Cas. Co. v. Ezrin, 764 F. Supp. 153 (1991) (sexual assault by child of insured).
One recent California case has specifically addressed the issue of employment discrimination and § 533. In B & E Convalescent Center v. State Comp. Ins. Fund, 8 Cal. App. 4th 78 (1992), the court held that coverage for wrongful termination in violation of the Labor Code and antidiscrimination statutes was precluded under § 533. "It can hardly be denied that a termination from employment in violation of antidiscrimination statutes or other fundamental and substantial public policies is inherently harmful." B & E, 8 Cal. App. 4th at 98. The factual record before the court clearly indicated that the employer had intended to discriminate against the employee because of her race and her union activities. B & E, 8 Cal. App. 4th at 95. Therefore, the employer was not entitled to indemnity under its general liability policy.
The London Defendants rely on a line of cases outside the § 533 context to argue that employment discrimination is not only always wrongful, but always intentional, under § 533. The London Defendants' reasoning is not persuasive. The cases they cite construe policy language, and stand for the proposition that an act of discrimination cannot be considered an "accident." See Loyola Marymount v. Hartford Acc. and Indem., 219 Cal. App. 3d 1217, 1224-25, 271 Cal. Rptr. 528 (1990); Commercial Union Ins. Co. v. Superior Court, 196 Cal. App. 3d 1205, 1208, 242 Cal. Rptr. 454 (1987); American Guaranty & Liability v. Vista Medical Supply, 699 F. Supp. 787, 790 (N.D.Cal. 1988). Whether an employer fires an employee with a discriminatory motive, or establishes a facially neutral employment policy which has the unintended effect of discriminating among employees, the employer is engaging in an "intentional" act as opposed to an "accidental" one. The inquiry under § 533, however, is whether the insured intended to engage in conduct that is wrongful. In all the post-J.C. Penney cases enumerated above, there was an inherently wrongful act and an insured who intentionally engaged in that act.
The issue before this Court is whether claims of disparate impact (unintentional), as well as disparate treatment (intentional), discrimination are barred from coverage by § 533.
Although B & E did not reach this question, the language and policy of § 533, and the case law arising under it, dictate the answer. Unintentional discrimination may be inherently harmful, but a plaintiff need not establish that the insured intended to commit a wrongful act in order to recover under such a theory. Therefore, the standard set forth in J.C. Penney30 would not be met, and the policy of discouraging wilful torts would not be furthered, if coverage for unintentional discrimination were barred under § 533. Accordingly, this Court will not take the extraordinary step advocated by the London Defendants. Unlike disparate treatment claims, disparate impact claims are not precluded from coverage under § 533.
The critical question here is how to characterize the claims in the underlying action. The parties dispute whether the Third Amended Complaint or the Fourth Amended Complaint is the "operative pleading" in the Herring Action.
The London Defendants at least implicitly charge collusion between Save Mart and the Herring Plaintiffs in crafting the Fourth Amended Complaint. This factual issue is material because as Save Mart acknowledges, there are express allegations of disparate impact, as opposed to disparate treatment, only in the Fourth Amended Complaint.
Reply re: Counter Motion at 13.
In light of the foregoing, the London Defendants are not entitled to a summary judgment that all the claims in the Herring Action are for intentional misconduct, and are barred by either the Policy language or § 533.
3. Number and Date of Occurrences. The Lloyd's Policy provides that "exposure to substantially the same general conditions existing at or emanating from one location shall be deemed one occurrence."
The London Defendants urge the Court to find as a matter of law that the alleged pattern and practice of discrimination constituted a single occurrence predating the Policy period.
The Herring Action involves sex, race, and age discrimination claims based on conduct which allegedly took place in various departments of various stores on various occasions, both before and during the Policy period. In order to determine the number and date of "occurrences" precipitated by the underlying conduct, the Court would be required to weigh evidence and make factual findings.
Accordingly, summary judgment is inappropriate.
4. Prior Knowledge of Save Mart. Insurance is designed to protect against unknown or contingent risks of harm, not known or expected losses. Chemstar, Inc. v. Liberty Mutual Ins. Co., 797 F. Supp. 1541, 1551 (C.D.Cal. 1992).
Herring filed her initial Charge of Discrimination on April 8, 1988; Save Mart acquired Fry's Assets on March 29, 1989; Herring received a right to sue letter from the EEOC on September 14, 1990; and the Lloyd's Policy went into effect on December 1, 1990. Based on this sequence of events, the London Defendants argue that Save Mart had prior knowledge of the discrimination claims, rendering them known risks outside the scope of the Policy. Save Mart responds with declaratory evidence that Save Mart was not in fact aware of the Herring charges against Fry's prior to the inception of the Policy. Zalatel Decl., Exh. L, M, N (Alexander, Bacon, Sauer). Save Mart alternatively argues that knowledge of the claims against Fry's would not constitute knowledge of claims against Save Mart.
The London Defendants have not established as a matter of law that Save Mart had knowledge of the discrimination claims prior to the inception of the Policy period. Accordingly, summary judgment is inappropriate.
5. Faithful Performance Coverage. A contract of insurance must be read as a whole, including any introductory clause or heading, to determine the intent of the parties. Ogburn v. Travelers Ins. Co., 207 Cal. 50, 52-53, 276 P. 1004 (1929).
Endorsement 17 to the Lloyd's Policy, entitled "Faithful Performance," is incorporated into "SECTION III - CRIME INSURANCE." The clause provides indemnity for loss caused by the failure of an employee "to perform faithfully his duties or to account properly for all monies and property received by virtue of his position of employment
Ultimate net loss under the Crime Insurance Section is defined as "the actual loss sustained by the Assured after making deductions for all recoveries and salvages."
Read as a whole, this clause clearly contemplates indemnification for monetary or property loss caused by the misconduct of an employee. The underlying complaint in this case alleges discriminatory employment policies not employee misconduct, and any cost to the Assured will result from liability imposed by law
not loss of money or property. Accordingly, the London Defendants are entitled to a summary adjudication that the discrimination claims are not covered by the Faithful Performance Clause.
Accordingly, IT IS HEREBY ORDERED that:
(1) The London Defendants' Motion for Summary Judgment is DENIED, except as to the Faithful Performance Provision. As to that provision only, the Defendants' Motion for Summary Judgment is GRANTED.
(2) Save Mart's Counter Motion for Summary Judgment is DENIED.
Dated: December 27, 1993.
Stanley A. Weigel