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CGL policy covers negligent hiring claim: California Supreme Court

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If an employer is sued for negligent hiring, retention and supervision of an employee, it can be considered a covered occurrence under a commercial general liability policy, says the California Supreme Court in a ruling issued Monday in a sexual abuse case.

The court was considering the case, Liberty Surplus Insurance Corp. et al. v. Ledesma & Meyer Construction Co. Inc., at the request of the 9th U.S. Circuit Court of Appeals in San Francisco, according to the unanimous ruling.

An attorney said the significant ruling clarifies state law on the issue.

The case involved a 13-year-old student’s abuse by an assistant superintendent for Cucamonga, California-based Ledesma & Meyer Construction Co., which had contracted with California’s San Bernardino United School District to manage a construction project at a middle school, according to the ruling.

The student filed suit against the company in state court charging it with the negligent hiring, retention and supervision of the employee.

L&M’s insurers, Liberty Surplus Insurance Corp., and Liberty Insurance Underwriters Inc., which are units of Boston-based Liberty Mutual Insurance Co., defended L&M under a reservation of rights, but also sought declaratory relief in federal court, contending they had no obligation to defend or indemnify L&M.

The U.S. District Court in Los Angeles ruled in the insurers’ favor, holding that the student’s injury was not caused by an “occurrence” under the CGL policy, and the 9th Circuit then asked the California Supreme Court to consider the case.

L&M argued the District Court had misapplied California law, and the California Supreme Court agreed.

It is “undisputed that (the employee’s) sexual misconduct was a ‘willful act’ beyond the scope of insurance coverage” under the insurance code, said the ruling. “However, (the employee’s) intentional conduct does not preclude potential coverage for L&M,” it said.

“We recognize society’s interest in providing an incentive for employers to take precautions against sexual abuse by their employees,” said the California Supreme Court ruling. “However, the threat of liability for negligent hiring, retention, and supervision is a significant deterrent even when insurance coverage is available.

“Liberty’s arguments, if accepted, would leave employers without coverage for claims of negligent hiring, retention, or supervision whenever the employee’s conduct is deliberate. Such a result would be inconsistent with California law, which recognizes the cause of action even when the employee acted intentionally.

“The requirements for liability of this kind are not easily met, but they are well established. Absent an applicable exclusion, employers may legitimately expect coverage for such claims under comprehensive general liability insurance policies, just as they do for other claims of negligence,” said the ruling.

Caroline Hurtado Ford, counsel with Haynes & Boone L.L.P. in Costa Mesa, California, who was not involved in the case, said the ruling is significant because it gave the California Supreme Court the opportunity to “systematically clarify the law on occurrence in California.”

She said the ruling could also impact cases in which pharmaceutical companies are sued in opioid-related cases for their alleged negligence.