Gauntlett on Intellectual Property/Antritrust Insurance : Insurance Policyholder Advocate & Attorney David Gauntlett : Gauntlett Law Firm : Insurance Recovery, Policy Interpretation : Irvine, Orange County, California

Momence residents, thereby triggering Healthcap’s duty to defend.

The injuries to the residents as alleged by the plaintiffs relate back to Momence's cost reports to the government where it certified that it provided quality services and care. Plaintiffs claim Momence knew that was false. The statutory damages they seek result from those allegedly false filings, and not from any alleged bodily injury to the residents. . . .

Under the FCA and the IWRPA, the plaintiffs do not have to show that any damages resulted from the shoddy care. See Horizon W. Inc. v. St. Paul Fire & Marine Ins. Co., 214 F.Supp.2d 1074, 1077-79 (E.D.Cal.2002) (citing 31 U.S.C. § 3729(a)) (“Liability under the FCA is based solely upon the creation or presentation of false claims to the government, not upon the underlying conduct used to establish the falsity of such a claim.”), aff'd, 45 Fed.Appx. 752 (9th Cir.2002). Instead, all the plaintiffs need to show is that Momence billed the government for services and a level of care that it knew it was not providing. See United States ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730, 740-41 (7th Cir.2007) (providing elements of FCA claim); see also Scachitti v. UBS Fin. Servs., 215 Ill.2d 484, 294 Ill.Dec. 594, 831 N.E.2d 544, 557 (2005) (noting the similarity between the FCA and the IWRPA and finding case law on the FCA “instructive” regarding the interpretation of the IWRPA).

Id. at 695-96.

Emphasizing this point, the court suggested that a False Claims Act suit is unlikely to generate CGL coverage since the operative wrongful conduct is simply the misrepresentation of a claim which will rarely implicate “advertising injury” or any form of “personal injury” itself even though the elements of predicate acts were describing why the claim was false may do so.

Other courts have recognized this distinction between the proof required for the FCA claim and the conduct underlying the false claims. They uniformly hold that an insurer is not obligated to defend a qui tam suit merely because the insurer would have to defend the insured against a suit for damages resulting from the insured's conduct underlying the qui tam action.

Id. at 695.

The court distinguished the only case urged by insured a qui tam action which ultimately resulted in an intervention suit by the impacted Southern California municipalities, Watts Industries, Inc. v. Zurich American Ins. Co., 121 Cal. App. 4th 1029, 18 Cal. Rptr. 3d 61 (2004).

Implicit in the court’s analysis of Watts is its view that even were the allegations as asserted by the actual injured party, in this instance a governmental entity, to trigger a right to a defense for that entity’s allegations, until an amendment to add the entity as a party the fact that a qui tam suit aligned with the insured’s interests could not give rise to potential coverage.

The court parted company with Momence’s view while agreeing that it is the factual allegations in the complaint, not the legal basis for liability of the plaintiff that controls, those facts must support a theory of recovery which alleges potential coverage and that theory must be raised in the complaint.

This view does not appear applicable to offense based coverage analysis and the case in which it is cited Ill. Emcasco Ins. Co. v. Nw. Nat’l Cas., 337 Ill. App. 3d 356, 271 Ill. Dec. 711, 785 N.E. 2d 905, 908 (2003) was in fact one for “bodily injury” as was true of the coverage sought in this fact scenario.

The court pointed out that the plaintiff in the underlying suit did not seek damages for substandard medical care which could be a form of bodily injury and as mere employees of Momence, not residents, as they lacked standing to sue on the resident’s behalf. Such claims are implicit in the court’s analysis that parties that lack standing to sue on their own behalf cannot meet the coverage criteria of the policy based on the questionable analysis of the 7th Circuit.

In BASF AG v. Great Am. Assur. Co., 522 F. 3d 813, 819 (7th Cir. 2008), applying Illinois law, which appears inconsistent with the logic in another case cited but not analyzed with specificity in this case, Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 223 Ill. 2d 352, 307 Ill. Dec. 653, 860 N.E.2d 307, 315 (2006). The potential to amend the suit where one of the qui tam litigant’s mother died a few weeks before Absher left Momence’s employ, in the court’s view was problematic because there were no factual allegations suggesting such a claim. This would not be a qui tam claim but would be a claim seeking distinct relief from that asserted, of which there was insufficient notice.

