City of Whittier v. Everest Nat'l Ins. Co.

315 Cal.Rptr.3d 856

CITY OF WHITTIER, Plaintiff and Appellant,

v.EVEREST NATIONAL INSURANCE COMPANY et al., Defendants and Respondents.

B321450

Court of Appeal, Second District, Division 1.

Filed December 6, 2023

As Modified on Denial of Rehearing December 26, 2023

Certified for Partial Publication.^*

APPEAL from a judgment of the Superior Court of Los Angeles County, Margaret Miller Bernal, Judge; Affirmed in part, reversed in part, and remanded. (Los Angeles County Super. Ct. No. 20NWCV00143)

Woolls Peer Dollinger & Scher, Jeffrey A. Dollinger, H. Douglas Galt, Los Angeles, and Brian W. Walsh for Plaintiff and Appellant.

Selman Leichenger Edson Hsu Newman Moore, Sheryl W. Leichenger, Los Angeles, Eldon S. Edson and Laura R. Ramos, Los Angeles, for Defendant and Respondent, Everest National Insurance Company.

Musick, Peeler & Garrett, Lawrence A. Tabb and Jennifer M. Kokes, Los Angeles, for Defendant and Respondent Starr Indemnity & Liability Company.

BENDIX, Acting P. J.

This appeal presents a question of first impression: whether Insurance Code section 533 (section 533), under which “[a]n insurer is not liable for a loss caused by the wilful act of the insured,” bars indemnification for claims under Labor Code section 1102.5. Labor Code section 1102.5 prohibits, inter alia,, retaliation against employees for reporting activity they have reasonable cause to believe is unlawful, or for refusing to participate in activity that actually is unlawful.

This is an important question whose answer will influence enforcement of our employment laws. How so? Retaliation claims are the most common employment claims in California. For fiscal years 2016 through 2022, retaliation claims of all types were the majority of charges filed in California with the United States Equal Employment Opportunity Commission (EEOC). (See EEOC, FY 2009-2022 EEOC Charge Receipts for CA.)¹ In 2019, retaliation was the most common basis for right-to-sue requests filed with the California Department of Fair Employment and Housing (DFEH). (DFEH, 2019 Annual Report, at p.9.)²

The availability of insurance is a key component of enforcing our employment laws and of an ordered workplace. The availability of insurance can ameliorate risk of collection against potentially judgment-proof employers while also providing expeditious compensation via settlement. Insurance also ameliorates financial risk to employers choosing to defend employment claims they believe are weak.

We decide this question upon the trial court’s grant of summary judgment against the insured City of Whittier (the City), in favor of its insurers, respondents Everest National Insurance Company (Everest) and Starr Indemnity & Liability Company (Starr). The City sought indemnification for settlement of a lawsuit alleging retaliation under Labor Code section 1102.5. In that lawsuit, police officers alleged retaliatory discipline when they objected to, and refused to comply with, a purported illegal citation and arrest quota system and the use of shift averaging to compare officers’ arrest counts in evaluat- ing their job performance. The trial court concluded the police officers’ complaint necessarily involved willful conduct, thus barring indemnification under section 533.

We disagree. As we explain in our Discussion, post, the parties rely on jurisprudence, first developed in underlying sexual molestation and assault cases, that equates “wilful” with inherently harmful or intentional. Because we conclude not all Labor Code section 1102.5 claims involve necessarily willful conduct, but rather some involve conduct more akin to negligence, the trial court erred when it found to the contrary in granting summary judgment in favor of Everest and Starr.

In the unpublished portion of this opinion, we agree with Starr’s alternative argument that its specific policy language does not obligate it to indemnify the City for the settlement.

Accordingly, we reverse the judgment as to Everest, and affirm the judgment as to Starr under Starr’s alternative argument.

BACKGROUND

1. The insurance policies

a. The Everest policies

Everest issued four public entity excess liability insurance policies to the California Insurance Pool Authority (CIPA),³ and included the City as a named insured and member agency. The policies provided coverage for employment practice liability of $10 million per “wrongful act” in excess of a retained limit of $1 million.

The policies stated, “We will, pay on your behalf, the ‘ultimate net loss,’ in excess of the ‘retained limit,’ that the insured becomes legally obligated to compensate others for loss arising out of your ‘employment practice liability wrongful act’….”

