David Kleis, Inc. v. Superior Court (37 Cal. App. 4th 1035, 1995)

Opinion

HASTINGS, J.

Petitioners David Kleis, Inc., doing business as Beaumont Convalescent Hospital (Kleis), and Anthony Raoul David, its administrator (David), seek a writ of mandate directing the superior court to vacate its order denying their motion to stay the trial in their declaratory relief action against California Insurance Company (CIC) and Pacific Rim Assurance Company (Pacific Rim).

Kleis and David (collectively referred to as petitioners) were named as defendants in four lawsuits filed in the District Court for the Central District of California in 1993, which were ultimately consolidated into one complaint (the federal court actions). The basic thrust of these lawsuits is that David, as administrator of Beaumont Convalescent Hospital (Beaumont), sexually harassed the four female plaintiffs who were under his supervision and control. As a result, each of the plaintiffs resigned her employment at Beaumont.

Petitioners tendered the defense of the federal court actions to Pacific Rim, the insurer that had issued Kleis workers’ compensation and employer’s liability policy, and to CIC, which had issued Kleis a general liability policy of insurance. Pacific Rim agreed to defend Kleis in the federal actions with counsel of its own choosing. Initially, CIC refused to provide Kleis with any defense whatsoever, then accepted the tender subject to a reservation of rights.

Petitioners then filed a declaratory relief action against CIC and Pacific Rim in July 1994 in order to determine the extent of the coverage under the policies (the declaratory relief action). In February 1995, petitioners filed a motion to stay the declaratory relief action, which was denied on March 9, 1995.

Petitioners sought a writ of mandate in this court seeking relief from the denial of the motion to stay. On April 6, 1995, we issued an alternative writ and temporarily stayed the commencement of trial in the declaratory relief action.

Factual and Procedural Background 1. The Federal Court Actions.

Each of the four individual federal court actions alleged claims for violations of title VII of the federal Civil Rights Act of 1964 (42 U.S.C. § 2000e et seq.), as well as state law claims for assault and battery, false imprisonment, defamation and slander, infliction of emotional distress (negligent and intentional), invasion of privacy, wrongful termination in violation of public policy, sexual harassment in violation of Government Code section 12940, breach of public policy, and common law claims for intentional infliction of emotional and physical harm. The four complaints shared some factual allegations but were not identical.

The Smith complaint

Carol Lynne Smith was assistant to the activities director at Beaumont from February 28, 1991. In July 1991, she was promoted to director of activities. David, as administrator, was her immediate supervisor.

Her complaint alleged that between February 28, 1991, and November 3, 1992, on the premises of Beaumont, during working hours, David made sexually explicit and degrading comments to Smith in private and at staff meetings; inquired about her personal life, marital status and social contacts with members of the opposite sex; grabbed or touched Smith; threatened Smith at staff meetings with serious bodily harm if she reported his comments; forced her to stay in his office while he made sexual comments and touched her; and instructed her to dress provocatively at outside events to attract business. Smith sought relief from other supervisors at Beaumont, but no action was taken. As a result, on November 3, 1992, Smith left her employment at Beaumont.

The Denison complaint

Febion Denison was a registered nurse supervisor at Beaumont from December 14, 1990, then was promoted to director of nurses in January 1991. David was her immediate supervisor.

Denison’s complaint alleged that between January 1991 until October 23, 1992, on the premises of Beaumont and during working hours, David made sexually explicit and degrading comments to her privately and at staff meetings; inquired about her personal life, marital status and contacts with the opposite sex; grabbed, touched or fondled her; threatened at staff meetings to “get back” at anyone who revealed his comments to others; ordered her to take off her clothes while she was in his office; ordered her to dress provocatively when the state surveyor visited the premises; and, on one occasion, summoned her into his office and grabbed her, commanding her to sit down when she attempted to leave. Denison sought relief from David and other supervisors, and when no action was taken, Denison left Beaumont’s employ on October 23, 1992.

The Manley complaint

Jeanie Lee Manley was a nurse’s aide at Beaumont from January 1992. David was her immediate supervisor.

