LA JOLLA BEACH AND TENNIS CLUB, INC., et al., Plaintiffs and Appellants, v. INDUSTRIAL INDEMNITY COMPANY, Defendant and Respondent.
In this case we find an employee made claims in a civil lawsuit which were potentially covered by his employer's workers' compensation policy. Although the employee's complaint also alleged facts which, if proven, would prevent payment of any indemnity under the policy, those allegations did not relieve the insurer of its broader duty to defend. Thus we reverse the summary judgment entered in favor of the insurer in the employer's bad faith action.
As we explain in greater detail below, we reach this result with some reluctance about the size and nature of the costs our decision may impose upon the workers' compensation system. Nonetheless, in the end we conclude the Legislature and the marketplace are better equipped to reassign the costs which give rise to our concern.
FACTUAL AND PROCEDURAL BACKGROUND
1. The Underlying Complaint
On April 24, 1986, Adnan Saleh filed a complaint against the Sea Lodge, the F.W. Kellogg Trust, the alleged owner of the lodge, and Robert Kellogg, manager of the lodge. Saleh alleged he had been employed at the Sea Lodge as manager of the restaurant for six years until his termination on April 1, 1986. According to the complaint Saleh “was terminated in whole or in part because he was not ‘white’. Prior to plaintiff's termination, he was told not to hire any more of ‘his own kind’, i.e. Palestinian or Arabic ancestried [sic] persons, and not to hire any ‘foreigners'. Plaintiff is further informed and believes and based thereon alleges that ROBERT KELLOGG had informed various employees of THE SEA LODGE that they were not to hire any foreigners except for some Mexicans, who should be kept in back.”
Saleh alleged his termination and the defendant's conduct gave rise to claims for breach of an employment contract, breach of the covenant of good faith and fair dealing, wrongful termination, intentional infliction of emotional distress and violation the Fair Employment and Housing Act (Gov.Code, § 12900 et seq.) (FEHA). In setting forth the distress claim, the complaint alleged “The above described acts of defendant constitute an intentional infliction of emotional distress against plaintiff. Said infliction was a substantial factor in causing damage and injury to plaintiff in an amount to be established at time of trial according to proof.”
2. Tender of Defense
On May 9, 1986, La Jolla Beach and Tennis Club, Inc. (La Jolla), the actual owner of the Sea Lodge, tendered defense of the Saleh complaint to its workers' compensation carrier, Industrial Indemnity Company (Industrial).1 La Jolla made the tender on its own behalf and on behalf of Kellogg, its employee.
The policy Industrial provided to La Jolla is designated a “Workers' Compensation and Employers' Liability.” Part 1 of the policy is designated “WORKERS COMPENSATION INSURANCE” and states in pertinent part “[w]e will pay promptly when due the benefits required of you by the workers compensation law.” Part 1 also provides “[w]e have the right and duty to defend at our expense any claim, proceeding or suit against you for benefits payable by this insurance. We have the right to investigate and settle these claims, proceedings or suits. [¶] We have no duty to defend a claim, proceeding or suit that is not covered by this insurance.”
Part 2 of the policy is designated “EMPLOYERS LIABILITY INSURANCE” and it states in pertinent part “[w]e will pay all sums you legally must pay as damages because of bodily injury to your employees, provided the bodily injury is covered by this Employers Liability Insurance.” However this portion of the policy excludes “any obligation imposed by a workers compensation, occupational disease, unemployment compensation, or disability benefits law, or any similar law.”
Industrial declined to provide La Jolla with a defense. According to Industrial's claims director, the company based its decision on its review of the Saleh complaint and what Industrial believed were pertinent case authorities.2
3. Settlement of the Saleh Claim
In responding to Saleh's complaint, La Jolla raised as an affirmative defense the exclusive jurisdiction of the Workers' Compensation Appeals Board. La Jolla also took the position Saleh had not been terminated but had voluntarily resigned in exchange for an agreement to provide him with an employment reference. La Jolla denied it had engaged in any discriminatory conduct.
Notwithstanding the defenses it raised, La Jolla settled Saleh's claim by agreeing to pay him $16,500. According to La Jolla's president, it agreed to the settlement because of the litigation expenses it would incur in defending the action.
