It’s no Accident, But is There Coverage’

Back in the early years of insurance, some great sage recognized that insurance should not apply to damages for the intentional conduct of the insured. Thus, murderers cannot buy murderer’s liability insurance and homeowners cannot get coverage if they torch their own homes. It all stems from the idea of fortuity—insurance only extends to accidents, the unforeseen and harmful problems that beset us. Coverage for intentional acts cuts against the very heart of the insurance scheme, which requires fortuity, and violates the public policy against allowing someone to purchase an insurance policy and then to commit acts with the intent to cause injuries to be paid for under the policy.

Generally, an insured under a liability policy cannot expect coverage when he intentionally causes the very loss or injury from which he seeks protection. In most such cases, such as arson or batteries committed directly by the insured, there is no interesting insurance question—there is simply no coverage. The requirement of fortuity renders such intentional harmful acts easy to evaluate.

An Exception?
However, the answer is not so obvious where an employer seeks coverage under a liability policy for its employee’s intentional acts performed while doing his or her job. Employers often assume that their liability coverage will protect them against third party claims arising from the actions, whether intentional or not, of their employees. That is, after all, why they bought insurance, right?

In addition, claims or suits usually allege some negligence on the part of the employer that is linked to the intentional conduct, such as negligent hiring. So even if the employee is not entitled to coverage, the insured can still claim that the allegations against it are for negligence, not the intentional act.

This argument, which has been made in many jurisdictions in recent years, often fails. The reasoning goes like this—the common law often allows one person to be legally responsible for the misconduct of another. For instance, the common law doctrine of respondeat superior stands for the proposition that the employer, as principal, is liable for the torts or misconduct of its agent (or employee) committed within the course and scope of its agency or employment. This type of liability, where one person is responsible for the acts of another, is called “vicarious” liability. If the employer is vicariously responsible for its employee’s intentional acts, (that is, steps into the shoes of the malfeasor) there is no “accident;” there is no insurable event.

Across the country, a number of courts have rejected coverage for the employer when the liability arises out of conduct that itself would not be covered under a general liability policy because of its intentional nature. See, e.g., Bankers Multiple Lines, Inc. Co. v. Pierce, 20 F.Supp.2d 1004 (S.D. Miss. 1998) (holding that no coverage exists for derivative claims against an employer that are related and interdependent on employee’s excluded conduct); Public Service Mutual Ins. Co. v. Camp Raleigh Inc., 650 N.Y.S.2d 136 (1st Dept. 1996) (derivative claims of negligence against an employer did not alter the intentional nature of the employee’s operative facts).

Other courts, however, have strained to find coverage under one theory or another under the same general fact patterns. (See, e.g., Evangelical Lutheran Church v. Atlantic Mutual Ins. Co., 169 F.3d 947 (5th Cir. 1999) (derivative claims constituted an “occurrence”); Silverball Amusement, Inc. v. Utah Home Fire Ins. Co., 33 F.3d 1476 (8th Cir. 1994) (holding under Arkansas law, an insurer is required to provide coverage against allegations of negligent hiring).

The key difference in the results in these factually similar cases depends on whether the court recognizes the intentional behavior to be vicarious, and thus the direct responsibility of the insured, or “derivative,” which is liability for one’s own negligence that is based on the intentional act of another. For instance, when an employee assaults someone, the assault is vicariously attributed to the employer. But the employer may also be guilty of negligence for the hiring of the employee (for example, hiring someone with a long record of DWI’s to drive large trucks on crowded streets). That type of liability is “derivative,” not vicarious.

The distinction is the key. No one disputes that the employee’s intentional conduct is outside coverage. But what about the related, though arguably separate, negligence claim against the employer? And if the negligence claim creates a duty to defend, the employer also should be entitled to a defense to the other, non-covered claim, right? Again, it depends.

A Test Case
Take, for instance, this pending case. The insured, a contractor named King, is the sole proprietor of a company in the business of cleaning up construction sites. King purchases a general liability policy, which includes a very common-looking insuring agreement which defines “occurrence” to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” During the policy period, an employee of King’s gets involved in a confrontation where another man, not an employee, accuses him of stealing materials from a job site. The argument becomes very heated and King’s employee decides that words are insufficient to solve the problem, so a knockdown, drag-out fight ensues. King’s employee kicks the other man in the face, causing severe personal injuries (presumably including loss of teeth and dignity). The injured man, of course, files suit both against the employee and King. The claim against King’s employee is for the intentional act of battery. The claim against King is for “negligent hiring, lack of adequate training, and lack of adequate supervision.” The carrier denies the duty to defend the employee, and also King.

Vicarious v. derivative
Now the issue in the case is whether there is an “accident” as that term is used in the policy. The term “accident” is not defined, but prior cases have defined an accident to be “an occurrence that is not the result of an intentional act and which could not be reasonably anticipated by the party causing the occurrence.” The lower court decided that while the intentional acts by the employee were clearly not an accident, the allegations against King for negligent acts were also barred from coverage “if the complainant’s injuries are the result of a negligent act of the principal that is related to and interdependent on the intentional conduct of the agent.” This is the so-called “but for” test.

In other words, if the negligence would not be an issue “but for” the intentional behavior that directly causes the harm at issue, the intentional behavior precludes coverage. That is, no suit against King for negligent hiring can be made unless the employee first beats someone up. Thus, the “vicarious” nature of the intentional act is the primary issue. The “derivative” negligence is causally distant, and is effectively subsumed into the intentional act.

This reasoning, followed in a growing number of jurisdictions, embraces the primacy of vicarious liability for the purpose of determining coverage when the facts are interdependent; one claim can not exist without the other. Without this focus on vicarious liability, a duty to defend would be required. When a court recognizes that the fundamental allegations against the employee are attributable to the employer, coverage can only be resurrected by some mechanism disentangling the employer from its responsibility for the employee’s misconduct. Consequently, courts finding coverage focus on the derivative nature of the negligence claim, and often misapply the “separation of insureds” provisions common to most general liability policies.

The King case, which is currently pending before the Texas Supreme Court, will likely decide the issue under Texas law. King v. Dallas Fire Ins. Co., 27 S.W.3d 117 (Tex. App. – Houston [1st Dist.] 2000, pet. granted). However, there is no consistency in jurisdictions across the United States on this issue. Some jurisdictions have split rulings in their own courts. Others have agreed that the employee is not entitled to coverage, but allow the derivative negligence claim to “stand alone,” so as to create a defense obligation.
Brian S. Martin is a partner in the Insurance and Coverage Section of the Houston office of Thompson, Coe, Cousins & Irons, L.L.P. He has extensive experience in insurance coverage and defense matters, specializing in environmental, toxic tort and products cases. Martin is a frequent author and CLE speaker on insurance topics, including coverage and bad faith issues.

Topics Claims Talent