In 2018, California courts delivered several notable decisions on issues relating to insurance coverage, including the California Supreme Court's decision that an employer's negligent hiring, supervision and retention can constitute an "occurrence".
In Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., Inc., (2018) 5 Cal. 5th 216, the California Supreme Court addresses the question of whether an insured employer's negligent hiring, retention and/or supervision of an employee who intentionally injures a third party constitutes an "occurrence" under the employer's commercial general liability policy that defined "occurrence" as an accident.
The underlying case involved a claim of sexual molestation of a minor, committed by Ledesma's employee while performing work at a middle school in San Bernadino County. The minor filed a lawsuit against Ledesma alleging, in part, negligent hiring, retention and supervision. Liberty Surplus agreed to defend Ledesma under a reservation of rights and thereafter filed a declaratory relief action for a determination as to its duty to defend or indemnify. The trial court granted summary judgment in favor of Liberty Surplus and Ledesma appealed, ultimately resulting in the 9th Circuit certifying the coverage question to the California Supreme Court for resolution given the importance of the issue and the need for resolution of the question.
Liberty argued that there was no connection between the molestation and the alleged supervision/retention, with which the trial court agreed, finding that Ledesma's alleged negligence was too attenuated from the employee's conduct to have a causal connection.
In finding that the alleged negligent hiring, retention and supervision can constitute an "occurrence" or accident under Liberty Surplus' policy, the Court focused on the distinction between allegations against the employee perpetrator versus the employer, noting that the employer's conduct was independent from that of the employee. The Court also noted that barring a policy exclusion, California employers have an expectation of coverage for such claims, as they would with other negligence-based claims.
In another ruling, the California Court of Appeal found a duty to defend where an insured installed a fence which partially blocked an easement that provided access to a neighboring property. The Court held that that blocking access to the easement constituted wrongful invasion of the right of private occupancy, implicating coverage under the insurance policy's personal injury coverage. Albert v. Truck Insurance Exchange, (2018) 23 Cal. App. 5th 367.
In reaching its conclusion, the Court noted that personal injury coverage is triggered by the offenses enumerated in the policy, not the injury or damages suffered. The Court held that the "invasion of the right of private occupancy" need not be "physical," but can be non-physical interference with the use of enjoyment of real property. Blocking half of the sole road providing access to the plaintiff's property was found to be sufficient interference with the plaintiff's use of plaintiff's own property to implicate coverage by interfering with his "ability to access, use, develop, and enjoy [the property]."
Interestingly, the Court also rebuffed the argument that the plaintiff's allegations constituted the offense of "wrongful entry," since the fence was erected by the insured on her own property. Even though it may have been a wrongful interference with the plaintiff's access to plaintiff's property, there was no "wrongful entry" onto the plaintiff's property.
Finally, the Court of Appeal determined that the reduction in income from the inability to use real property as a nightclub
following the loss of a conditional use permit constituted damages because of property damage in the form of loss of use of tangible property that was not physically injured.
In Thee Sombrero, Inc. v. Scottsdale Insurance Company, 28 Cal. App. 5th 729, Thee Sombrero operated a nightclub on its property under a conditional use permit. Scottsdale's insured, CES, was hired by Thee Sombrero to provide security services. A patron at the nightclub was shot and another patron killed. Unbeknownst to Thee Sombrero, CES had converted an entrance into a "VIP entrance" to the club which did not have a metal detector and CES admitted that the gun that was the subject of the shootings was brought in through the VIP entrance. As a result of the shootings, Thee Sombrero's conditional use permit was revoked, but renegotiated to allow Thee Sombrero to operate a banquet hall, which produced less income than the nightclub.
The Scottsdale policy applied to damages because of "property damage", which was defined to include loss of use of tangible property that is not physically injured.
In the coverage action, the trial court court granted summary judgment in favor of Scottsdale, holding that Thee Sombrero suffered only uncovered economic damages, not damage to tangible property. The Court of Appeal unanimously reversed, holding that Thee Sombrero's inability to use its owned property constituted "loss of use of tangible property that is not physically injured" and further held that diminution in value is a measure of covered damages, as opposed to uncovered economic loss.
In reaching its conclusion, the Court declined to rule on whether 1) the loss of the conditional use permit, in and of itself, constituted a loss of use of tangible property; and 2) whether construction of the VIP entrance amounted to physical damage to tangible property.