While an insurer certainly has a duty to defend its insured against any complaint that leaves open the possibility of coverage, Ill. Emcasco Ins. Co., 271 Ill.Dec. 711, 785 N.E.2d at 907, that duty is premised on the facts the parties to the underlying complaint actually alleged in their complaint, not on those facts that a nonparty to the suit could have alleged had it decided to sue as well.

Id. 696, n.9.

The court also found unavailing what it described as a tortured attempt to describe counts factually alleging emotional distress as a form of bodily injury since it viewed the employment related practice exclusion as foreclosing any coverage for same.

The court found that personal injury liability for disparagement must be caused by a medical incident under the terms of the professional liability policy and absent such allegations no coverage thereunder could be triggered.

The court found that a cause of action for slander was therefore stated.

The court did not find the Employment-Related Practices Exclusion, however, surpassed and determined that it barred potential coverage because the alleged conduct was employment-related in its view.

The court reasoned,

At the very least, in calling Wilson a “nigger,” Plaintiff's employees intended to create a hostile, uncomfortable workplace environment. At most, in calling Wilson a “nigger,” Plaintiff's employees indicated their belief that he was not capable of performing the job competently. The point being made here is that no matter how one slices it, the underlying incidents were “employment-related practices, policies, acts or omissions” excluded under this provision.

Id. at *8.

The court did not directly deal with the issue of whether the fact, and that the actors were not the employer’s supervisors, but other employees made the acts, acts of the employer, so as to be employment-related in that all of the offenses, the harassment, humiliation, discrimination, demotion, coercion, evaluation and reassignment, were necessarily acts of an employer. There is no reason that defamation should be given a singular and distinct interpretation in context so as to make it actionable, if done by co-employees, where those were not the acts of the employer. The court assumes respondeat superior without analyzing this issue.

The Employment-Related Acts Exclusion

While the use of racial epithets may have occurred at the work site, the perpetrators were mere employees who were not acting either at the behest or direction of management nor whether acts ratified by management. More critically, since it is not the true facts but those alleged that count for coverage purposes, it was not alleged that conduct of these employees was attributable to the employer other than as a consequence of its alleged and implicit negligent supervision.

Had the complaint against Diversified been clearer in its fact allegations about negligent supervision, perhaps the court would have reached a different conclusion. At minimum, the court would have faced a tougher challenge in ruling as it did.

Had California case law specifically narrowly construed the scope of the employment-related exclusion on analogous facts as was the case in the Peterborough Oil Co., Inc. v. Great American Ins. Co., 397 F. Supp. 2d 230, 238-39 (D.Mass. 2005), the district court would also have had a harder task in ruling against Diversified.

Notably, the district court did not look to Peterborough or any other out-of-state authority (even though it was the case which was most directly on point) or seek to distinguish it or otherwise comment upon its non-applicability.

Although the suit asserted labeled causes of action for “harassment” Govt. Code § 12940(j) and discrimination Govt. Code § 12940(a) and (n) as the court observed which arose from acts on the employer’s premises and in an employment setting, that fact does not answer the question as to whether the unauthorized and unratified acts of non-managerial employees against another co-employee were an “employment related practice . . . act or omission” as the policy requires.

In this circumstance the conduct alleged would only be chargeable against Diversified for negligent supervision which under one plausible construction of the exclusion would not be within its ambit.

Per Peterborough Oil Co., Inc. v. Great American Ins. Co., 397 F. Supp. 2d 230, 238-39 (D. Mass. 2005) the provisions, when taken together “strongly suggest the common-sense conclusion that the term ‘employment-related’ has a relatively narrow meaning: it is intended to refer to matters that directly concern the employment relationship itself, such as the demotion, promotion, or discipline of employees by employers, and tortious acts that may accompany such personnel decisions, such as discrimination, harassment, or defamation. Conversely, it is not intended to refer to all matters that concern or relate to employees.

