Ins. Commissioner of California v. Golden Eagle Ins. Co.

Filed 3/27/07 Ins. Commissioner of California v. Golden Eagle Ins. Co. CA1/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION THREE

In this appeal, claimant Danco Valve Company (Danco) seeks relief from a judgment denying its application for an order to show cause against the Insurance Commissioner of the State of California, as conservator of Golden Eagle Insurance Company (Golden Eagle). Danco challenges the trial courts determination that the relevant policies absolve Golden Eagle of a duty to defend sexual harassment claims brought by a bookkeeper at Dancos workplace. Like the trial court, we conclude the policies exclude coverage for such claims. Accordingly, we affirm the judgment.

BACKGROUND

In 1960, Thomas Dante founded the Dante Valve Company (Dante). Twenty-five years later, members of the Dante family incorporated Danco, a manufacturer of safety and pressure release valves for use in military applications. Although Danco and Dante are separate corporations, they share the same place of business and the same corporate officers, all of whom are members of the Dante family.

In 2002, Dante sued its bookkeeper of over 10 years for conversion, fraud and unjust enrichment after discovering she had forged checks and misappropriated company funds. The bookkeeper responded in May 2003 with a cross-complaint against Dante and Danco, alleging claims for gender and pregnancy discrimination, sexual harassment, intentional infliction of emotional distress and violation of the California Family Rights Act (Gov. Code,  12945.2). She alleged numerous incidents of sexually explicit behavior and claimed such behavior and comments by her supervisorsall members of the Dante familycreated a hostile work environment that caused her to suffer, among other things, severe emotional and physical distress.

Dante and Danco tendered defense of the bookkeepers cross-complaint to Golden Eagle under three policies: a commercial general liability (CGL) policy covering August 1, 1995 through August 1, 1997, and two workers compensation and employer liability policies covering January 1, 1995 through January 1, 2001. Only the CGL policy is at issue in this appeal. Golden Eagle provided CGL coverage for Dante and Danco, which were jointly named as insureds, under two successive policy agreements. Most of the relevant terms of the policies are identical. Among other things, the policies cover liability for bodily injury, which is defined as bodily injury, sickness or disease sustained by a person, including death, and personal injury, which is defined as an injury other than a bodily injury arising out of the offenses of false imprisonment, malicious prosecution, wrongful eviction, defamation or invasion of privacy. Covered bodily injuries were limited to those caused by an occurrence, which was defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

Both policies also included an endorsement entitled Employment-Related Practices Exclusion (ERP exclusion), though they differed slightly in wording. The policy covering August 1, 1995 through August 1, 1996 (1995-1996 Policy) excluded coverage for bodily injury or personal injury arising out of any: (1) Refusal to employ; (2) Termination of employment; (3) Coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or other employment-related practices, policies, acts or omissions; or (4) Consequential [bodily or personal] injury as a result of (1) through (3) . . . . Under the paragraph describing this exclusion with respect to bodily injury coverage, the policy stated: This exclusion applies whether the Insured may be held liable as an employer or in any other capacity and to any obligation to share damages with or to repay someone else who must pay damages because of the injury. This sentence was not repeated in the paragraph describing the ERP exclusions application to personal injury coverage.

Similarly, the policy covering August 1, 1996 through August 1, 1997 (1996-1997 policy) excluded coverage for bodily injury or personal injury to a person arising out of any: (a) Refusal to employ that person; (b) Termination of that persons employment; or (c) Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person . . . . As in the 1995-1996 policy, consequential injuries suffered by family members of the injured party were also excluded. Unlike the 1995-1996 policy, though, the 1996-1997 policy specified with respect to both bodily injury and personal injury coverage that the ERP exclusion applied [w]hether the Insured may be liable as an employer or in any other capacity.

On November 11, 2003, Golden Eagle denied coverage for the cross-complaint. First, Golden Eagle stated emotional distress claims unaccompanied by physical injury were not considered to be bodily injury within the policies, and any bodily injury claims alleged by the bookkeeper were not the result of an occurrence, or accident. Second, Golden Eagle did not believe the cross-complaint alleged any personal injury offenses that occurred during the policy period. Finally, with respect to both bodily injury and personal injury coverage, Golden Eagle noted that the ERP exclusion expressly barred coverage for the types of claims asserted.

