Evanston Insurance Company v. Enterprise Plan B, Inc.

Background

Evanston Insurance Company issued a commercial general-liability policy to Enterprise Plan B, Inc., Lance Brown, and Diane Stember Richards. The policy generally covered bodily injury caused by an accident in the United States, subject to a $1 million limit per occurrence. It included an auto exclusion and a Designated Premises or Project limitation.

Brown hired James Brown to perform plumbing work during Enterprise’s renovation of a residential property. James was not a licensed plumber. While driving to the property after purchasing plumbing supplies, James ran a red light and seriously injured Alex Borja. Alex and Eugenia Serrano Borja later sued James and the insureds. A referee entered a judgment for the Borjas totaling nearly $78 million. Evanston refused to defend the insureds, citing the auto exclusion and the Designated Premises or Project limitation.

Evanston filed this insurance-coverage action seeking a declaration that it had no duty to defend or indemnify the insureds. The Borjas counterclaimed for declarations that Evanston had both duties and also sought breach-of-contract and related damages. Both sides moved for summary judgment, which is a decision without a trial when no genuine dispute of material fact exists.

Auto exclusion

The parties agreed that the injuries arose from James’s use of an auto. The auto exclusion therefore turned on whether James was an “insured” under the policy because he was an employee acting within the scope of his work.

The court rejected Evanston’s argument that James’s status as a statutory employee under California Labor Code section 2750.5 automatically made him an employee under the insurance policy. The policy did not adopt that statutory definition, and the court concluded that the Borjas were not barred from arguing that James was not an employee under the policy even though they had previously argued that he was a statutory employee in the underlying action.

The court also declined to treat the common-law definition of employee as conclusive. Instead, it considered ordinary meaning, including whether the insureds paid James wages for work below the executive level and exercised control over his work. The parties agreed that James worked below the executive level and for wages, but they offered conflicting evidence about control. Evidence indicated that Brown supervised and directed some of James’s work, while other evidence indicated that Brown did not control where James worked or how many hours he worked, that James used his own tools, that he was principally employed by another company, and that he worked only on short-term projects.

Because this evidence created a genuine dispute of material fact about whether James was an employee under the policy, the court denied both cross-motions for summary judgment on the auto-exclusion issue.

Designated Premises or Project limitation

The court held that the limitation did not bar coverage. The policy documents did not identify a designated project, but they listed the renovation property in a section concerning premises the insureds owned, rented, or occupied. The court treated that property as the designated premises.

The limitation applied only to injuries “arising out of” ownership, maintenance, or use of the designated premises, rather than to every injury occurring at the property. Under California law, that phrase requires only a minimal causal connection or incidental relationship. The court found that connection here because the insureds’ ownership of the property led them to hire James, and James’s trip to purchase supplies for work at the property led to the accident. The court therefore granted the Borjas’s motion for summary judgment on this issue and denied Evanston’s motion on it.

Duty to defend

The court held that Evanston had a duty to defend the insureds in the underlying action. An insurer’s duty to defend is broader than its duty to indemnify, meaning the insurer must defend when the available information shows even a potential for coverage.

When Evanston refused to defend, it knew that the insureds said they had nothing to do with the accident and that a subcontractor’s employee, who had no regular hours and drove his own truck, caused it. Evanston’s records likewise described James as a subcontractor employee. That information created at least the possibility that James was not an employee under the ordinary meaning of the policy and that the auto exclusion did not apply. The information that James was driving on company business also created the possibility that the accident arose from the insureds’ ownership of the property.

The court rejected Evanston’s arguments that the insureds could not reasonably expect coverage because they had purchased general-liability rather than automobile insurance, that the underlying complaint eliminated any possibility of coverage, and that other information reasonably showed that James was an employee. The court held that the potential for coverage was enough to trigger the duty to defend. Because Evanston declined to defend, the court granted the Borjas’s motion for summary judgment that Evanston had and breached that duty.

Disposition

The court denied Evanston’s motion for summary judgment. It denied the Borjas’s motion as to Evanston’s duty to indemnify because the auto-exclusion issue remained factually disputed. It granted the Borjas’s motion as to Evanston’s duty to defend and as to the Designated Premises or Project limitation. The opinion did not finally resolve Evanston’s duty to indemnify.