policy to protect itself from liability in the event that something like this occurred. The court finds that it did not.”

Finally, one California appellate court adopted this reasoning, but did so in a depublished opinion. In L.A. Checker Cab Co-op., Inc. v. First Specialty Ins. Co. (2010) 186 Cal.App.4th 767 (depublished), the court examined whether a liability policy provided coverage to an employer for alleged negligent supervision related to the intentional assault committed by an employee, where the liability policy applied to bodily injury caused by an “occurrence,” defined as an “accident.” In L.A. Checker Cab, a cab driver and employee of the insured cab company got into an argument with a passenger. (Id. at 336-37.) The driver then pulled out a pistol and although the passenger alleged the driver shot him without further provocation and after he exited the cab, the driver claimed that the passenger continued to attack him and he fired in reaction. (Ibid.) The passenger brought an action against both the driver and the cab company for assault and battery, and against the cab company for negligent supervision, which the cab company tendered to its insurer, but the insurer declined coverage. (Ibid.) Allegedly, basing its decision on Delgado, the appellate court determined that “[the claimant’s] injury was not accidental as a matter of law and, consequently, there is no potential for coverage under the policy and no duty on the part of [the insurer] to defend or indemnify.” (Id. 337-38.) Specifically, in relation to the cause of action for negligent supervision, the L.A. Checker Cab court noted that “the term ‘accident’ unambiguously refers to the event causing damage, not the earlier event creating the potential for future injury ….” (Id., quoting Delgado, 47 Cal.4th at 316.)

But L.A. Checker Cab is not precedent, offers no binding authority, and limits its discussion of coverage for negligent supervision to two paragraphs, and only one of those paragraphs actually provides the court’s opinion. L.A. Checker Cab, as with many insurers, fails to discern the difference between the negligent acts of the insured and the intentional acts of a third-party – ignoring the specific language in Delgado that coverage must turn on the acts of the insured. And L.A. Checker Cab makes no mention of tort-based concepts of causation that must be used to determine the scope of third-party liability coverage. The failure to address, let alone even consider, these arguments is likely a significant reason for the depublication.

Conclusion

Clearly, this remains an undecided question, with authority and hints on both sides of the issue. Hopefully, the California Supreme Court will provide some guidance to insurers and insureds across the state, and in so doing confirm coverage for employer insureds (and others found responsible for negligent supervision, hiring, and retention) and ensure a source of recovery for victims of intentional torts.

In the meantime, insureds (and third-party claimants) are well advised to focus on the insured’s conduct in bringing about the harm. Focus on the negligent aspects of that conduct, particularly if the negligence contributed some additional harm beyond that of the employee’s intentional tort. Remember that claims of negligent supervision, hiring, and retention are independent torts based on an insured’s independent conduct. And finally, try to remind the insurer that its third-party liability policy, by necessity, incorporates tort concepts of proximate cause and fault. If an action is sufficiently causally connected so as to impose liability, it should not be too attenuated to trigger an occurrence under a CGL policy.