Insurance Policy’s Promise to Advance Claims Expense for Covered Claims Does Not Create a Duty to Defend

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In United Farm Workers of America v. Hudson Insurance Company, (E.D. Cal.) 2019 WL 1517568, the United Farm Workers of America union (UFW) sued Hudson Insurance Company for breach of contract and bad faith arising out of a former employee’s wrongful termination and wage and hour lawsuit.

Hudson provided UFW with Labor Professional Liability Insurance that included employment practices liability coverage. Hudson reserved its rights and agreed to pay an allocated share of the defense costs, citing the terms of its policy. UFW and Hudson agreed to a 50-50 allocation and, defending itself, UFW moved to compel arbitration of the employee lawsuit pursuant to its collective bargaining agreement. However, the trial court found that the only claim subject to arbitration was the employee’s wrongful termination claim, which Hudson contended eliminated the sole covered cause of action.

The employee’s complaint was amended to include class action allegations for the statutory wage and hour claims and the case proceeded to trial, resulting in an adverse judgment of $1.2 million. Hudson paid UFW for the allocated share of the defense costs incurred through the dismissal of the sole covered claim, and disclaimed any obligation for the wage and hour award.

Hudson retained Haight, Brown & Bonesteel to defend the company against the subsequent bad faith lawsuit brought by the UFW, which alleged that Hudson wrongfully failed to defend or indemnify the union for the employees’ lawsuit. Besides the $1.2 million wage and hour award, UFW claimed in excess of $800,000 incurred defending itself as damages.

UFW and Hudson brought cross-motions for summary judgment, with UFW seeking summary adjudication on the duty to defend. UFW argued that Hudson had a duty to defend the entirety of the employee lawsuit based on the mere potential for coverage, which was not extinguished by the partial grant of UFW’s motion to compel arbitration. (Citing Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263; Montrose Chem. Corp. v. Super. Ct. (1993) 6 Cal. 4th 287; and Buss v. Super. Ct. (1997) 16 Cal.4th 35.) UFW argued that Hudson’s failure to do so amounted to a bad faith breach of contract, exposing Hudson to the full amount of the defense costs, the resulting judgment, UFW’s own attorney’s fees for suing Hudson under Brandt v. Super. Ct. (1985) 37 Cal.3d 813, and other damages.

Hudson’s cross-motion for summary judgment asserted that there was no duty to defend under the terms of its policy, which expressly stated that UFW had the duty to defend. Under the policy, Hudson was only obligated to advance defense expenses for covered claims, subject to an allocation based on the respective liabilities and further subject to reimbursement in the event of an uncovered result, none of which translated into a duty to defend. (Citing Jeff Tracy, Inc. v. United States Spec. Ins. Co. (C.D. Cal. 2009) 636 F.Supp.2d. 995; and Petersen v. Columbia Casualty Company (C.D. Cal.) 2012 WL 5316352.) Further, although the employee’s original claim for wrongful termination was a covered claim under the Hudson policy’s definition of Wrongful Employment Practices, Hudson argued that none of the statutory wage and hour claims that remained after wrongful termination was ordered to arbitration came within the policy’s Wrongful Acts, Wrongful Offenses or Wrongful Employment Practices coverages. (Citing California Dairies v. RSUI Indem. Co. (E.D. Cal. 2009) 617 F.Supp.2d 1023.)

Consequently, Hudson contended that its payment after the entry of judgment, limited to an allocated share of the defense expense, and its disclaimer of coverage for the wage and hour award, were entirely proper and not in breach of the contract. In addition, Hudson uncovered the existence of misrepresentations in UFW’s application for the insurance during discovery, which Hudson argued voided the policy. (Citing Imperial Cas. Co. v. Sogomonian (1988) 198 Cal.App.3d 169; and Thompson v. Occidental Life (1973) 9 Cal.3d 904.) Without coverage or a breach of contract, Hudson argued that there could be no bad faith.

The district court agreed with Hudson, denying UFW’s motion for summary adjudication on the duty to defend and granting Hudson’s cross-motion for summary judgment. The court found that there was no duty to defend under the terms of the policy, which imposed the duty to defend on the insured and not the insurer. The court agreed that Hudson’s obligation was limited to payment for the cost of defending claims actually covered by the policy, and the award for wage and hour violations did not come within any of the policy’s coverages. Additionally, the court found that UFW made material misrepresentations in its application for insurance, holding that the contract was void. Because there was no coverage there was no breach of contract, and the cause of action for breach of the implied covenant of good faith and fair dealing had to fail as well, entitling Hudson to summary judgment.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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