Dante and Danco did not challenge this coverage decision until almost nine months later. On August 9, 2004, counsel for Dante and Danco sent a letter to Golden Eagle to follow up with additional information on the claims provided at the bookkeepers deposition. Contrary to allegations of the cross-complaint, made against both Danco and Dante, the bookkeeper identified only Dante as her employer in deposition. Counsel also provided more detail about the abusive incidents the bookkeeper described and the emotional and physical consequences she claimed to have suffered as a result of the abuse.

After reviewing transcripts of the bookkeepers nine-session deposition, Golden Eagle again denied coverage. Once again, Golden Eagle concluded the cross-complaint did not allege any bodily injury that had resulted from an occurrence, and coverage for any personal injury or bodily injury alleged by the bookkeeper was specifically barred by the ERP exclusion. Golden Eagle also observed that the two alleged personal injury incidents, for false imprisonment, occurred outside the coverage years. Finally, Golden Eagle concluded it was irrelevant whether Danco or Dante was the bookkeepers employer, since the CGL policies listed both companies as insureds and since the ERP exclusions expressly applied whether the insured was held liable as an employer or in any other capacity.

Pursuant to the procedures established for adjudicating coverage claims against Golden Eagle, Danco filed an application for an order to show cause (OSC) on December 16, 2004. In opposing the OSC, Golden Eagle repeated the reasons raised in its letters denying coverage and also argued that Dancos application was untimely because it was brought more than a year after Golden Eagle initially denied coverage (Ins. Code,  1032), and the bookkeepers employment status was not newly discovered evidence that could extend the time for filing. On June 9, 2005, the trial court denied Dancos request for an OSC. Without addressing Golden Eagles timeliness argument, the court concluded that although the cross-complaint alleged bodily injury and personal injury as these terms are defined in the policies, coverage was specifically excluded under the ERP exclusion. Considering the wording of the ERP exclusion, the court concluded it applied even if Danco was not the bookkeepers employer.

DISCUSSION

I. Standard of Review

Because Golden Eagle is in liquidation, our review, like the trial courts review, is circumscribed. (Low v. Golden Eagle Ins. Co. (2002) 104 Cal.App.4th 306, 315 (Low).) In determining claims made against an insolvent insurer, the Insurance Commissioner  exercises the states police power to carry forward the public interest and to protect policyholders and creditors of the insolvent insurer. [Citation.] . . . [] In exercising this power, the Commissioner is vested with broad discretion. [Citation.] [Citation.] (Quackenbush v. Mission Ins. Co. (1996) 46 Cal.App.4th 458, 465-466.) If the trial court is called upon to review the Insurance Commissioners rejection of a claim, its review is conducted in a summary show-cause procedure under Insurance Code section 1032. [Citation.] It has consistently been held that the trial court, acting on an OSC, must affirm the actions of the commissioner as conservator unless they constitute an abuse of discretion. (Garamendi v. Golden Eagle Ins. Co. (2005) 128 Cal.App.4th 452, 465-466, fn. omitted.) Like the trial court, we too apply the abuse of discretion standard of judicial review on appeal. (Low, supra, 104 Cal.App.4th at p. 316; see also In re Executive Life Ins. Co. (1995) 32 Cal.App.4th 344, 358 [review of Insurance Commissioners action for abuse of discretion considers whether the action was arbitrary, i.e., unsupported by a rational basis].) Applying this circumscribed standard of review, we conclude neither the trial court nor the Insurance Commissioner abused their discretion in concluding Golden Eagle did not have a duty to defend Danco against the claims asserted here.

II. Scope of the ERP Exclusion

[A] liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081.) The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy. [Citation.] (Ibid.) [T]he insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 300.) An insurance companys duty to defend is not unlimited, however. It arises from the contractual terms of the insurers policy and  is measured by the nature and kind of risks covered by the policy [citations]. [Citation.] (Frank and Freedus v. Allstate Ins. Co. (1996) 45 Cal.App.4th 461, 469 (Frank and Freedus).)

We interpret the language of an insurance policy in light of its plain and ordinary meaning, unless the Policy clearly indicates to the contrary. When the language is clear a court should not give it a strained construction to impose on the insurer a liability it has not assumed. [Citation.] An insurance company has the right to limit the coverage of a policy issued by it and the plain language of the limitation must be respected. [Citation.] . . . [Citation.] (Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1118.) If policy language is ambiguous, we must first attempt to interpret the ambiguous provision in the sense the insurer believed the insured would reasonably and objectively have understood it when the policy was issued. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264-1265.) (Acceptance Ins. Co. v. Syufy Enterprises (1999) 69 Cal.App.4th 321, 326.) Only if the ambiguity remains after consideration of the policy language and context and of the parties reasonable expectations, do we construe the ambiguous provision against the insurer and in favor of coverage. (Acceptance Ins. Co. v. Syufy Enterprises, supra, 69 Cal.App.4th at p. 327.)

