The opinion of the court was delivered by: Frank C. Damrell, Jr. United States District Judge
This matter is before the court on defendants G.L. Anderson Insurance Services, Inc. ("GLAIS") and Gary L. Anderson's ("Anderson")) (collectively, "defendants") motion for summary judgment and plaintiff Markel American Insurance Company's ("Markel") cross-motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. For the reasons set forth below,*fn1 defendants' motion for summary judgment is DENIED, and plaintiff's motion for summary judgment is GRANTED in part and DENIED in part.
This case arises out of an insurance coverage dispute between plaintiff and defendants. Markel issued an Employment Practices Liability Insurance Policy (the "Policy") to GLAIS, effective December 30, 2007 to December 30, 2008, with limits of liability of $500,000 for each claim and $1,000,000 in the aggregate. (PUF ¶ 1.) The Policy provides, in pertinent part, that Markel "will pay on behalf of the Insured all Damages which the Insured shall become legally obligated to pay as a result of Claims . . . by reason of any Wrongful Employment Practice." (PUF ¶ 3.) However, pursuant to Exclusion 1, the Policy does not apply to any claim against the Insured based on conduct "that is committed with wanton, willful, reckless, or intentional disregard of any law or laws" that form the basis of the claim. (PUF ¶ 6.) Both GLAIS and Anderson are Insureds under the Policy. (PUF ¶¶ 7-8.)
On January 25, 2008, Tiffany Cole ("Cole") filed an action against defendants in the Sacramento Superior Court. (PUF ¶ 9.) The complaint alleged causes of action for sexual harassment and discrimination in violation of the Fair Employment and Housing Act ("FEHA"), California Government Code § 12940 et seq., retaliation, violation of public policy, and defamation-libel and slander per se. (PUF ¶ 11.) GLAIS hired Cole on December 27, 2004, as a Marketing/Customer Service Representative. (PDF ¶ 1.) Cole alleged that during the later part of 2006, Anderson began sexually harassing and discriminating against her by referring to her as a "bitch" and by asking her questions relating to her menstrual cycle. (PUF ¶ 12.) She also alleged that in 2007, Anderson repeatedly called her a "whore" and a "bitch" and sent email communications in which he referred to her as such. (PUF ¶¶ 13-14.) She alleged that she asked Anderson to stop making the sexually demeaning and offensive comments and that, in February 2007, she threatened to quit because of the way she was treated by Anderson. (PUF ¶¶ 15-16.) Cole asserted that in response to her threat to quit, Anderson agreed to allow her to work part-time on a telecommute schedule and come into the office one to two days per week. (PUF ¶ 17.) Cole further alleged that Anderson's conduct continued, even after she again asked him to stop in October 2007. (PUF ¶ 19.) She asserted that after she complained, Anderson sent out defamatory emails to clients calling her "so God damned lazy, she can't get her cheesy, fat fucking ass in the car and drive to work." (PUF ¶ 20.) Finally, Cole alleged that Anderson retaliated against her complaints of sexual harassment by firing her effective January 2008. (PUF ¶ 22.)
Anderson, current employees of GLAIS, and a former employee confirmed that profanity was regularly used in the office by Gary, Cole, and other employees. (PUF ¶¶ 28, 38.) Anderson admitted calling Cole a "bitch" and a "whore," but asserted it was in the context of a joke after Cole had used those terms in referring to herself. (PUF ¶ 41; PDF ¶ 38-39.) Anderson also admitted that sexual slurs and jokes and racial or ethnic slurs and jokes were occasionally told at the office. (PUF ¶ 43.) However, no one was aware of any complaints by Cole about sexual harassment. (Ex. 6 to Decl. of Clara Celebuski ("Celbuski Decl."), filed Mar. 3, 2010, at 5.) When interviewed, Anderson and the employees commented that plaintiff herself made sexually explicit comments, sent emails that had sexual innuendoes and sexual jokes, and made sexual gestures in public when other employees were present. (Id. at 4-5; PDF ¶¶ 36-37, 51.) Anderson believed that all employees were comfortable in the uninhibited environment at GLAIS because they appeared to enjoy the bantering that included profanity and sexual comments. (PDF ¶ 47.)
Anderson also admits sending the email to Dan Carroll ("Carroll"), a friend of Anderson's, that referred to Cole, but presents evidence that Carroll did not know to whom Anderson was referring. (PUF ¶ 59; PDF ¶ 27.) The email did not mention Cole's name, and she was not the only employee that worked from home. (PDF ¶ 19.)