Her complaint alleged that between January 1992 until September 1992, on premises of Beaumont and during working hours, David made sexually explicit and degrading comments to her privately in public situations; ridiculed her publicly and privately when she reported to him that another male employee of Beaumont had exposed himself to her; called her at home and threatened to fire her; and discouraged her from filing a workers’ compensation claim for an accident. Manley attempted to seek relief from David and other supervisors at Beaumont, but, when no action was taken, she left work on September 20, 1992.

The Remillard complaint

Kathryn Jean Remillard was a certified nurse’s assistant from August 13, 1986, and in September of 1990, was promoted to assistant to administrator. David was her immediate supervisor.

Remillard’s complaint alleged that between January 1991 and October 1992, on the premises of Beaumont and during working hours, David made sexually explicit and degrading comments to her, touched and fondled her, inquired about her personal life, her marital status and her social contacts with members of the opposite sex; threatened her with a handgun if she did not orally copulate him; ridiculed her job performance; ordered her to dress provocatively when state auditors visited; placed a box of prophylactics with her belongings; and threatened to kill her or to fire her if she told anyone about their sexual contact. Remillard attempted to seek relief from David and other supervisors at Beaumont, but, when no action was taken, she left Beaumont’s employ on October 30, 1992.

The consolidated complaint

On July 11, 1994, Remillard, Smith, Denison and Manley filed a consolidated complaint, which reiterated the factual allegations contained in the individual complaints, and specifically enumerated 47 separate incidents of sexual harassment and discrimination. The consolidated complaint named as defendants certain directors and shareholders of Kleis, and another employee, Michael Aquintano, in addition to David.

The consolidated complaint alleged that in June 1992, Aquintano fondled Manley during working hours on the premises of Beaumont, and that in July 1992, Aquintano exposed himself to Manley. Manley reported the incident to David, but David told her to “take it as a compliment,” and later David threatened her that he would see she would not get another job if she told anyone about the Aquintano incident.

The complaint further alleged that the individual stockholders and directors of Kleis personally directed the activities of David and Aquintano; they were aware of the vulnerability of the plaintiffs and acquiesced in and were negligent in failing to act as David and Aquintano engaged in the systematic sexual activities and harassment, forcing plaintiffs to constructively terminate their employment. It was further alleged that they had employed David and Aquintano with advance knowledge of their unfitness, in conscious disregard of the rights and safety of others, and ratified the conduct by retaining them as employees, after learning of their conduct, by failing and refusing to discipline, reprimand or supervise them.

The claims for relief in the consolidated complaint were: (1) violation of title VII of the federal civil rights act; (2) assault and battery; (3) false imprisonment; (4) defamation and libel; (5) intentional and negligent infliction of emotional distress; (6) invasion of privacy; (7) wrongful termination; (8) sexual harassment in violation of California Government Code section 12940; and (9) common law claims of intentional infliction of emotional and physical harm.

2. The CIC Policy.

CIC issued a “Nursing Home Package Policy” (No. 0G9591424) to Kleis, effective August 1,1991, to August 1,1992. That policy included a “Health Care General Liability Coverage Form,” which provides a grant of coverage under coverage A for “bodily injury” and under coverage B for “personal injury.” The policy excludes from coverage liability visited upon the insureds for intentional acts as well as for liability arising out of defamation, discrimination, humiliation, harassment, or termination from employment.

3. The Motion to Stay.

On February 23, 1995, petitioners filed a motion to stay the declaratory relief actions, asserting that “CIC and Pacific Rim have, through their correspondence, demurrers and oppositions to plaintiffs’ motions for summary judgment, repeatedly asserted, inter alia, that their defense duties are precluded by ‘intentional act’ exclusions, Insurance Code § 533, and Civil Code § 1668.” Petitioners argued that in order to prove the acts fell within the intentional acts exclusion, CIC and Pacific Rim would have to try certain aspects of the underlying action to establish that the sexual harassment did in fact occur and that the insureds acted intentionally. They urged that this would be improper pursuant to Montrose Chemical Corp. v. Superior Court (hereinafter Montrose I) (1993) 6 Cal.4th 287 [24 Cal.Rptr.2d 467, 861 P.2d 1153].