4. These Proceedings
Following settlement of the Saleh claims, La Jolla and Kellogg brought this action against Industrial. They alleged Industrial's failure to provide them with a defense or indemnity in the Saleh action gave rise to claims for breach of contract and breach of the covenant of good faith and fair dealing.
Industrial moved for summary judgment. In pertinent part, Industrial argued that no duty to defend arose because Saleh's termination was not an accident within the meaning of the policy, because the policy only provided coverage for claims brought before the Workers' Compensation Appeals Board and because the policy did not provide any coverage for racial discrimination claims. The trial court granted Industrial's motion and entered judgment dismissing La Jolla's complaint. La Jolla filed a timely notice of appeal.
ISSUES ON APPEAL
On appeal La Jolla and Kellogg argue that the trial court erred because Saleh's complaint set forth facts which would support a potential claim covered by the workers' compensation policy. We agree.
We recently summarized the principles which govern an insurer's duty to defend: “It is axiomatic that an insurer's duty to defend is separate from and broader than its duty to indemnify. [Citation.] The duty to defend is not measured solely by how the third party denominates its complaint or frames its theories, but is also measured by whether there is any potential for the third party's complaint to assert a covered claim. [Citation.] Thus, if the insurer learns facts—whether from the complaint, the insured or another source—which create a potential for the third party to assert a covered claim, the insurer owes a duty to defend. [Citation.]
“Additionally, the duty to defend is measured at the outset of the litigation because, unlike the duty to indemnify, which is determinable only after the basis for the insured's liability is finally established, the duty to defend is based on the potential for the establishment of a covered claim, not the actual establishment of a covered claim. [Citation.] The duty to defend arises as long as the facts (either as expressed or implied in the third party's complaint, or as learned from other sources) give rise to a potentially covered claim [citation], even though the insurer's investigation produces facts showing the claim is baseless. It is the insurer's duty to prove the allegations false. [Citation.] Finally, if an insurer is bound to defend an action based on the assertion of one covered claim, it must defend the entire action even though some portions of it involve noncovered claims. [Citation.]
] “The foregoing authorities show the duty to defend is indeed a wide-ranging obligation. However, such duty, while broad, is not unlimited. Where there is no potential for the third party to recover on a covered claim, there is no duty to defend. [Citations.]” (Devin v. United Services Auto. Assn. (1992) 6 Cal.App.4th 1149, 1157, 8 Cal.Rptr.2d 263.)
In Wong v. State Compensation Ins. Fund (1993) 12 Cal.App.4th 686, 16 Cal.Rptr.2d 1 (rev. denied) (Wong), these principles were applied in a factual setting somewhat similar to the one presented here. In Wong an employer was covered by a two-part “Workers Compensation & Employers Liability Policy” which is nearly identical to Industrial's policy. (See Wong, supra, 12 Cal.App.4th at p. 690, 16 Cal.Rptr.2d 1.)
An employee, McClellan, filed a complaint against the employer, Wong, seeking damages “for breach of employment contract; fraud and deceit; breach of covenant of good faith and fair dealing; intentional infliction of emotional distress and negligent infliction of emotional distress (the underlying case). The basis for each of the causes of action in the underlying case was an alleged constructive discharge.” (Wong, supra, 12 Cal.App.4th at p. 691, 16 Cal.Rptr.2d 1.)
Relying on Shoemaker v. Myers (1990) 52 Cal.3d 1, 17–20, 276 Cal.Rptr. 303, 801 P.2d 1054, the court in Wong noted “injuries resulting from the nonconsensual termination of employment are included within the scope of workers' compensation as both the act of termination and the acts leading up to termination necessarily arise out of and in the course of employment. This is so, even when the employee attempts to renounce workers' compensation remedies.” (12 Cal.App.4th at p. 694, 16 Cal.Rptr.2d 1.)
