Insurer Had No Duty to Defend Employer Accused of Negligent Hiring

California appeals court held employment-related practices exclusion precluded duty to defend insured in negligent hiring claim

By © Troutman Sanders LLP Feb 6, 2017

In Golden Eagle Insurance v. Munoz, the court held that an employment-related practices exclusion barred any duty to defend a claim that the insured negligently hired and supervised an employee alleged to have sexually assaulted and harassed another employee on the job.

The insured was accused of knowingly hiring a registered sex offender to work at its store who, in turn, hired the claimant, a female minor, who he allegedly proceeded to repeatedly kiss and hug at work.

The claimant filed a lawsuit against both the insured and the other employee. The insured was accused of negligently hiring and supervising the other employee, among other things, including wrongful termination in violation of public policy, constructive termination and failure to take reasonable steps to prevent harassment from occurring. The other employee was accused of sexual harassment, false imprisonment, and assault and battery.

The store tendered the suit to its commercial general liability insurer. 

The insurer filed a declaratory relief action against the insured, the employee, and the claimant, contending that it had no duty to defend or indemnify due to an employment-related practices exclusion in the policy, which stated, in part, that there is no coverage for bodily injury to a person "arising out of any … [e]mployment-related practices, policies, act or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person."

Further, it states: "This exclusion applies … [w]hether the insured may be liable as an employer or in any other capacity … ." The parties filed cross-motions for summary judgment concerning the exclusion's application and the trial court granted the insurer's motion. The claimant appealed, and the decision was affirmed.

Broad Scope

On appeal, the court noted that several courts have interpreted such exclusions as having a very broad scope. Relying heavily on Jon Davler Inc. v. Arch Ins. Co., 229 Cal. App. 4th 1025 (2014), the court reasoned that because the exclusion uses the phrase "such as," the fact that specific claims, like false imprisonment, assault and battery, and negligent supervision, are not enumerated in the exclusion does not mean that the exclusion does not apply to them.

Additionally, the court pointed out that there was nothing in the exclusion that limits it to causes of action based on intentional rather than negligent conduct and that the average layperson would know that the exclusion applied to both intentional and negligent acts. 

Applying the two part test of Low v. Golden Eagle Ins. Co., 104 Cal. App. 4th 306 (2002), also followed in Jon Davler, the court stated that the factors relevant to the determination of whether the events in the underlying action are within the scope of the exclusion include: "(1) the nexus between the [tort] at issue and the third party plaintiff's employment by the insured, and (2) the existence (or nonexistence) of a relationship between the employer and the third party plaintiff outside the employment relationship." The court found the nexus here to be "as close as a nexus can be," because "the only reason she suffered her injuries was because she was hired by [the insured] and directly supervised by [the other employee]." And it found no facts suggesting any other relationship than an employer-employee relationship. 

The court rejected the notion that the exclusion only applies to employment related practices, policies or omissions directed at the person claiming injury, noting that it expressly applies regardless of the capacity in which the insured is found liable for the plaintiff's injuries in the workplace: "A layperson would plainly understand the focus of the ERP exclusion is the injury and causes rather than the specific pleaded claims asserted against the insured. Here, it was alleged [the insured's] misconduct in hiring, supervising, and retaining [the other employee] facilitated and resulted in the acts of sexual harassment that caused [plaintiff's] injuries." 

The case is Golden Eagle Insurance Corporation v. Munoz, (Cal. Ct. App., unpub., Sept. 23, 2016).

Troutman Sanders LLP is an international law firm with offices located throughout the United States and Asia. © Troutman Sanders. All rights reserved. Reposted with permission. 

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