The policies defined “ ‘[u]ltimate net loss,’ ” as “the total sum…. actually paid or payable due to a ‘claim’ or ‘suit’, for which you are liable either by a settlement to which we agreed or a final judgment, and shall include defense costs.”

Under the policies, “ ‘[e]mployment practice liability wrongful act’ ” included “ ‘retaliation.’ ”

b. The Starr policies

Starr issued two public entity excess liability policies to CIPA and included the City as a named insured. Like the Everest policies, the Starr policies provided coverage for employment practice liability of $10 million per “wrongful act” in excess of a retained limit of $1 million. The policies provided, “We will pay on your behalf sums in excess of the retained limit that the insured becomes legally obligated to pay for damages to compensate others for loss arising out of your employment practice liability wrongful act ….” Again like the Everest policies, the Starr policies included “retaliation” in the definition of “[e]mployment practice liability wrongful act.”

2. Underlying lawsuit

On March 3, 2015, six officers in the Whittier Police Department, including Joseph Rivera (the Rivera plaintiffs), filed a complaint against the City in the Los Angeles County Superior Court. (Rivera et al. v. City of Whittier, No. BC574443.) The complaint alleged the police department instituted “an unlawful citation and arrest quota in violation of California Vehicle Code sections 41600 et seq. on its officers, and illegally compared officers using shift averaging as a means of determining a benchmark for performance.” The complaint further alleged the police department “retaliated against those [who] refused to participate in and/or reported the unlawful citation and arrest quota,” including, inter alia, “negative language and/or documentation being placed in [plaintiffs’] personnel packages about their refusal to comply with the unlawful quota, unwarranted counseling sessions, unwarranted increased scrutiny, unwarranted transfers, [and] disparaging comments made about them.” We provide more information about the allegations in our Discussion, post.

The City notified Everest and Starr about the Rivera action, advising that the plaintiffs sought damages exceeding $1 million and there was a potential for coverage under the insurers’ policies.

Prior to trial, the City’s counsel notified the insurers of an upcoming mediation session and demanded that they attend. Everest’s and Starr’s coverage counsel attended the mediation, at which the City negotiated a settlement with the Rivera plaintiffs and agreed to pay $3 million to resolve the action. Neither Everest nor Starr consented to the settlement.

The City paid the $3 million, and the Rivera action never went to trial or resulted in a judgment. On December 24, 2019, counsel for CIPA and the City tendered the Rivera settlement to Everest and Starr for indemnity under their respective policies. The insurers denied the request for indemnity.

3. The instant lawsuit

On February 26, 2020, the City filed this action against Everest and Starr, asserting causes of action for declaratory relief, breach of contract, and bad faith. The City alleged the insurers owed a duty to indemnify the City in connection with the Rivera settlement. The parties stipulated to referring to a referee all issues pertaining to the City’s causes of action for declaratory relief and breach of contract.

The insurers each moved for summary judgment, and the City moved for summary adjudication. As relevant to this appeal, the insurers contended retaliation claims under Labor Code section 1102.5 can be established only through proof of an employer’s willful acts, and section 533 therefore barred indemnity. Starr argued in the alternative that its policy required indemnification only of “damages,” which did not include amounts paid in prejudgment settlement. In its motion, the City contended section 533 did not bar indemnity and therefore the insurers were in breach of the insurance contracts.

In a statement of decision, the referee agreed with the insurers, finding no triable issue existed as to whether the insurers owed the City indemnification of the Rivera settlement. The referee reasoned that section 533 prohibits coverage for loss caused by an insured’s willful act, and whistleblower retaliation under Labor Code section 1102.5 “ ‘can only be established by evidence of an employer’s motive and intent to violate or frustrate’ California’s Whistleblower laws.” The referee granted the insurers’ motions for summary disposition and denied the City’s motion.

The trial court adopted the referee’s statement of decision as its own. At the City’s request, the court dismissed without prejudice the cause of action for breach of the covenant of good faith and fair dealing, which was neither addressed nor resolved by the various motions for summary disposition. The court then entered judgment for the insurers.

The City timely appealed.

STANDARD OF REVIEW

A motion for summary judgment “shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (Code Civ. Proc., § 437c, subd. (c); see Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 820, 843, 107...