The Wong court also noted that “claims for intentional or negligent infliction of emotional distress are preempted by the exclusivity provisions of the workers' compensation law notwithstanding the absence of any compensable physical disability.” (Wong, supra, 12 Cal.App.4th at pp. 694–695, 16 Cal.Rptr.2d 1, citing Livitsanos v. Superior Court (1992) 2 Cal.4th 744, 747, 7 Cal.Rptr.2d 808, 828 P.2d 1195.) Thus “[a]ny damages based on injuries that occurred while the employee remained on the job as well as physical injuries and emotional distress resulting from the termination of employment are barred by the exclusivity provisions of workers' compensation․ [Citation.]” (Wong, supra, 12 Cal.App.4th at p. 695, 16 Cal.Rptr.2d 1.)
In light of McClellan's allegations and the scope of the workers' compensation law, the Wong court found the insurer, State Fund, owed a duty to defend the civil action under part one of its policy: “In light of the authority discussed above, Wong's alleged conduct is clearly the sort that normally occurs in the workplace and necessarily arises out of and in the course of an employment relationship, even if deemed constructive discharge. Accordingly, workers' compensation provided McClellan's sole and exclusive remedy for any personal injury, physical or emotional, resulting from the alleged conduct. And, since State Fund agreed under the policy to ‘pay promptly when due to those eligible under this policy the benefits required of you by the workers' compensation law,’ it follows that the allegations in the underlying case establish State Fund's potential liability. Such potential liability is all that was needed to trigger State Fund's duty to defend.” (Wong, supra, 12 Cal.App.4th at p. 695, 16 Cal.Rptr.2d 1.)
In finding Wong was entitled to a defense, the court in Wong rejected the notion the duty to defend provided by part one of the policy was limited to proceedings initiated before the Workers' Compensation Appeals Board. “[T]he defense clause in the workers' compensation section of the policy does not clearly exclude the defense of a civil action based on injury coming within the exclusive jurisdiction of the workers' compensation system. Rather the language is simple and broad. Under it, Wong could reasonably expect an appropriate defense to any claim based on injuries potentially covered by the policy and not otherwise excluded, regardless of whether the plaintiff's choice of forum was appropriate. Moreover, as a general rule, a duty to defend necessarily includes an obligation to assert any and all affirmative defenses available to a defendant. Thus, given State Fund's potential liability under the workers' compensation section of the policy, Wong could reasonably have expected State Fund to assert the bar of workers' compensation as an affirmative defense in the underlying case.” (Wong, supra, 12 Cal.App.4th at pp. 695–696, 16 Cal.Rptr.2d 1.)
We agree with the result and reasoning in Wong. Although the participation of workers' compensation carriers in wrongful termination lawsuits brought as civil actions is certainly a relatively new phenomenon, in our view application of workers' compensation policies to such claims is the logical result of the Supreme Court's recent decisions defining the scope of the Workers' Compensation Act.
As we have seen, Industrial, like the insurer in Wong, defines its workers' compensation coverage in terms of amounts payable under the workers' compensation law. Thus, when our Supreme Court defined the scope of the workers' compensation remedy, of necessity the court also defined the scope of Industrial's workers' compensation coverage. As the court in Wong noted, the Supreme Court has found that, in general, workers' compensation is the exclusive remedy for emotional distress caused by a termination of employment. (See Shoemaker v. Myers, supra, 52 Cal.3d at pp. 17–20, 276 Cal.Rptr. 303, 801 P.2d 1054; Livitsanos v. Superior Court, supra, 2 Cal.4th at p. 754, 7 Cal.Rptr.2d 808, 828 P.2d 1195.) Accordingly, where an employee claims he suffered emotional distress as a result of his termination, he has made a claim which comes within the workers' compensation provisions of policies like Industrial's.
Like the court in Wong, we believe the fact that most wrongful termination lawsuits are initiated as civil actions does not prevent coverage or a defense. As the court in Wong noted, the policy language we are considering does not exclude defense of civil actions. Moreover, it is well established that while the superior court does not have jurisdiction to grant relief for injuries suffered within the course and scope of employment, it does have, concurrently with the WCAB, the jurisdiction to determine jurisdiction. (Scott v. Industrial Acc. Com. (1956) 46 Cal.2d 76, 82–83, 293 P.2d 18.) “Thus, if there is a final determination as to the matter of coverage (i.e., of jurisdiction) in either the [WCAB] or the superior court proceedings, such determination will be res judicata in subsequent proceedings before the other tribunal between the same parties or those privy to them.” (Id. at p. 83, 293 P.2d 18; see also Busick v. Workmen's Comp. Appeals Bd. (1972) 7 Cal.3d 967, 976, 104 Cal.Rptr. 42, 500 P.2d 1386.)