CIC opposed the motion, urging that “[CIC] has no intention of proving . . . that the insured in fact engaged in intentional conduct. Rather, [CIC] will seek to establish that sexual harassment and discrimination of the nature alleged in the underlying actions is not covered under the relevant [CIC] policy. In demonstrating what the nature of the alleged misconduct is in the underlying actions, [CIC] will rely exclusively upon the complaints filed in the underlying action, the factual contentions made by the claimants in the underlying action (which may flesh out the allegations in the underlying complaints), and undisputed facts already established in the underlying actions.” (Italics in original.) CIC then indicated that not only was it relying upon the intentional acts exclusion, it was also asserting that the conduct alleged did not fall within the term “occurrence,” and that the conduct alleged falls within the “Employment Related Injury Exclusion.” It concluded with the point that “there is no pattern of negligent conduct described in the Underlying Actions which could trigger a duty to defend.” (Italics in original.)

At argument on the motion, the trial court indicated its tentative decision was to stay the matter pending outcome of the underlying litigation. CIC urged that it would not try to prove that the acts occurred but would rely solely upon the nature of the pleadings in the underlying actions and the depositions of the plaintiffs describing what took place. Counsel for CIC stated: “My focus only needs to be the subject matter. The subject matter of the underlying litigation is excluded under this policy. [^Q I know Your Honor expressed at the hearing on the demurrer some concern, which maybe there would be if there is a negligent supervision aspect. Even if there is negligent supervision, the subject matter is still excluded. [<5Q If an employee was harassing another employee and the harasser was negligently supervised, doesn’t make any difference. The subject matter that is being complained of is excluded and that’s all you need to do.”

Counsel for petitioners rejoined: “We will rely on the complaints in the underlying action, the consolidated complaint, and we will rely on the deposition testimony of the underlying plaintiffs, including the deposition testimony of Ms. Manley, where she alleges that . . . David negligently supervised one of Manley’s peers, one of her co-employees who is not in a supervisory position to Ms. Manley, [fl Ms. Manley alleges that Mr. Aquintano falsely imprisoned her in a bathroom at Beaumont . . . and that Beaumont[‘s]. . . liability for that and . . . David’s liability for it arises out of David’s supervision of Mr. Aquintano. ...['][] Your Honor, to prove that, though, they would have to show that it occurred within the course and scope of employment, and that would be adverse to . . . David and Beaumont . . . in the underlying action. flD . . . [ffl That is what he is going to try to prove, and obviously, Beaumont. . . and . . . David are going to try to show that they have no liability for these acts because Mr. Aquintano’s acts were not within the course and scope of his employment. [^Q . . . So on that basis alone, there is [sic] grounds to defend because there would be collateral estoppel or res judicata to the underlying action.”

The court indicated it would include within any order made that its findings would have no collateral estoppel effect on the underlying action. It then denied the request for stay.

Discussion

1. The Procedural Dilemma.

There are two basic duties set out within the typical insurance policy, the duty to defend and the duty to indemnify. An insurer must defend a case which potentially seeks damages within the coverage of the policy, even though it ultimately turns out that coverage may not be afforded. (Montrose I, supra, 6 Cal.4th at p. 295; Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275 [54 Cal.Rptr. 104, 419 P.2d 168].) Therefore, the duty to defend has been determined to be much broader than the duty to indemnify. (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 275.)

The duty to defend, however, is not without limits, but is limited by the nature and kind of risk covered by the policy. (La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27, 39 [36 Cal.Rptr.2d 100, 884 P.2d 1048].) “ ‘[T]he insurer need not defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.’ (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 276, fn. 15; [Montrose I], supra, 6 Cal.4th at p. 300.)” (La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co., supra, 9 Cal.4th at p. 39; Aetna Casualty & Surety Co. v. Superior Court (1993) 19 Cal.App.4th 320, 327 [23 Cal.Rptr.2d 442], and cases cited therein, italics added.)

The distinction between the duty to defend and the duty to indemnify oftentimes places the carrier in a precarious situation. If it denies the insured a defense and it is ultimately determined that a defense was owed, the carrier can be subjected to a claim of bad faith and may ultimately be required to provide indemnity even where no duty to indemnify exists. (Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 791 [244 Cal.Rptr. 655, 750 P.2d 297].) Alternatively, if a defense is provided and ultimately it is determined that no coverage existed for defense or indemnity, the carrier has needlessly expended monies providing a defense. Therefore, where the carrier provides a defense it is interested in resolving the issue of the duty to defend as early as possible.

