News - November 2008

• Insurer Has Duty to Defend Insureds Against Taxpayer Suit Seeking Both Injunctive Relief and “Damages”
• Despite Uncertainty Concerning Who Actually Employed Worker Killed in Accident, Insured Is Not Entitled to Defense Under “Employers’ Liability” Coverage

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Insurer Has Duty to Defend Insureds Against Taxpayer Suit Seeking Both Injunctive Relief and "Damages"

The United States District Court, applying California law, has ruled that a liability insurer had a duty to defend its insureds against a taxpayer lawsuit suit which sought both injunctive relief and monetary “damages.” (The Los Osos Community Services Dist. v. American Alternative Ins. Corp. (C.D. Cal. 2008) -- F.Supp.2d --, 2008 WL 4885680)  

Facts

The Los Osos Community Services District (“District”) is a public entity which undertook plans to build a wastewater treatment facility in Los Osos, California. A number of people who lived in the area tried to stop construction of the treatment facility by placing a measure called “Measure B” on the ballot. In response, the District sued and obtained a court order declaring the measure illegal and barring it from the ballot. 

Thereafter, a group of disgruntled residents succeeded in recalling three of the District’s Board members. The “new Board” then immediately took steps to stop the construction of the treatment facility. Among other things, the new Board dismissed the lawsuit brought to stop Measure B, which by then had reached the state appellate court. In addition, the new Board allegedly used $600,000 in state money to enter into a settlement with Measure B’s proponents, who were allied with the three new members of the Board.

In response, a group called Taxpayers Watch and two individual taxpayers (collectively “Taxpayers Watch plaintiffs”) sued the District and several Board members, alleging that the settlement was “a sham settlement with the Board’s cronies” and that ultimately District taxpayers “will be responsible for repaying those monies to the state of California.” The Taxpayers Watch plaintiffs sought relief under California Code of Civil Procedure section 526a, which provides that “[a]n action to obtain a judgment, restraining and preventing any illegal expenditure of, waste of, or injury to, the estate, funds, or other property of a county, town, [or] city … may be maintained against any officer thereof ... by a citizen resident therein … who is assessed for and is liable to pay… a tax therein.” The Taxpayers Watch plaintiffs also sought “a judgment requiring and mandating that … the District's individual Board members be held personally liable to repay the monies wasted as a result of their thoughtless and wasteful decisions, including return of the $600,000 paid to Measure B proponents in a collusive settlement.” 

The District filed for bankruptcy protection. However, the District’s individual Board members tendered the defense of the lawsuit to the District’s liability insurer, American Alternative Insurance Company (“AAIC”). The AAIC policy provided that the insurer would indemnify an insured against “damages because of ... ‘wrongful acts’,” and that the insurer would defend an insured against any suit seeking covered damages. AAIC denied the tender, on the ground that the Taxpayers Watch plaintiffs were not seeking monetary “damages” against the Board members.

Following the denial of coverage, the Board members filed a bad faith action against AAIC, alleging that AAIC had wrongfully refused to defend the Board members in the underlying action brought by the Taxpayers Watch plaintiffs. The Board members then moved for partial summary that AAIC had a duty to defend them in the underlying action.

Holding

The United States District Court, applying California law, held that AAIC did have a duty to defend the Board members in the underlying action brought by the Taxpayer Watch plaintiffs. The district court acknowledged that the Taxpayer Watch plaintiffs had sued the Board members under CCP section 526a, and that the text of section 526a only allows for injunctive relief—not monetary damages. However, the district court noted that despite the text of the statute, California state courts “have extended section 526a to allow taxpayers to obtain an order requiring officials to repay wasted funds to the public entity” and “have characterized this remedy as one for ‘damages.’” Under the circumstances, the Taxpayers Watch plaintiffs were seeking “damages” from the Board members, sufficient to trigger AAIC’s duty to defend. It did not matter that any damages recovered from the Board members would ultimately go back into the District’s coffers, as opposed to the Taxpayers Watch plaintiffs themselves.        