In our view the undisputed jurisdiction of the civil courts to determine the existence of WCAB jurisdiction lends considerable support to the conclusion, reached in Wong, that insured employer's “could reasonably expect an appropriate defense to any claim based on injuries potentially covered by the policy ․ regardless of whether the plaintiff's choice of forum was appropriate.” (Wong, supra, 12 Cal.App.4th at p. 696, 16 Cal.Rptr.2d 1.)
Having accepted the holding in Wong, we turn to its application to the record before us. Insofar as Saleh alleged he suffered emotional distress upon his termination, his claim had the potential of coming within the scope of the Workers' Compensation Act. (See Shoemaker v. Myers, supra, 52 Cal.3d at pp. 17–20, 276 Cal.Rptr. 303, 801 P.2d 1054; Livitsanos v. Superior Court, supra, 2 Cal.4th at p. 754, 7 Cal.Rptr.2d 808, 828 P.2d 1195.) Thus it had the potential for coming within the coverage provisions of part 1of the Industrial policy.3 As we have seen, this potential would in turn give rise to a duty to defend. (Wong, supra, 12 Cal.App.4th at p. 696, 16 Cal.Rptr.2d 1.)
However, as Industrial points out, Saleh did not simply allege he was terminated and suffered emotional distress as a result. Saleh alleged he was terminated because of his Palestinian ancestry and that the discriminatory termination caused his emotional injury.
As Industrial points out, if proven, the discrimination claims would not be covered by part one of Industrial's policy. Racial or sexual discrimination in employment violates the fundamental public policy of this state. (Rojo v. Kliger (1990) 52 Cal.3d 65, 90, 276 Cal.Rptr. 130, 801 P.2d 373.) It therefore falls outside the employment bargain. (Gantt v. Sentry Insurance (1992) 1 Cal.4th 1083, 1100–1101, 4 Cal.Rptr.2d 874, 824 P.2d 680.) Because liability on discrimination claims falls outside the scope of our workers' compensation law, it also falls outside the scope of a workers' compensation insurance policy. (Cf. Wong, supra, 12 Cal.App.4th at p. 696, 16 Cal.Rptr.2d 1.)
However the fact Saleh might have been able to defeat application of the Workers' Compensation Act to his claims, and hence coverage under part 1 of the Industrial policy, does not govern La Jolla's right to a defense. The facts in Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275–277, 54 Cal.Rptr. 104, 419 P.2d 168, the seminal duty-to-defend case, amply illustrate this principle. In Gray v. Zurich the plaintiff in the underlying action alleged the insured “ ‘wilfully, maliciously, brutally and intentionally assaulted’ him.” (Id. at p. 267, 54 Cal.Rptr. 104, 419 P.2d 168.) The insured tendered defense of the claim to his liability insurer, who declined to provide a defense on the ground the complaint alleged an intentional tort which fell outside the coverage of the policy. The insured then defended the case himself on the theory of self-defense. The jury rejected the defense and awarded the plaintiff $6,000 in damages. In finding a duty to defend, even though the face of the underlying complaint alleged facts which, if proven, would take the claim outside the coverage provisions of the liability policy, the court in Gray v. Zurich stated: “To restrict the defense obligation of the insurer to the precise language of the pleading would not only ignore the thrust of the cases but would create an anomaly for the insured. Obviously, as Ritchie v. Anchor Casualty Co., 135 Cal.App.2d 245, 286 P.2d 1000, points out, the complainant in the third party action drafts his complaint in the broadest terms; he may very well stretch the action which lies in only nonintentional conduct to the dramatic complaint that alleges intentional misconduct. In light of the likely overstatement of the complaint and of the plasticity of modern pleading, we should hardly designate the third party as the arbiter of the policy's coverage.
