Employers Assurance Company v. The Ford Store Morgan Hill Inc.

Background

Employers issued Ford a workers’ compensation and employers’ liability insurance policy effective March 1, 2019, through March 1, 2020. The policy required Employers to defend covered workers’ compensation proceedings and covered certain damages arising from employees’ bodily injuries. It excluded obligations imposed by workers’ compensation law and damages arising from specified employment practices.

In June 2019, Ford employee Xavier Anthony Souto instructed another employee, Steven Leet, to leave his employment. Leet returned with a firearm and killed Souto and another employee before killing himself. A workers’ compensation case was later brought against Ford and Employers. Employers hired the law firm Mullen & Filippi, LLP, to represent both companies. Ford alleged that it did not consent to the joint representation, that the lawyers did not communicate directly with Ford, and that they failed to identify all potential dependents of Souto. The workers’ compensation case ended in a settlement that Employers paid.

Other potential dependents later sued Ford in state court. The lawsuit asserted negligence and gross negligence based on allegations that Ford failed to provide Souto with a safe work environment, instructed him to terminate Leet despite his fear, failed to follow termination procedures, and failed to protect employees after Leet remained on the property. Ford tendered the defense to Employers, but Employers initially denied coverage. Ford hired its own counsel and settled the lawsuit. Employers later offered to defend, but Ford had already settled, and Employers refused to reimburse Ford’s defense and settlement expenses.

Employers filed this federal action seeking a declaration that it had no duty to defend or indemnify Ford in the state-court lawsuit. Ford filed a counterclaim asserting four claims: declaratory relief concerning the duty to defend, declaratory relief concerning the duty to indemnify, breach of contract, and breach of the implied covenant of good faith and fair dealing. Employers moved to dismiss the counterclaim for failure to state a legally sufficient claim.

Court’s analysis

Duty to defend. Under California law, an insurer must defend when the underlying allegations or facts known to the insurer create a potential for coverage. The court held that the workers’ compensation exclusion applied to the state-court lawsuit. The lawsuit alleged that Ford negligently failed to provide a safe workplace; it did not allege that Ford shot Souto, ratified the shooting, or engaged in criminal conduct. The court concluded that the claim fell within the scope of workers’ compensation law even though Souto was killed by a third party and the complaint alleged gross negligence.

Because the exclusion eliminated any potential for coverage, the court held that Employers had no duty to defend Ford in the state-court lawsuit. The court dismissed Claim 1 without leave to amend. The court rejected Employers’ separate argument based on the employment-practices exclusion because the underlying complaint suggested, but did not conclusively establish, that Leet killed Souto because of his termination. The court also rejected Employers’ argument that Ford’s lack of formal service defeated the duty to defend because Employers cited no supporting policy language or legal authority.

Duty to indemnify. Because the court found no coverage for the state-court lawsuit, it also found no duty to indemnify Ford for that lawsuit. The court dismissed Claim 2 without leave to amend.

Breach of contract. Ford alleged that Employers breached the policy in its handling of both proceedings. As to the workers’ compensation case, the court held that Ford adequately alleged possible breaches, including assigning counsel to represent both Ford and Employers without Ford’s consent, providing an inadequate defense, and failing to investigate other potential dependents. The court also found allegations supporting a reasonable inference that the joint representation created a conflict of interest. The motion to dismiss Claim 3 was therefore denied to the extent the claim was based on the workers’ compensation case.

As to the state-court lawsuit, the court held that there was no potential for coverage, so Employers’ denial of coverage and related conduct did not breach the policy. The motion to dismiss Claim 3 was granted without leave to amend to the extent the claim was based on the state-court lawsuit. The court stated that the surviving workers’ compensation-based contract claim could potentially support damages for defense and indemnity costs Ford incurred in the state-court lawsuit because Ford alleged that Employers’ earlier breach caused that lawsuit to be filed.

Implied covenant of good faith and fair dealing. The court held that Ford adequately alleged this claim as to Employers’ handling of the workers’ compensation case. Ford alleged that Employers assigned counsel to represent both parties without Ford’s consent and made claims-handling decisions to reduce or avoid Employers’ obligations while favoring its own interests. The motion to dismiss Claim 4 was denied to the extent it was based on the workers’ compensation case.

The court dismissed the part of Claim 4 based on the state-court lawsuit because it had already determined that Employers did not breach the policy in that matter. The motion was granted without leave to amend to that extent.

Disposition

The court granted in part and denied in part Employers’ motion to dismiss the counterclaim, without leave to amend. The motion was granted without leave to amend as to Claim 1, Claim 2, Claim 3 to the extent based on the state-court lawsuit, and Claim 4 to the extent based on the state-court lawsuit. The motion was denied as to Claim 3 and Claim 4 to the extent those claims were based on the workers’ compensation case. The order terminated the motion identified as ECF 20.