On the other hand, the insured is interested in having a full defense provided whether coverage exists or not. Where a defense is being provided the insured has no real interest in an early determination of the coverage issues. However, when the carrier denies a defense: “Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf. [Citation.]” (Montrose I, supra, 6 Cal.4th at p. 295.)

Here, CIC originally denied a defense so petitioners brought this action for declaratory relief and sought an early trial date. Shortly thereafter, CIC reversed its position and began providing a defense. Petitioners no longer need an early trial date. On the other hand, now that CIC is providing a defense, it would like an early resolution of coverage. A problem arises when a determination of the duty to defend is dependent upon resolution of issues similar to those to be addressed in the underlying third party action.

Stay of a declaratory relief action to determine coverage is often in order when the coverage question turns on facts to be litigated in the underlying third party action “[t]o eliminate the risk of inconsistent factual determinations that could prejudice the insured. . . .” (Montrose I, supra, 6 Cal.4th at p. 301.) The “classic” situation in which a declaratory relief action should be stayed is where the third party seeks damages based on the insured’s negligence, and the insurer seeks to avoid providing a defense by arguing that the insured acted intentionally. By contrast, however, “. . . when the coverage question is logically unrelated to the issues of consequence in the underlying case, the declaratory relief action may properly proceed to judgment.” (Montrose I, supra, at p. 302.)

“There are three concerns which the courts have about the trial of coverage issues which necessarily turn upon the facts to be litigated in the underlying action. First, the insurer, who is supposed to be on the side of the insured and with whom there is a special relationship, effectively attacks its insured and thus gives aid and comfort to the claimant in the underlying suit; second, such a circumstance requires the insured to fight a two front war, litigating not only with the underlying claimant, but also expending precious resources fighting an insurer over coverage questions—this effectively undercuts one of the primary reasons for purchasing liability insurance; and third, there is a real risk that, if the declaratory relief action proceeds to judgment before the underlying action is resolved, the insured could be collaterally estopped to contest issues in the latter by the results in the former. It is only where there is no potential conflict between the trial of the coverage dispute and the underlying action that an insurer can obtain an early trial date and resolution of its claim that coverage does not exist. ([Montrose Chemical Corp. v. Superior Court] Montrose II [(1992) 25 Cal.App.4th 902, 910 (31 Cal.Rptr.2d 38)]).” (Haskel, Inc. v. Superior Court (1995) 33 Cal.App.4th 963, 979 [39 Cal.Rptr.2d 520], fn. omitted, italics in original.)

2. Determination of the Duty to Defend.

In determining whether an insurer has a duty to defend, one must first compare the allegations of the complaint with the terms of the policy. Next, it must be ascertained whether facts not alleged in the complaint, but known by the insurer at the inception of the lawsuit, reveal a possibility that the claim is covered by the policy. (Montrose I, supra, 6 Cal.4th at p. 295; Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081 [17 Cal.Rptr.2d 210, 846 P.2d 792].) A duty to defend may exist, therefore, even though the face of the complaint does not reflect a potential for liability under the policy. (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 276.) “This is so because current pleading rules liberally allow amendment; the third party plaintiff cannot be the arbiter of coverage. (Ibid.)” (Montrose I, supra, at p. 296.)

3. Review of the Coverage Issues.

The CIC policy has two separate coverages. We address each coverage separately, to the extent that they differ.

a. Coverages

Coverage A

The grant of coverage for this portion of the policy provides: “Coverage A. Bodily Injury And Property Damage Liability [*]Q 1. Insuring Agreement. [*]Q a. We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies . . . caused by an‘occurrence’. . . .’’Under “Section v—Definitions,” the following definition is pertinent: “3. ‘Bodily injury’ means bodily injury, sickness or disease sustained by a person, including death. . . .”

Initially, it appears that at least some of the claims made in the underlying action could fall within this coverage, which is defined by the nature of the injury, not to any type of activity out of which the injury arose. The facts alleged in the underlying action indicate classical circumstances out of which “bodily injury” could arise.

CIC relies upon one of the exclusions relating to this coverage, as follows: “2. Exclusions. [IQ This insurance does not apply to: [f . . . [H e. ‘Bodily injury’ to: [<]Q (1) An employee of the insured arising out of or in the course of employment by the insured; [*]Q . . . [Ü This exclusion applies: [