Several published decisions have interpreted the meaning of the ERP exclusion at issue in this case. Frank and Freedus, supra, 45 Cal.App.4th 461, involved an ERP exclusion worded exactly the same as the ERP exclusion in the 1995-1996 policy. That is, the provision excluded coverage for, inter alia, [b]odily injury or personal injury arising out of any: [] . . . [] (3) [c]oercion, . . . defamation, harassment, . . . or other employment-related practices policies, acts or omissions . . . . (Id. at p. 470.) In holding the insurer had no duty to defend an attorneys suit against his former employer for defamation, the Frank and Freedus court rejected attempts to characterize the term employment-related in the ERP exclusion as ambiguous: The term is not technical in nature. It is used in its ordinary sense, i.e., related to employment. As a term, it modifies the specified acts . . . as well as the terms practices, policies, acts or omissions. The clear meaning of [this subdivision] of the exclusion is coverage for practices, policies, acts or omissions which are related to employment . . . . (Id. at p. 471.) The court concluded the ERP exclusion applied even though the allegedly defamatory statement was made after the attorneys employment had been terminated. (Id. at pp. 471-473.) The statement was nevertheless employment-related because it was made in the context of [the attorneys] employment and its content was directed to [his] performance during employment. (Id. at pp. 471-472; see also Loyola Marymount University v. Hartford Accident & Indemnity Co. (1990) 219 Cal.App.3d 1217, 1223 (Loyola Marymount) [Even though postemployment defamations would involve injuries occurring after the employment [citation], the offenses would still fall clearly within the policy exclusion, as either directly or indirectly related to the employment . . . ].)

In Golden Eagle Ins. Corp. v. Rocky Cola Caf, Inc. (2001) 94 Cal.App.4th 120, 127 (Rocky Cola), the court relied on Frank and Freedus and Loyola Marymount in concluding that complained-of conduct must, at a minimum, be made in the context of the persons employment for the ERP exclusion to apply. The question in Rocky Cola was whether an ERP exclusion barred coverage for a defamation claim based on statements calling the plaintiff a sexually promiscuous and calculating bitch uttered by a man who was her supervisor but also her lover. (Id. at pp. 123, 128-129.) Under the circumstances, the court concluded this statement was not made in the context of [the plaintiffs] employment for purposes of the ERP exclusion, [n]or was the content of the remark directed to her performance during employment or to anything else relating to her employment. (Id. at pp. 128-129; see also HS Services, Inc. v. Nationwide Mutual Ins. Co. (9th Cir. 1997) 109 F.3d 642, 646-647 (HS Services) [concluding ERP exclusion did not bar coverage for post-termination defamation of former employee who had launched a competing business].)

Division Four of this District attempted to harmonize these decisions in Low, supra, 104 Cal.App.4th 306. In considering whether a Golden Eagle policys ERP exclusion barred coverage for alleged defamation against a former employee, Low distilled several factors relevant to determining whether a claim is employment-related. First, the court observed, the mere fact the alleged tort sued on arose after the employment relationship had ceased cannot, per se, serve to take the case out of the ambit of the ERP exclusion. (Id. at p. 314.) Instead, the timing of such conduct is one of the handful of factors relevant to the ultimate determination that the events in suit either were, or were not, within the scope of the exclusion. (Ibid.) [O]ther factors relevant to that ultimate determination include (1) the nexus between the allegedly defamatory statement (or other tort) at issue and the third party plaintiffs 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. (Ibid.)

