A liability insurer’s duty to defend its insured against lawsuits is extremely broad, much broader than its duty to indemnify its insured for a judgment entered against it. That has been the law in California for decades. But just how broad is the duty to defend? Does it extend to civil lawsuits alleging the insured raped and sexually assaulted the plaintiff? Does it extend to lawsuits alleging intentional acts by the insured? You bet it does if the policy contains the right language.
The California Court of Appeal recently addressed these issues in Gonzalez v. Fire Insurance Exchange, __ Cal. App. 4th __ (Feb. 5, 2015). There, plaintiff Jessica Gonzalez alleged she was sexually assaulted and raped by Stephen Rebagliati and nine other members of the De Anza College baseball team. Ms. Gonzalez, who was seventeen years old at the time, alleged she was invited to a party by Mr. Rebagliati and the other team members, given shots of hard liquor in quick succession, and then later that night sexually assaulted by unknown members of the baseball team as she lay unconscious in a room. Ms. Gonzalez alleged that Mr. Rebagliati and the other defendants prevented three innocent bystanders from taking her out of the room during the assault. She alleged that although Mr. Rebagliati was in the room, he did not rescue her. Also, that the men took photos, videos and cheered during the assault.
Ms. Gonzalez filed a lawsuit against Mr. Rebagliati and the other team members alleging fifteen causes of action, including rape, sexual battery, unlawful intercourse, false imprisonment, invasion of privacy, slander per se, negligence and other claims. While she pleaded claims labeled “negligence” against Mr. Rebagliati for inviting her to the party, serving her alcohol and failing to rescue her, those claims failed to allege accidental acts, only deliberate, intentional acts. All of the causes of action were pleaded against Mr. Rebagliati “and/or” the other defendants, except the negligence claims were pleaded solely against Mr. Rebagliati. Thus, the complaint allegations left open the possibility that just the other team members sexually assaulted and raped Ms. Gonzalez, not Mr. Rebagliati.
Mr. Rebagliati was insured through his parents’ homeowner’s policy issued by Fire Insurance Exchange (“Fire”) and an umbrella policy issued by Truck Insurance Exchange (“Truck”). He tendered the sexual assault lawsuit to both insurers and asked that they defend him. They denied the claim on the grounds that the sexual assault lawsuit did not allege an “accident” and their policies covered accidents, not willful misconduct; coverage was precluded under various intentional acts exclusions since all of the claims alleged intentional misconduct; and the sexual molestation exclusion precluded coverage for all of the lawsuit’s claims because each claim was inextricably intertwined with the uncovered sexual assault claim.
Mr. Rebagliati settled the sexual assault lawsuit with Ms. Gonzalez. As part of the settlement, he assigned her all of his rights against Fire and Truck under the insurance policies. He also agreed to entry of judgment against him in Ms. Gonzalez’ favor.
Ms. Gonzalez sued Fire and Truck alleging they breached their duty to defend their insured, Mr. Rebagliati, and for bad faith. Both insurers successfully moved for summary judgment. The trial court found the insurers did not have a duty to defend Mr. Rebagliati in the sexual assault lawsuit.
Ms. Gonzalez appealed. The appellate court reversed the summary judgment made in favor of Truck (the umbrella insurer) and held it had a duty to defend. The court, however, upheld the judgment in Fire’s favor. It reasoned the homeowner’s policy insured against just damages caused by “accidents” and the sexual assault lawsuit did not allege accidental acts, only intentional acts.
The court found Truck’s umbrella policy had broader language, a duty to defend its insured against accidents and intentional misconduct. Unlike the primary liability policy issued by Fire, the coverage grant in the umbrella policy was not limited to accidental acts. It covered injury caused by “personal injury” offenses enumerated in the policy including: wrongful detention or imprisonment; invasion of privacy; and slander. While the primary policy required similar “personal injury” offenses to result from an “accident” for coverage to exist, the umbrella policy did not. The Court of Appeal therefore found Truck had a duty to defend the underlying lawsuit, despite that it alleged solely intentional and not accidental acts. The suit alleged damages resulting from the “personal injury” offenses covered by the policy, including false imprisonment, invasion of privacy and slander:
Next, Gonzalez insists the court erred in granting summary judgment in favor of Truck because its umbrella policy provided broader coverage than the Fire homeowner’s insurance policy. Specifically, she argues the umbrella policy’s definition of “personal injury” did not require covered incidents to be “accidental” in nature. Given the wording of the policy’s definitions, we agree.
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Gonzalez points to the policy’s definition of an “occurrence”: “Occurrence means: [¶] a. with regard to bodily injury or property damage, an accident, . . . .; or [¶] b. with regard to personal injury, offenses committed during the policy period . . . .” (Italics added by the court.) . . . .
Accordingly, the Truck umbrella policy sets forth no requirement that a personal injury arise out of an “accident” in order for there to be coverage. As a result, Gonzalez’s complaint, which alleged causes of action for false imprisonment, slander per se, and invasion of privacy, raised the potential for coverage under the umbrella policy’s provision providing coverage for damages from an “occurrence” resulting in “personal injury.”
