Insurer Must Cover Employer’s Cost to Fight Negligent Hiring Case

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By Joyce E. Cutler

Liberty Surplus Insurance Corp. must pick up the costs a Southern California construction company paid to defend against claims it negligently hired a twice-convicted registered sex offender who later raped a 13-year-old girl at a school construction site, the California Supreme Court ruled.

The ruling means employers in California with comprehensive liability policies can expect reimbursement for the costs of defending a negligent hiring claim.

But the state high court’s decision may only be the tip of the iceberg for insurers in the Golden State. The June 4 ruling also could extend beyond any alleged negligence of employers and implicate pharmaceutical company insurers like Travelers Property Casualty Co. that face claims they should pay for opioid-related litigation costs.

The decision affects “all types of businesses to help them get it covered for things they would never have allowed or authorized” their people to do, Steven W. Murray of Steven W. Murray APC, in Sherman Oaks, Calif., told Bloomberg Law. Murray submitted a brief to the court in support of the construction company in the case, Ledesma & Meyer Construction Co.

The court’s near-unanimous ruling resolves an unsettled area of insurance law—whether claims of negligence that harm a third party are considered to be accidents and covered as “occurrences” under liability insurance. The court said such claims can be considered accidents.

“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,” Justice Carol Corrigan wrote for the court.

Liability, Coverage

A state trial court found Ledesma & Meyer liable by for negligently hiring Darold Hecht, a convicted sex offender who subsequently assaulted the girl at a San Bernardino Unified School District construction site.

The middle school student was awarded $3.2 million from Ledesma, which covered the school district’s legal costs under the contract.

Ledesma’s insurer, Liberty Surplus, then filed a federal lawsuit saying it wasn’t obligated to cover the district’s costs as an accident under the policy. When that case was appealed to the U.S. Court of Appeals for the Ninth Circuit, the federal appeals court asked the California Supreme Court to decide whether an insurance company should be liable for legal defense costs in a case stemming from the willful act of an insured company’s employee.

It’s undisputed that Hecht’s sexual misconduct was a “willful act” beyond the scope of insurance coverage under California’s Insurance Code section 533, Justice Corrigan said. “However, Hecht’s intentional conduct does not preclude potential coverage for L&M,” said Corrigan, whose opinion was joined by five other justices. Justice Goodwin Liu filed a separate and concurring opinion.

Coverage Legitimately Expected

Liberty maintained that Hecht’s molestation of the girl wasn’t an unexpected consequence of L&M’s independently tortious acts of negligence.

“Liberty’s arguments, if accepted, would leave employers without coverage for claims of negligent hiring, retention, or supervision whenever the employee’s conduct is deliberate. Such a result would be inconsistent with California law, which recognizes the cause of action even when the employee acted intentionally,” the court said. “The requirements for liability of this kind are not easily met, but they are well established. Absent an applicable exclusion, employers may legitimately expect coverage for such claims under comprehensive general liability insurance policies, just as they do for other claims of negligence.”

It’s “just not a viable argument any longer” that employers cannot be covered by commercial general liability policies, Jeffrey I. Ehrlich, of the Ehrlich Law Firm who argued for L&M, told Bloomberg Law.

“We have seen lots of cases where the courts have disposed of insurance claims at the outset on the grounds that the conduct was not an accident because it was a consequence of the insured’s volitional or deliberate act. Some of those cases will survive this opinion and some of them won’t, and it’s not entirely clear what the circumstances of what the boundary of unexpected, unforeseen, and independent acts are,” Ehrlich said.

Representatives for Liberty weren’t immediately available for comment.

The case now returns to the U.S. Court of Appeals for the Ninth Circuit.

Opioid Implications

The ruling also has implications for ongoing opioid litigation.

The state Supreme Court agreed in February to review a state appellate decision that held Travelers Property Insurance Co. has no duty to defend Watson Pharmaceutical Inc., under its insurance policies. The policies covered bodily injuries caused by an accident rather than any deliberate and intentional conduct alleged in lawsuits filed by the city of Chicago and Orange and Santa Clara counties.

Chicago and the California counties also alleged Purdue Pharma LP, Johnson & Johnson’s Janssen Pharmaceuticals, Endo Health Solutions Inc., Actavis Inc., Watson, and Teva Pharmaceuticals used fraudulent marketing to target susceptible prescribers and vulnerable populations to expand the sales of opioid products. Teva settled last year for $1.6 million.

The justices granted review in the case and deferred briefing until it released an opinion in the Liberty case.

Patrick Fredette and Christopher Ryan of McCormick, Barstow, Sheppard, Wayte & Carruth LLP in Cincinnati represent Liberty. Jeffrey Ehrlich of the Ehrlich Law Firm in Claremont, Calif., and Michael J. Bidart and Ricardo Echeverria of Shernoff Bidart Echeverria in Los Angeles represent Ledesma & Meyer.

The case is Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co,. Inc., Cal., No. S236765, order filed 6/4/18.

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