Defendants contend that Cole's employment was terminated on January 11, 2008 on the basis of insubordination. Specifically, they assert that she was terminated due to an email she sent to all GLAIS employees stating that she would not comply with new compensation procedures that GLAIS had implemented in January 2008. (PUF ¶ 47; PDF ¶¶ 30-31.)
After Cole's complaint was filed, by letter dated January 29, 2008, Markel wrote a letter to Anderson acknowledging receipt of the claim; the letter provided, "This letter does not address applicability of coverage, which will be addressed in future correspondence." (PUF ¶ 25; Ex. 3 to Decl. of Clara Celebuski ("Celbuski Decl."), filed Mar. 3, 2010.) By letter dated January 31, 2008, Markel appointed Robert J. Schnack ("Schnack") of Jackson Lewis LLP to defend the named defendants in the Cole litigation. (PUF ¶ 24.)
On February 25, 2008, Cole made a settlement demand for the policy limit of $500,000, less attorneys' fees and costs incurred, which expired on April 4, 2008. (PUF ¶ 26.) That same day, Schnack filed defendants' answer to Cole's complaint, which denied all of the allegations and asserted 18 affirmative defenses. (PDF ¶ 50.)
On February 26, 2008, Markel and Anderson received Schnack's initial report relating to the liability faced by defendants in the Cole litigation. (PUF ¶ 27; DPUF ¶ 13.) Schnack acknowledged that there were defenses to Cole's claim, but recommended settlement. (PDF ¶ 55.) Schnack's preliminary evaluation was "that this case presents some significant liability exposure as to both compensatory and punitive damages." (DPUF ¶ 15; Ex. 6 to Celebuski Decl. at 8.) Specifically, the report noted that "regardless of plaintiff's own conduct and comments, the jury could easily believe that in 2006 and 2007 such conduct and comments simply should not occur in the workplace." (Ex. 6 to Celbuski Decl. at 8.) Schnack reiterated his conclusions that defendants faced significant exposure beyond the policy limits in an email to Anderson sent on April 9, 2009. (PUF ¶¶ 48-49.)
On March 26, 2008, Markel's coverage counsel, Andrew Waxler ("Waxler"), sent a letter to Anderson regarding coverage related to the Cole litigation. (PUF ¶ 31; PDF ¶ 56.) The letter provided that "[b]ased upon the information received by Markel thus far, Markel wishes to advise that it will defend [Anderson] and GLAIS . . . under a reservation of Markel's right to disclaim coverage." (Ex. 7 to Celebuski Decl. at 1.) The letter confirmed that the policy limit for the claim was $500,000. (Id.) The letter also provided that Exclusion 1 to the Policy may disallow coverage based upon willful conduct and that Insurance Code § 533 also prohibits indemnification for willful conduct and any punitive damage award. (Id. at 5-6.) The letter advised that Markel reserved the right to seek reimbursement of the Claim Expenses incurred in the litigation on behalf of the insureds if the litigation was not covered under the Policy. (Id. at 6.) The letter also advised that, although Waxler encouraged allowing Schnack to continue to act as counsel in the litigation, Anderson and GLAIS were entitled to independent counsel under California Civil Code § 2860. (Id.) Anderson received and reviewed the letter on March 27, 2008. (PUF ¶ 36.)
Schnack obtained an agreement from Cole's counsel to extend the deadline for the policy limits demand from April 4, 2008, to April 11, 2008. (PUF ¶ 59.) On April 9, 2008, Anderson informed Schnack that he had an appointment with Kim Collins ("Collins") of Murphy, Campbell, Guthrie & Alliston on April 10. (PUF ¶ 51.) The settlement deadline was extended until April 14, 2008. (PUF ¶ 51; PDF ¶ 65.)
On April 10, 2008, Anderson retained Collins as independent counsel. (PUF ¶ 37.) That same day, Waxler received a letter from Collins, demanding that the policy limits settlement be accepted. (PUF ¶ 53.) The letter also noted that Waxler had "plac[ed] pressure" on Anderson to agree to pay money of his own to satisfy the demand and that he had warned Anderson of the possibility of non-covered damages since approximately April 3, 2008, "with several follow ups." (Ex. 16 to Decl. of Andrew J. Waxler ("Waxler Decl."), filed Apr. 8, 2010, at 3.)
Waxler attempted to reach Collins at least three times on Friday, April 11, 2008 to discuss whether defendants would contribute any money to a settlement of the Cole litigation. (Waxler Decl. ¶ 9.) Waxler left messages for Collins, providing a cell phone number and inviting him to call over the weekend to discuss these issues prior to expiration of the ...