Implicit within this discussion is the premise that while the topic was one within the scope of the exclusion the chargeable acts must be those of an employer which is itself the actor who engaged in defamatory behavior.

In Truck Ins. Exchange v. Prairie Framing, LLC, 162 S.W.3d 64, 79 (Mo. Ct. App. 2005) negligent supervision asserted as an alternative to a respondeat superior claim was covered. Artfully pleaded allegations suggested a basis for liability due to employer’s knowledge that employees drank excessive amounts of alcohol while at work.

There was no allegation in the Wilson complaint that the shop supervisor was representing the employer, or was serving as a member of Diversified’s management team at the time the alleged acts took place. There was no allegation in the Wilson complaint that the shop supervisor was acting on behalf of the employer, or was a member of management.

In a telling part of his Order, Judge Gutierrez notes, “The statements made by Plaintiff’s employees [were] allegedly on Plaintiff’s behalf . . ., p. 12.

The court’s order assumes that the factual basis for the allegations directed against Diversified that were made allegedly on Plaintiff’s behalf “was respondeat superior. That the employer’s defamation statements were chargeable against Diversified because they were the acts of Diversified’s manager or agents. Yet this is but one, albeit not the most logical construction of the fact allegations against Diversified.

It is equally logical to presume that liability would still attach if the acts were chargeable to Diversified if the actors, who allegedly suffered defamation statements were negligently supervised by Diversified.

The complaint alleged that:

¶14. WILSON’s supervisor, individually, and for DCS and 105 defendant’s other agents engaged in the above-referenced actions [and] . . . should have known of these harassing actions because WILSON complained to his supervisor of the demeaning comments by his managers, supervisors, and other employees . . . DCS failed to take immediate and appropriate corrective action to stop the harassment.”

Liability could have been achieved against Diversified under this theory of recovery consistent with the above allegations where Diversified was negligent, i.e., “should have known” of the conduct of Wilson’s co-employers but either was unaware of their conduct and failed to have managers act to restrain the allegedly defamatory behavior.

A Kansas district court observed in Park Univ. Enters. v. American Cas. Co. of Reading, PA, 314 F. Supp. 2d 1094 (D. Kan. 2004) in a decision affirmed by the Tenth Circuit analyzing the analogous “personal injury” offense of invasion of privacy:

J.C. Hauling alleges that Park knew or should have known that the facsimile was unsolicited. “Should have known” is a term connoting negligence not intention. Restated, the J.C. Hauling complaint alleges alternatively that Park either (1) intentionally sent the facsimile, knowing that the recipient did not invite it, or (2) intentionally sent the facsimile, negligently believing that the recipient invited it. Because the J.C. Hauling complaint alleges that Park may have acted negligently, American should have considered that allegation when evaluating whether to defend Park in the underlying state court action.

Also germane to this analysis is a case cited in Park. Stegman v. Hunter Health Clinic, Inc. and Cincinnati Ins. Co., No. 97-1048-WEB, 1998 WL 748953 (Holding that facts available to insurer showed a possibility of coverage for defamation, even though retaliatory employment discrimination was not covered).

As Landmark’s exclusion may not bar employment related conduct that was not pertinent by the employer but rather a co-employee which the employer was liable for under theories of negligent supervision but which were not the acts of the employer, Landmark has not established that its exclusion would bar coverage in all possible worlds. Thus its exclusion should not bar a defense.

Even though it may ultimately be determined that Atlantic Mutual has a viable defense to coverage by virtue of the . . . exclusion, this can only affect its liability for indemnification. Its duty to defend depended on the existence of only a potential for coverage. That potential was never conclusively negated and obviously cannot be negated short of an actual trial to resolve what is clearly a genuine factual dispute. Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1040 (2002).

In other words, the court emphasized that the conduct was employment-related because it allegedly occurred on the work site. The court, however, did not explain why that was sufficient in and of itself to trigger the exclusion where another possible construction of employment-related exclusion, i.e., that the activity be for the benefit of the employer or in effectuating its purposes was not met by the allegations.