“[The plaintiff's] complaint clearly presented the possibility that he might obtain damages that were covered by the indemnity provisions of the policy. Even conduct that is traditionally classified as ‘intentional’ or ‘wilful’ has been held to fall within indemnification coverage. Moreover, despite [the plaintiff's] Jones' pleading of intentional and wilful conduct, he could have amended his complaint to allege merely negligent conduct. Further, plaintiff might have been able to show that in physically defending himself, even if he exceeded the reasonable bounds of self-defense, he did not commit wilful and intended injury, but engaged only in nonintentional tortuous conduct. Thus, even accepting the insurer's premise that it had no obligation to defend actions seeking damages not within the indemnification coverage, we find, upon proper measurement of the third party action against the insurer's liability to indemnify, it should have defended because the loss could have fallen within that liability.” (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at pp. 276–277, 54 Cal.Rptr. 104, 419 P.2d 168, emphasis added, fn. omitted; see also Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1085, 5 Cal.4th 294C, 17 Cal.Rptr.2d 210, 846 P.2d 792.)
Thus La Jolla's right to a defense depends upon whether, notwithstanding the discrimination claims, Saleh's claims might fall within part 1 of the Industrial policy. The short answer to this question is yes, they might.
We note that in answering Saleh's complaint, La Jolla and Kellogg denied the material allegations of Saleh's complaint, including the allegations of discriminatory conduct. If La Jolla was able to establish it had not terminated Saleh because of his Palestinian ancestry and that his termination did not otherwise violate public policy, Saleh would still have a remedy under the workers' compensation law for the emotional distress he suffered upon his termination. (See Shoemaker v. Myers, supra, 52 Cal.3d at pp. 17–20, 276 Cal.Rptr. 303, 801 P.2d 1054; Livitsanos v. Superior Court, supra, 2 Cal.4th at p. 754, 7 Cal.Rptr.2d 808, 828 P.2d 1195.) In this regard, it is important to recognize that recovery under the Workers' Compensation Act is permitted even when there is no showing of any employer fault. (Shoemaker v. Myers, supra, 52 Cal.3d at pp. 15–16, 276 Cal.Rptr. 303, 801 P.2d 1054.)
In this sense, then, La Jolla can argue it was in the same position as the insured in Gray v. Zurich: if La Jolla was able to defeat allegations of intentional and unlawful conduct, it would nonetheless still be exposed under Shoemaker v. Myers to recovery for claims falling squarely within the terms of part 1 of the Industrial policy. Given this potential, La Jolla was entitled to a defense under part 1 of the policy. (See e.g. Devin v. United Services Auto. Assn., supra, 6 Cal.App.4th at p. 1157, 8 Cal.Rptr.2d 263.)
The result we have reached is not altered by two recent cases relied upon by Industrial, B & E Convalescent Center v. State Compensation Ins. Fund (1992) 8 Cal.App.4th 78, 9 Cal.Rptr.2d 894 (B & E ) and Coit Drapery Cleaners, Inc. v. Sequoia Ins. Co. (1993) 14 Cal.App.4th 1595, 18 Cal.Rptr.2d 692 (Coit.) In neither case was the court asked to consider the potential of coverage under the workers' compensation insurance portion (part one) of a standard workers' compensation and employers' liability policy.
In B & E an employee sued her employer for wrongful termination alleging, inter alia, emotional distress and violation of the FEHA. The court found no recovery in the civil action was possible without proof of intentional and willful conduct by the employer. (B & E, supra, 8 Cal.App.4th at p. 95, 9 Cal.Rptr.2d 894.) Because willful conduct was needed for recovery by the plaintiff in the civil action, the court found no potential right to indemnity and hence no right to a defense under the employers' liability portion (part two) of a standard workers' compensation and employers' liability policy. (B & E, supra, 8 Cal.App.4th at p. 101, 9 Cal.Rptr.2d 894.)
