CGL Insurer Can’t Avoid Covering Employer for Negligent Hiring of Employee Who Committed Intentional Wrong, California Supreme Court Says

By statute, California law holds that willful misconduct—where an insured intends to cause someone harm—is not insurable as a matter of public policy. For years, insurance companies have sought to expand this prohibition to exclude coverage where anyone acts deliberately, regardless of the intent of the insured, or the insured’s intent to cause harm.

In Liberty Surplus Ins. Corp. v. Ledesma & Meyer Construction Co. Inc ., the California Supreme Court on June 4 decisively came down in favor of an insured employer who had been sued for negligent supervision and hiring. In the new decision, the policyholder, a construction company, was sued for its alleged negligent hiring and supervision of an employee who ended up committing child abuse in connection with his employment. While Liberty defended the employer policyholder for a time, it also sued for a coverage declaration, arguing that the willful misconduct of the employee deprived the employer policyholder of its coverage. The federal trial court agreed with Liberty, excusing it from coverage and handing it a judgment for the defense fees it had expended, plus interest.

While on appeal, the Ninth Circuit asked the California Supreme Court to answer the following question of state law:

Whether there is an “occurrence” under an employer’s commercial general liability policy when an injured third party brings claims against the employer for the negligent hiring, retention, and supervision of the employee who intentionally injured the third party.

A unanimous California Supreme Court responded that the intentional conduct of the employee does not preclude coverage for the insured employer, who had a legitimate expectation of coverage under its comprehensive general liability insurance policy, just as it did for other claims of negligence. The court held that when a third party sues an employer for the negligent hiring, retention and supervision of an employee who intentionally injures a third party, the suit can allege an “occurrence” under the employer’s CGL policy if the injury can be considered accidental. And the determination of whether the conduct is “accidental” must be viewed based on the conduct of the insured, not the conduct of the aberrant employee.

While the decision specifically addresses a scenario of coverage for an employer in the context of a negligent hiring and supervision claim involving sexual misconduct by an employee, the principal is stated broadly, and should serve to refute insurers’ efforts in other situations where they seek to deny coverage because someone other than the insured acted with bad intent.