California Supreme Court Rules That General Liability Insurer Must Defend Employer Against Employee Misconduct Allegations

The Supreme Court of California has ruled that a general liability insurer must defend an employer against allegations of employee misconduct, reinforcing the breadth of (1) what constitutes an "occurrence" under an employer's commercial general liability (CGL) policy and (2) the duty to defend regarding claims for negligent hiring, retention and supervision. The opinion in Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. Co., Inc. can be found here.

Ledesma & Meyer (L&M), a construction company, was contracted by the San Bernardino Unified School District to manage a construction project at a middle school. The company assigned Darold Hecht as assistant superintendent on the project. In 2010, a 13-year-old student at the school (Jane Doe) sued in state court alleging that Hecht had sexually abused her during the course of his work on the job. The suit included a cause of action against L&M for negligently hiring, retaining and supervising Hecht.

L&M tendered the defense to its CGL insurers (Liberty), who defended under a reservation of rights while seeking declaratory relief in federal court. Liberty maintained that it had no obligation to defend or indemnify L&M because no "occurrence" was alleged under the policy, which defined the term "occurrence" as "an accident." The district court agreed, reasoning that the "alleged negligent hiring, retention and supervision were acts antecedent to the sexual molestation .... While they set in motion and created the potential for injury, they were too attenuated from the injury-causing conduct committed by Hecht." The district court therefore granted summary judgment to Liberty on the cause of action for negligent hiring, retention and supervision. L&M appealed to the Ninth Circuit, which sought guidance from the Supreme Court of California, posing the question: "When a third party sues an employer for the negligent hiring, retention, and supervision of an employee who intentionally injured that third party, does the suit allege an 'occurrence' under the employer's commercial general liability policy?" The Supreme Court of California held that it did.

The framework for the inquiry was whether Liberty had a duty to defend L&M against Doe's lawsuit. Under California law, "the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential." Liberty argued that Hecht's intentional misconduct could not be covered because it was not...