The court in B & E did consider the applicability of the Workers' Compensation Act, but solely in the context of determining what proof was needed to recover in the civil action and obtain coverage under the employers' liability portion of the policy. The court found, quite properly, that in the absence of an intentional violation of public policy, no civil action against the employer could be maintained. However, because it evidently was not raised by the employer, the court in B & E did not also consider the potential for recovery under the workers' compensation portion (part one) of the policy. As we have explained, where no intentional misconduct by an employer is established an employee may still be entitled to recover workers' compensation benefits (Shoemaker v. Myers, supra, 52 Cal.3d at pp. 15–19, 276 Cal.Rptr. 303, 801 P.2d 1054) and the employer will then be entitled to coverage under part one of the standard workers' compensation policy. (Wong, supra, 12 Cal.App.4th at p. 696, 16 Cal.Rptr.2d 1.)
In Coit the court confronted a claim of sexual harassment by an employee. The employer tried to obtain a defense and indemnity under a general liability policy. Because it was only presented with a general liability policy, like the court in B & E, the court in Coit did not consider the potential for recovery under a workers' compensation insurance policy. Thus the holding in Coit, denying the insured both indemnity and a defense, does not impair La Jolla's right to a defense under part one of the Industrial policy.
Having found that La Jolla was entitled to a defense, we must reverse the judgment in favor of Industrial. However, as we stated at the outset of our opinion, we recognize the result we reach will create additional burdens for our workers' compensation system.
The workers' compensation system is designed to provide relatively prompt payment to injured workers without incurring the expense of proving or defending allegations of fault. (See Shoemaker v. Myers, supra, 52 Cal.3d at pp. 15–16, 276 Cal.Rptr. 303, 801 P.2d 1054; Johns–Manville Products Corp. v. Superior Court (1980) 27 Cal.3d 465, 474, 165 Cal.Rptr. 858, 612 P.2d 948.) Yet, by virtue of broad language used in a workers' compensation policy and precedent defining the scope of our workers' compensation law, we have obligated workers' compensation carriers to prove their insureds are faultless and that, therefore, workers' compensation is the only available remedy.
Under different circumstances the foregoing might justify some departure from the principles set forth in Gray v. Zurich. After all, in Gray the insured obtained a “general liability” policy which no doubt gave rise to greater defense expectations than the workers' compensation coverage we are considering. Nonetheless, in light of the broad defense language used in the Industrial policy, we are hesitant to undertake the task of drawing a workable and meaningful distinction between express duties to defend as they appear in liability and workers' compensation policies. In this regard we note workers' compensation carriers have the power to draft narrower defense clauses and, with the approval of the Department of Insurance, put them in their policies.
More importantly, we take note of the fact that our Legislature has recently enacted a number of reforms in our workers' compensation system, including substantial limitations on the ability of employees to recover for distress caused upon termination of employment. (See Stats.1993, ch. 118.) Unlike this court, the Legislature is empowered to alter the scope of the workers' compensation law. Accordingly, given the limitations on our ability to resolve the conflicting and sensitive policy issues presented, wisdom “lies in the direction of judicial deference to the legislative branch.” (Community Redevelopment Agency v. Abrams (1975) 15 Cal.3d 813, 832, 126 Cal.Rptr. 473, 543 P.2d 905.)
The judgment is reversed.
1. La Jolla also tendered defense of the Saleh complaint to a liability carrier, American National Fire Insurance Co. (American). American initially accepted the tender under a reservation of rights but later withdrew the defense.
2. The cases Industrial relied upon were St. Paul Fire and Marine v. County of Yuba (1984) 161 Cal.App.3d 1199, 208 Cal.Rptr. 5, and Georgia–Pacific Corp. v. Workers' Comp. Appeals Bd. (1983) 144 Cal.App.3d 72, 192 Cal.Rptr. 643.
3. In this regard we reject as irrelevant Industrial's contention that Saleh's termination was not accidental and therefore fell outside the scope of coverage. As we have seen, La Jolla argued Saleh was not fired but resigned. Thus, even setting aside the issue of whether injury to Saleh was accidental or intentional (see Republic Indemnity Co. v. Superior Court (1990) 224 Cal.App.3d 492, 502–503, 273 Cal.Rptr. 331.), Industrial cannot show as a matter of law that Saleh's termination was an intentional act.
BENKE, Associate Justice.
KREMER, P.J., and FROEHLICH, J., concur.