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By: Rebecca Smith and Zach Moura
It may just be, according to the California Supreme Court’s recent decision in Liberty Surplus Ins. Corp. v. Ledesma & Meyer Construction Co., Inc. (June 4, 2018, No. S236765). In Liberty v. Ledesma, the underlying lawsuit was brought by a minor who sought damages for molestation committed by an employee of a general contractor (“L&M”) while the employee was working on a long-term construction project at the minor’s school. In response to this underlying suit and the tendering of the action by L&M to its carrier, Liberty Surplus Insurance Corporation and Liberty Insurance Underwriters (“Liberty”), Liberty filed a declaratory relief action seeking to adjudicate that they had no duty to provide coverage under a general liability policy.
The certified question presented to the Supreme Court by the 9th Circuit Court of Appeals was when a third party sues an employer for negligent hiring, retention and supervision of an employee who intentionally injured that third party, does the suit allege an “occurrence” under the employer’s general liability policy? The Supreme Court responded that the answer turns on whether the injury can be considered “accidental” and concluded “it can.”
In reaching its decision, the Supreme Court acknowledged that the act of L&M in hiring the employee who later turned out to be the molester was intentional and that the employee’s molestation of the student was also intentional; however, held that because L&M did not “expect” its employee to molest a student, an accident transpired as required by the definition of “occurrence” in the Liberty policy. The Court emphasized that the issue of whether an act constituted an accident for purpose of coverage MUST be viewed from the standpoint of the insured. Explaining their decision, the Court stated that because the molester’s acts were unanticipated from L&M’s perspective, they were accidents in the context of providing insurance. The allegedly negligent hiring, retention and supervision were independently tortious acts according to the Supreme Court, which form the basis of their claim against Liberty for defense and indemnification. Further, the Court stated that the molester’s intentional conduct did not preclude potential coverage for L&M.
While the Supreme Court effectively wiped out a line of California Court of Appeal decisions which held that the unexpected consequences of an intentional act are not an accident, the Court pointed out that if the determination was justified in that if the insurer’s argument regarding the definition of occurrence and accident were accepted, it would leave employers without coverage for claims of negligent hiring, retention or supervision whenever the employee’s conduct is deliberate. Such a result, the Court opined, would be inconsistent with California law, which recognizes the cause of action even when the employee acted intentionally.
It is expected that the opinion will lead to an increase in claims to insurers from employers facing negligent hiring claims. It may also lead to an increase in litigation of coverage for liability claims based on intentional acts that result in allegedly unexpected injury, which would previously have been denied on the basis that the unexpected consequences of an intentional act are not an accident and therefore, not an occurrence under personal injury liability coverage.
If you have any questions or would like more information, please contact Rebecca Smith at [email protected] or Zach Moura at [email protected].