Next the court addressed three exclusions in Truck’s policy. First, it rejected Truck’s argument that it owed no duty to defend Mr. Rebagliati given the policy’s sexual molestation exclusion. That exclusion precludes coverage for damages resulting from any acts of molestation by the insured (Mr. Rebagliati) or any other person who is acting or who appears to be acting on behalf of the insured. The court reasoned the exclusion may not apply because the sexual assault complaint was pleaded using the disjunctive “and/or” for each claim and thus raised the possibility that Mr. Rebagliati might be found liable for covered conduct (such as invading Ms. Gonzalez’ privacy or wrongly imprisoning her) but not for the uncovered sexual assault claim. Because the complaint raised the possibility the other defendants committed the uncovered physical act of sexually assaulting Ms. Gonzalez, not Mr. Rebagliati and not anyone else acting on his behalf, the court found the exclusion may not ultimately apply to a judgment entered against Mr. Rebagliati and, therefore, a potential for indemnity coverage existed.
In reaching this conclusion, the court discussed the well-established rule that an insurer’s duty to defend is exceptionally broad and applies unless the insurer can prove there is no potential the underlying claims will fall within the policy’s indemnity coverage. The court also discussed the rules pertaining to exclusions, which also strongly favor policyholders, especially when deciding a duty to defend issue:
While an insured bears the initial burden to demonstrate a claim may be covered by a policy, when it comes to exclusions the burden is switched. It is up to the insurer to conclusively show an exclusion to the policy applies barring coverage. Once that possibility of coverage has been raised . . . then the insurer may defeat such claim of coverage by extrinsic evidence, but only where such evidence presents undisputed facts which conclusively eliminate a potential for liability. . . . . Moreover, exclusionary clauses are interpreted narrowly, whereas clauses identifying coverage are interpreted broadly. [Internal quotes and citations omitted; italics in original].
Since there was at least a bare possibility Mr. Rebagliati would be covered under his umbrella policy for a judgment entered against him in the sexual assault lawsuit at the time Truck denied him a defense, based on the underlying complaint’s broad allegations, the court held Truck owed him a duty to defend the entire lawsuit. It also held that the sexual molestation exclusion did not obviate Truck’s duty to defend because there remained a possibility the exclusion would not apply to him.
The court next found the umbrella policy’s exclusion for damages that are either “expected or intended from the standpoint of the insured” did not obviate Truck’s duty to defend. Nor did the statutory exclusion, read into every insurance policy under Insurance Code section 533, for a loss caused by the insured’s willful act. The court reasoned that coverage is not precluded under these exclusions by just intentional acts without more. Instead, the insured must have intentionally acted with a “preconceived design to inflict injury.” Indeed,
Courts have held that the appropriate test for expected damage is whether the insured knew or believed its conduct was substantially certain or highly likely to result in that kind of damage. . . . . Therefore, it is the insured’s subjective belief as to whether his or her conduct would cause the type of damage claimed that excludes coverage. [Internal quotes and citations omitted].
The court found under the complaint’s broad allegations, Mr. Rebagliati could have committed various intentional acts without the requisite intent to cause damage to Ms. Gonzalez and, therefore, there was at least a potential for covered liability under the policy despite its intentional acts exclusions. For example, it noted that the tort of slander per se does not necessarily require a defendant to subjectively intend to harm the plaintiff. Under the complaint allegations, the jury could possibly award damages against Mr. Rebagliati for intentionally making statements about Ms. Gonzalez, though he had no subjective intent to harm her. Thus, Truck failed to meet its burden to conclusively prove the intentional acts exclusions barred any possibility of a covered liability under its policy.
The court rejected Truck’s argument that it had no duty to defend based on the criminal acts exclusion. The court reasoned there was no evidence that conclusively proved Mr. Rebagliati sexually assaulted Ms. Gonzalez and thus committed a crime. And, based on the complaint allegations, it was possible the jury would find the other team members perpetrated the sexual assault, not Mr. Rebagliati. The court therefore held Truck had a duty to defend Mr. Rebagliati because it failed to conclusively demonstrate the exclusion applied to all of Ms. Gonzalez’ underlying claims against him.
The Court addressed one final matter, the insurer’s argument that Mr. Rebagliati’s potentially covered acts were “inseparably intertwined” with the uncovered sexual assault claim and therefore should be excluded from coverage as well. Truck relied on various sexual assault cases that had held as much. The court distinguished those cases and held:
We disagree with the insurers that these cases set forth a blanket rule that if a cause of action is related to sexual molestation it must be excluded from insurance coverage. This interpretation would gloss over the finer nuances of the law governing an insurer’s duty to defend.
The court noted that, unlike the other cases, Mr. Rebagliati was one of several defendants and Ms. Gonzalez’ complaint raised the possibility that other individuals and not Mr. Rebagliati perpetrated the sexual assault. Additionally, Mr. Rebagliati had not admitted to the assault and Truck had not conclusively proved he was involved in that aspect of the alleged wrongs prior to rejecting his tender of defense. The court thus found the insurer had not met its burden to conclusively demonstrate the policy’s criminal acts exclusion eliminated all possibility for indemnity coverage.
The lesson of Gonzalez v. Fire Insurance Exchange is that an insurer’s duty to defend is extremely broad and that duty requires an insurer to defend its insured against even a lawsuit alleging rape and sexual assault under the right circumstances (i.e., there is no requirement that personal injury arise from an accident). As California courts have held for decades, if there is any possibility for indemnity coverage under an insurance policy based on the underlying complaint’s allegations, the insurer must defend its insured against the entire lawsuit unless and until it can conclusively prove with undisputed facts the contrary.