The court thus presumed that the employees who allegedly made the defamatory statements were acting on behalf of or with the knowledge of or agreement of Diversified, under the doctrine of respondeat superior. This is not what the complaint against Diversified alleged.

The court suggests that the racial epithets were uttered for the purpose of “undermining employee morale.” However, this understanding of the allegations is only one possible construction. Another possibility is the rogue acts of co-employees who are not engaging in conduct of which Diversified managers approved or knew of. The district court also fails to consider much less distinguish the point raised in our Reply:

“Diversified explained Mr. Williams’ negligent supervision theory and allegations in its moving papers. Landmark did not oppose that argument.”

Supervision of these employees, however, was not alleged to be as careful as it could have been and thus there was potential exposure for negligent supervision.

employment-related practices.

The underlying defamation claims were based on the statements of the insured Greenspoint’s controller James Sparks, general manager Mort Hall, and used car sales manager Jamie Mouton, who made racist and defamatory remarks about Martinez to third parties and ultimately fired him. These included statements by Mr. Satterfield and Mr. Holland. Mr. Mouton told them that Mr. Martinez was a “thieving spic beaner” or “thieving Mexican.” Id. at 56-57. They found that the statements were defamatory and that there was actual malice at the time the statements were communicated and that the respondents actually knew their statements to be false at the time of communication. Id. at 57.

Each of the parties making statements was a vice principal of the insured Greenspoint Dodge and thus their statements bound management. The Court noted:

In a section entitled “Allocation of Liability,” the arbitration panel specifically stated that a corporation is liable for its agents who engage in defamation if the agents are vice-principals, and then found Greenspoint, Apple, Sparks, Hall, and Mouton jointly and severally liable for the actual damages and assessed separate amounts for each of them for the punitive damages.
 

Id. at 58.

The principal focus of the court’s analysis was whether the knowledge of falsity exclusion precluded coverage for the defamatory statements where made by corporate vice principals. Greenspoint’s argument was that

The motion for summary judgment states that “director” has a well-understood and specific meaning when used in the context of organizations and when itemized along with “officers” and “shareholders.” . . . [T]he arbitration panel's determination that Sparks, Hall, and Mouton were vice-principals of the corporation is insufficient to make any of them a director, executive officer, or stockholder of the corporation, which are the terms used by the insurance policy for people who are “the insured.”
 

Id. at 62.

The court observed that under the law of the underlying forum, Texas,

A person's “status as a vice-principal of the corporation is sufficient to impute liability to [the corporation].” GTE Sw., 998 S.W.2d at 618. Corporations can act only through their agents. . . .
. . . .
. . . Courts use the “vice-principal” doctrine to “distinguish between the acts of ‘the corporation itself’ and ‘that of a mere servant or employee.’ ”
 

Id. at 64.

Explaining why the “vice principal” concept was not properly applied here to make the parties’ acts those of Greenspoint for insurance coverage purposes, the court noted that none of the identified actors who committed wrongful acts were “executive officers, directors or shareholders” as the policy required.

Drawing a distinction between the capacity of vice principals for tort law and the contract limitations of the policy’s exclusionary language, the court stated:

Put simply, under tort law Greenspoint is responsible for the actions of certain people in supervisory positions because their actions are determined to be the actions of the corporation, and liability is imposed even though the supervisors are not officers, directors or shareholders of the corporation. But the policy excludes from coverage only a false statement by Greenspoint, as it is defined under the policy, as officers, directors or shareholders of the corporation. We conclude that the terms of the policy itself control the definition of which people make up the corporation, for purposes of the insurance coverage. See Grimes Constr., Inc. v. Great Am. Lloyds Ins. Co., 51 Tex. Sup.Ct. J. 545, 248 S.W.3d 171, 172 (Tex.2008) (“[L]abels of tort or contract could not override the language of the insuring agreement”) . . . .

Id. at 65-66.

The court found the “knowledge of falsity” exclusion unavailing as the policy required Greenspoint itself to have knowledge of the defamation, which was not alleged.