Employer’s Liability Insurer Not Obligated to Cover Claims Alleging Intentional Conduct

In Seneca Ins. Co. v. Cybernet Entertainment, LLC, et al., No. 16-cv-06554, the United States District Court for the Northern District of California ruled that the State Insurance Compensation Fund (“State Fund”) has no duty to defend Cybernet Entertainment, LLC (“Cybernet”), a producer of adult films, in a series of personal injury lawsuits filed by three actors alleging that they contracted human immunodeficiency virus (HIV) while on set. Cybernet maintained a Workers’ Compensation and Employer’s Liability Insurance Policy (the “Policy”) issued by the State Fund, and the instant dispute arose after Cybernet sought coverage to defend the underlying lawsuits.

After contracting HIV, the actors sought workers’ compensation benefits pursuant to the Act and under the Policy. The State Fund initially paid partial benefits to two of the three actors, but denied liability for the third actor’s claims. The actors thereafter filed civil actions against Cybernet in California State Court. Cybernet unsuccessfully responded to the lawsuits by demurring on grounds that California workers’ compensation provided an exclusive remedy and barred all tort claims. The State Fund agreed to defend Cybernet in these lawsuits subject to a reservation of rights, but later denied coverage after the California Superior Court overruled the demurrers, citing exclusions in the employer’s liability section of the Policy for claims (1) covered by workers’ compensation and (2) arising from Cybernet’s intentional actions.

By way of background, the Act provides a comprehensive system of remedies for workers who suffer injuries in the course and scope of their employment. The Act provides, in part, that workers’ compensation is the “sole and exclusive remedy of the employee…against the employer.” Cal. Lab. Code § 3602(a). California Courts apply a two-pronged test to determine whether the Act preempts tort claims – (1) the injury must arise out of an in the course of the employment; and (2) the act giving rise to the injury must constitute a risk reasonably encompassed within the compensation bargain between employee and employer. See Shoemaker v. Myers, 801 P.2d 1054 (1990). The Court found that claims based upon the allegedly negligent conduct of Cybernet (negligent supervision, negligent hiring, etc.) were preempted under the Act and no duty to defend existed under the Policy, which excludes “any obligation imposed by a workers’ compensation…benefits law.”

The Court was equivocal with respect to the preemptive impact of the Act on claims arising from the allegedly intentional conduct of Cybernet (intentional misrepresentation, fraud, battery, etc.), but found that the language of the Policy obviated any need for a decision under the Act. The Court framed the issue as follows: “to the extent that plaintiffs’ claims arise from Cybernet’s intentional conduct and therefore are not necessarily preempted…the issue becomes whether the State Fund has a duty to defend Cybernet with regard to these claims under the terms of the Policy.” Generally, the Policy provides “liability insurance” for “bodily injury by accident or…disease” and defines “accident” as “an event that is neither expected nor intended from the standpoint of the insured.” The State Fund argued that Cybernet was not entitled to coverage for any claims arising from intentional actions because the Policy excludes coverage for any “injury intentionally caused or aggravated” by Cybernet. The Court agreed, granting the State Fund’s partial motion for summary judgment, reasoning that no coverage exists and finding that the State Fund has no duty to defend Cybernet from claims arising from its allegedly intentional acts.