California Supreme Court Holds Insured Entitled to Coverage Under CGL Policy for Negligent Hiring

In its recent decision in Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. Co.,2018 Cal. LEXIS 4063 (Cal. June 4, 2018), the Supreme Court of California addressed the question of whether an insured’s negligent hiring, retention and supervision of an employee who intentionally injured a third-party can be considered an occurrence under a general liability policy.

The insured, L&M, was the construction manager on a project at a middle school in California. It was alleged that one of its employees sexually abused a thirteen year old student during the course of the project. The student later brought a civil suit against L&M based on its negligent hiring, retention and supervision of the employee-perpetrator.

L&M’s general liability insurer, Liberty, denied coverage on the basis that because the underlying incident was not accidental, the derivative negligence claims against L&M necessarily were not caused by an occurrence either.  In the ensuing coverage litigation, the United States District Court for the Eastern District of California held in Liberty’s favor, reasoning that L&M’s hiring, supervision and retention of the employee were not the injury-causing acts.  On appeal, the United States Court of Appeals for the Ninth Circuit elected to certify this question to the California Supreme Court.

In considering the question, the Court began its analysis by revisiting the distinction between coverage for a perpetrator of sexual assault and the employer of the perpetrator, as explained in its 2010 decision in Minkler v. Safeco Ins. Co. of America, 49 Cal. 4th315 (Cal. 2010).  Minklerestablished that while the perpetrator is not entitled to coverage for his or her misconduct, L&M’s allegedly negligent hiring, retention, and supervision were independently tortious acts” and therefore had to be considered independently for coverage.  The Court agreed that the district court properly distinguished between the perpetrator’s liability and L&M’s liability, but failed to properly analyze the facts.

Specifically, the Court rejected the district court’s analysis on the issue of causation.  Coverage for L&M, explained the Court, turned “on whether the damages for which the insured became liable resulted – under tort law– from covered causes.” (Emphasis in original.). That is, the inquiry must be whether the insured’s conduct is a “substantial factor” in bringing about the plaintiff’s injury.  While the district court found that L&M’s alleged negligence was too attenuated to be the cause of the plaintiff’s injury, the Court disagreed, citing to numerous California decisions in which an employer’s negligence can be considered a substantial factor in a sexual molestation claim, so long as the negligence is the starting point of the series of events leading to the act of molestation.  The Court found that L&M’s negligence was, in fact, the starting point for the underlying misconduct.

After distinguishing numerous cases relied on by Liberty and the district court, the Court discussed the societal implications of allowing coverage for the derivative claims against employers resulting from sexual abuse committed by employees.  The Court did not see a public policy reason that would preclude coverage for such claims.  On the contrary, it recognized economic and practical reasons for allowing such coverage, explaining:

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 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.