Comment

The AAIC policy did not define the term “damages.” As such, the district court applied the case law definition of “damages” i.e., “‘compensation,’ in ‘money,’ ‘recovered’ by a party for ‘loss' or ‘detriment’ it has suffered through the acts of another.”

Note that when a third-party claimant sues an insured under a statutory scheme that only allows for injunctive relief and does not allow for “damages,” the insurer may not have a duty to defend. (See, e.g., Cutler-Orosi Unified School District v. Tulare County School Districts Liability/Property Self-Ins. Authority (1994) 31 Cal.App.4th 617, 629-630.) Here, however, the Taxpayer Watch plaintiffs sued the Board members under a statute that has been interpreted to allow for both injunctive relief and “damages,” thus triggering AAIC’s duty to defend.  

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Despite Uncertainty Concerning Who Actually Employed Worker Killed in Accident, Insured Is Not Entitled to Defense Under "Employers' Liability" Coverage

The California Court of Appeal has held that, despite uncertainty as to who actually employed a worker who was killed in an accident, a subsequent wrongful death action against an insured did not trigger a defense obligation under the insured’s “employers’ liability” coverage. (Power Fabricating, Inc. v. State Compensation Ins. Fund (2008) 167 Cal.App.4th 1446)

Facts

Power Fabricating, Inc. (Power) and a related entity, Temp Power Systems, Inc. (Temp), were in the business of providing temporary electrical power to construction sites. A developer requested that Temp re-route electrical power at a construction site. In performing this task, apprentice electrician Jonathon Kryzak (Kryzak) came into contact with an energized electrical line and was fatally electrocuted. A question existed as to whether, at the time of the accident, Kryzak worked for Power, for Temp, or for a “joint venture” comprised of the two entities.

Power and Temp were listed as “employer” under a workers’ compensation / employers’ liability policy issued by State Fund Insurance Company (State Fund). State Fund paid Kryzak’s widow statutory death benefits under the workers compensation part of the State Fund policy.     

Subsequently, Kryzak’s widow brought a wrongful death action against Power. She alleged that Power negligently failed to confirm that the developer had de-energized the electrical system before Kryzak began work, failed to inspect Kryzak's work, failed to implement safety procedures, and failed to provide a safe workplace.

Power tendered the wrongful death action to State Fund under the employers’ liability section of the State Fund policy. The employers’ liability section of the policy provided that the insurer would indemnify and defend an insured against a claim for covered “bodily injury to your employee that arises out of and in the course of employment….” The employers’ liability section of the policy specifically excluded coverage “any obligation imposed by a workers' compensation ... law....”. 

State Fund refused to defend Power in the wrongful death brought by Kryzak’s widow. As a result, Power sued State Fund for breach of contract and bad faith. The trial court granted summary judgment in favor of State Fund. Power appealed.

Holding

On appeal, Power contended that there was a “triable issue of fact” as to whether Kryzak was an employee of Power, Temp, or a joint venture comprised of the two entities. Specifically, Power argued that the widow's claims against Power could fall within the employers’ liability coverage, but outside the workers' compensation exclusion, if either: (1) Kryzak, as the employee of a Temp / Power joint venture, was injured by the negligent acts of Power; or (2) Kryzak, as an employee of Power, was injured by the negligent acts of the Temp / Power joint venture. 

The Court of Appeal rejected this argument. According to the appellate court, if Kryzak was not Power's employee, then the employers’ liability coverage would not be triggered in the first instance. Conversely, if Kryzak was Power's employee, then the workers' compensation exclusion would apply. In either scenario, there was no potential for coverage under the employers’ liability section of the policy. Because there was no potential for coverage, State Fund had no duty to defend Power in the underlying wrongful death action.

Comment

Employers' liability insurance is traditionally written in conjunction with workers' compensation policies. It is intended to serve as a “gap-filler,” providing protection to the employer in those relatively rare situations where either the employee is not subject to the workers' compensation law, or the employee has a right to bring a tort action against the employer despite the provisions of the workers' compensation statute. Here, neither situation was present. 

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