Tuesday, October 07, 2014

Baek v. Continental Cas. Co. (Cal. Ct. App. - Oct. 6, 2014)

This is a pretty good test case to find out where you stand vis-a-vis bright line rules.

Let's take the easiest case -- not this one -- first.  Imagine that you're on the California Supreme Court.  You're hearing an insurance coverage dispute.  A deputy sheriff is allegedly groping other sheriffs at work.  Without their consent.  City gets sued, submits the claim to its insurance company, and the insurer refuses to defend the lawsuit, claiming that the groping wasn't done "within the scope of the sheriff's employment."  But the City disagrees, admitting that, true, it didn't pay the sheriff to sexually harass people, but he nonetheless did it at work, to his co-workers, so there's at least the potential for coverage.

How do you rule?

This isn't a hypothetical.  The California Supreme Court heard pretty much exactly this case in 1995. Holding that, no, that wasn't within the scope, so there's no duty to defend.  (I've loosened up the facts a tiny bit, since this was actually a Tort Claims Act case, but it's nonetheless pretty much on point to the more general issue.)

Now, you could have gone the other way on this way.  Justices Mosk and Kennard, for example, dissented.  But whatever.  That's at least the holding of the Court.

Given this precedent, you now you can do one of two things.  (Three, if you count "overrule the thing" as an option.)  First, you can make it a bright-line rule, and say that sexual harassment and/or touching is always outside the course and scope of your employment.  Alternatively, you can make the issue a fact-dependent one.  Sometimes there's coverage, sometimes there's not.

If you're on the California Supreme Court, which option would you select?

The advantage of a bright-line rule is ease of application.  Sexual misconduct will never be covered.  But its disadvantage is potential injustice.  It's not covered even if the risk of misconduct is, indeed, part of the job; indeed, maybe it's the principal reason for your desire for insurance.

Say, for example, you own a business that gives therapeutic messages.  Maybe a little chiropractic work.  Maybe some sports injury healing.  You've got to hire some employees.  Those employees will be touching clients.  Intimately.  Hopefully not too intimately, since the place you're running is totally legitimate.

But you're no idiot.  You know full well that there's a fine line between "legitimate" touching and "illegitimate" touching in the message business.  And there's always a risk that either (1) one of your employees might get out of line, and/or (2) one of your clients might wrongfully misperceive a totally legitimate touching for an illegitimate one.

So you want insurance coverage.  Since you don't want the business to bankrupt you.  You're willing to pay the premium.  But you want coverage.

The downside of the bright-line rule is that you can't get it.  By definition, any lawsuit against your employee (or you) will be "outside the course and scope of employment" and hence uncovered.  The upside being that any claim that you ever make for insurance coverage will be quickly dismissed on a demurrer.

That's this case.

The Court of Appeal holds that the trial court properly granted a demurrer to the insured's complaint for declaratory relief.  There's not even the potential for coverage -- and hence no duty to defend -- because alleged sexual misconduct is by definition outside the course and scope.

Bright line rules have their upsides.  But they have serious equitable downsides as well.