Applying this formulation, we readily conclude the bookkeepers allegations against Danco are employment-related. All of the discriminatory and harassing conduct alleged in the cross-complaint and described in the bookkeepers mediation brief occurred at the workplace, while she was still employed there, and was perpetrated by her supervisors. All of the supervisors who allegedly harassed her were officers of Danco (as well as Dante). There is no evidence the bookkeeper had any relationship with Danco or these supervisors outside the employment relationship. Unlike the former employee-turned-competitor in HS Services, supra, 109 F.3d at pp. 646-647, or the spurned ex-girlfriend in Rocky Cola, supra, 94 Cal.App.4th at pp. 128-129, the only connection between the bookkeeper and Danco stemmed from her employment by Danco supervisors and their allegedly harassing conduct toward her at Dancos workplace. Especially in light of the broad interpretation California courts have consistently afforded the phrase arising out of in insurance contracts (Acceptance Ins. Co. v. Syufy Enterprises, supra, 69 Cal.App.4th at p. 328),[1] we cannot conceive of how the bookkeepers claims do anything but aris[e] out of . . . employment-related practices, policies, acts or omissions. All of the claims alleged in the cross-complaint concern [c]oercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation [or] discrimination related to the bookkeepers employment. Accordingly, the ERP exclusions in both the 1995-1996 policy and the 1996-1997 policy apply, and Golden Eagle had no duty to defend its insureds against the bookkeepers claims.

Nevertheless, despite the otherwise clear application of the ERP exclusion, Danco insists Golden Eagle had a duty to defend it because Danco was not technically the bookkeepers employer. The factual premise for this argument is less certain than Danco would have us believe. The cross-complaint alleges that during all relevant times the bookkeeper was employed by Dante and Danco. Danco claims the bookkeeper testified she only worked for Dante, but in fact the deposition testimony leaves room for uncertainty. When asked whom she worked for at a specific point in time, the bookkeeper responded, Dante Valve Company. As far as we can tell from the record submitted on appeal, she was never asked about Danco and did not specifically deny being employed by Danco. On the contrary, she described many duties she performed for Danco, including making deposits for Danco and transferring money between the Dante and Danco accounts.

Even assuming the bookkeeper was technically employed by Dante only, this distinction does not change the type of injuries she alleges, which are clearly employment-related. The record shows Danco and Dante were closely interrelated business operations. They shared the same place of business and the same shareholders and officers. More importantly, the supervisors who allegedly harassed and discriminated against the bookkeeper were principals of Danco. Because the cross-complaint identifies Danco officersnamely Michael Dante, Charles Dante and Thomas Danteas wrongdoers, there is a direct nexus between the wrongful conduct alleged and Dancos employment-related practices. Any other interpretation would elevate form over substance and ignore the reality of the work environment alleged in the cross-complaint. Danco complains the trial court improperly construed the policy phrase employment-related to mean employee-initiated, but it is Dancos interpretation that is strained. As the 1996-1997 version of the ERP makes clear, the policy excludes coverage for complaints of unlawful employment practices brought by a person. There is no requirement in either version of the ERP exclusion that the person bringing such employment-related complaints be an employee of the insured. To read in such a requirement would run counter to settled California law holding claims for post-termination conduct brought by former employees may fall within an ERP exclusion. (Low, supra, 104 Cal.App.4th at p. 314; Frank and Freedus, supra, 45 Cal.App.4th at pp. 471-472.) Our conclusion is further supported by policy language stating that the ERP exclusion applies to claims arising out of employment-related practices [w]hether the Insured may be held liable as an employer or in any other capacity . . . . This language reinforces the broad definition of claims to be excludedi.e., all claims arising out of employment-related practices, regardless of the basis for asserting liability against the insured.

The factual predicate for the bookkeepers claims distinguishes this case from North American Building Maintenance, Inc. v. Firemans Fund Ins. Co. (2006) 137 Cal.App.4th 627 (NABM), a case Danco brought to our attention shortly before oral argument. In NABM, the Court of Appeal for the Fifth Appellate District considered whether an ERP exclusion applied to false imprisonment claims brought by employees of a subcontractor of the insured, based upon incidents at a third partys jobsite. (Id. at pp. 630-631.) Without discussing any of the aforementioned decisions interpreting the scope of standard ERP exclusions, the NABM court decided the language of an ERP exclusion similar to the one in this case was ambiguous and therefore had to be construed against the insurer. (Id. at pp. 641-642.) Applying this construction, the court concluded a reasonable interpretation of the [ERP] exclusion is that it does not apply where the insured is not the employer or former employer, and never was the prospective employer, of the third party claimant. (Id. at p. 642.)

The courts finding of ambiguity in NABM was not based on the entirety of the ERP exclusion but focused only on the phrase stating the exclusion applied [w]hether the insured may be liable as an employer or in any other capacity. (NABM, supra, 137 Cal.App.4th at pp. 640-642.) Although the NABM court states (twice) that it find[s] no unmistakable meaning to this phrase (id. at pp. 641, 642), we believe that in most contexts the meaning of the sentence in which it appears will be reasonably clear. The full sentence suggests that coverage for employment-related practices will be excluded,regardless of whether a claim seeks to hold the insured liable as an employer or in some other role. The passage represents the insurers attempt to broaden the scope of the exclusion to ensure that it will apply in situations like the one before us, in which liability is asserted by one who may be technically a non-employee. We agree with the NABM court that exclusionary clauses are strictly construed, but   strict construction does not mean strained construction. [Citations.] We may not, under the guise of strict construction, rewrite a policy to bind the insurer to a risk that it did not contemplate and for which it has not been paid. [Citation.] [Citation.] [Citation.] (Gunderson v. Fire Ins. Exchange, supra, 37 Cal.App.4th at p. 1118.)

The courts interpretation of the exclusion in NABM was undoubtedly influenced by the unique facts of that case, which are distinguished from those here. The claims in NABM were brought by employees of an independent contractor hired by the insured. (NABM, supra, 137 Cal.App.4th at pp. 630-631.) Unlike the record here, evidence presented in NABM established the two companies were distinct entities, and the insureds liability appeared to be premised only upon its hiring of the contractor that employed the plaintiffs. (See id. at pp. 630-631, 635.) Moreover, the CGL policy in NABM included an additional endorsement that provided coverage for wrongful employment practices, which were very similar to the employment-related practices excluded by the ERP provision. (Id. at p. 634.) This endorsement defined covered claims as those brought by  any employee, former employee or applicant for employment,  and it specifically excluded claims brought by any employee of an independent contractor. (Id. at p. 643.) Since the endorsement was apparently designed to allow insureds to purchase coverage for claims otherwise excluded by the ERP clause, the NABM court interpreted the two provisions together and reached the reasonable conclusion for that policy that the scope of the ERP exclusion was limited to claims brought by former, current or prospective employees. (Id. at pp. 642-643.) No corresponding coverage for wrongful employment practices exists in the two Golden Eagle policies before us. Without this predicate, there is no reason to import NABMs analysis to the different facts and policies involved in this case.

Finally, Danco argues language extending the ERP exclusion to liability in any other capacity cannot justify absolving Golden Eagle of a duty to defend because one of the policies here, i.e., the 1995-1996 policy, used this language with respect to bodily injury coverage only. Because the 1995-1996 policy did not repeat the same language in the paragraph addressing the ERP exclusions application to personal injury claims, Danco asserts Golden Eagle was obligated to defend these claims and, by extension, all claims in the cross-complaint. (See Horace Mann Ins. Co. v. Barbara B., supra, 4 Cal.4th at p. 1081 [once a duty to defend attaches, the insurer is obligated to defend against all claims, covered and uncovered].)[2] We disagree. As we have already discussed, the language of the ERP exclusion alone is broad enough to encompass the bookkeepers claims against Danco under the facts of this case. Additional language clarifying that the exclusion applied whether the insured was potentially liable as an employer or in any other capacity was not necessary; even without this language, it would not have been objectively reasonable for Danco to believe its Golden Eagle policies would cover sexual harassment and discrimination claims based on misconduct by its officers. (See Bank of the West v. Superior Court, supra, 2 Cal.4th at p. 1265 [court must determine whether coverage is consistent with the insureds objectively reasonable expectations].)

Considering the clear language of the ERP exclusion in the policies at issue, and the fact that all claims alleged against Danco arose from employment-related misconduct of Danco supervisors at the workplace, the Insurance Commissioner and the trial court did not abuse their discretion in determining the exclusion absolved Golden Eagle of a duty to defend these claims. Because we resolve the appeal on this ground, we do not address Golden Eagles alternative arguments for affirmance.

DISPOSITION

The judgment is affirmed. Danco shall pay costs of appeal.

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McGuiness, P.J.

We concur:

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Pollak, J.

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Siggins, J.

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[1] As we stated in Syufy: It is settled that this [arising out of] language does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship. [Citations.] (Acceptance Ins. Co. v. Syufy Enterprises, supra, 69 Cal.App.4th at p. 328.)

[2] Danco also argues the ERP exclusion cannot reach any false imprisonment claims against it (though the cross-complaint asserts none) because such claims are not employment-related as a matter of law. However, the case Danco cites for this proposition, Fermino v. Fedco, Inc. (1994) 7 Cal.4th 701, deals exclusively with workers compensation, and thus does not constrain our interpretation of the parties insurance contract.