Frank & Freedus v. Allstate Insurance

in favor of Allstate Insurance Company (Allstate) and State Compensation Insurance Fund (State Fund). Frank and Freedus contend the court erred in finding, as a matter of law, that neither Allstate or State Fund owed a duty to provide a defense to Frank and Freedus for a complaint by a former employee seeking damages for wrongful termination and defamation. We affirm.

Facts

In April 1993, a former attorney with Frank and Freedus, Martin Caprow, filed a complaint against Frank and Freedus alleging Frank and Freedus improperly terminated his employment on the basis he was gay and had tested positive for HIV. Caprow alleged causes of action for discrimination based on a physical handicap, violation of San Diego’s AIDS discrimination ordinance, violation of Labor Code provisions, violation of San Diego’s Human Dignity Ordinance, wrongful termination in violation of public policy, breach of contract, breach of the implied covenant of good faith and fair dealing, intentional infliction of emotional distress and defamation. As to the defamation cause of action, Caprow alleged: “When [the office administrator] later discussed with Defendant Freedus that staff morale was low because of the decision to terminate Caprow when others remained who had shorter tenure and/or performance problems, Defendant Freedus dismissed Caprow’s importance with the comments that he is ‘likely gay and probably has AIDS’ and then instructed [the office administrator] to inform staff that the ‘real reason’ for his termination was failure to perform and develop as an associate.’” (Italics added.) Caprow alleged the italicized language defamed him.

Frank and Freedus tendered the defense of this suit to its business liability insurer, Allstate, and to its workers’ compensation insurer, State Fund.

Allstate refused to defend.

State Fund initially refused to defend but in October 1993 agreed to defend Frank and Freedus after this court issued an opinion indicating a duty to defend in such circumstances.^[1] State Fund’s defense was subject to a reservation of rights to contest coverage. In a November 1993 letter, Frank and Freedus acknowledged the defense was subject to a reservation of rights. In January 1994, State Fund in a letter memorializing the agreement to

defend, stated it was accepting the defense due to our recent decision but added if that decision were “accepted for review, or ordered decertified or unpublished, State Fund reserves its right to withdraw from the defense of this action to and/or seek reimbursement of defense costs expanded [sic] on behalf of Frank & Freedus.” State Fund reiterated this position later in the letter, stating: “State Fund reserves the right to withdraw from the defense and/or seek reimbursement from you should it be determined that there is no potential for coverage under the State Fund policy either as a result of a legal decision of [szc] voluntary action by the plaintiff.”

State Fund sent an auditor to Frank and Freedus’s attorneys in January 1994 to review defense costs.

On February 24, 1994, Frank and Freedus filed a cross-complaint against State Fund for declaratory relief, breach of contract and breach of the implied covenant of good faith and fair dealing.^[2] Frank and Freedus sought a declaration State Fund had a duty to defend pursuant to policy language stating:

“This workers’ compensation insurance applies to bodily injury by accident or bodily injury by disease, including resulting death, subject to the following conditions:

“This employer’s liability insurance applies to bodily injury by accident or bodily injury by disease. Bodily injury means a physical or mental injury, including resulting death. Bodily injury does not include emotional distress, anxiety, discomfort, inconvenience, depression, dissatisfaction or shock to the nervous system, unless caused by either a manifest physical injury or a disease with a physical dysfunction or condition resulting in treatment by a licensed physician or surgeon.”

Frank and Freedus alleged State Fund had “breached its contract by failing to investigate, to defend and to agree to indemnify [Frank and Freedus] in the underlying action” and, as a result, Frank and Freedus had “been compelled to engage counsel to defend it in the underlying action and to incur” attorney fees and other costs. As to the third cause of action for breach of the implied covenant of good faith and fair dealing, Frank and

[Citations.]” (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1 , 18 [ 44 Cal.Rptr.2d 370 , 900 P.2d 619 ].) “ ‘. . . [I]f there is ambiguity ... it is resolved by interpreting the ambiguous provisions in the sense the promisor (i.e., the insurer) believed the promisee understood them at the time of formation. ... If application of this rule does not eliminate the ambiguity, ambiguous language is construed against the party who caused the uncertainty to exist. ‘This rule, as applied to a promise of coverage in an insurance policy, protects not the subjective beliefs of the insurer but, rather, “the objectively reasonable expectations of the insured.” . . . Only if this rule does not resolve the ambiguity do we then resolve it against the insurer. . . .’ ” (Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 , 667 [ 42 Cal.Rptr.2d 324 , 897 P.2d 1 ], citations omitted.)

Frank and Freedus contend the exclusion is ambiguous because it is inconsistent with the general definition of “personal” injury which includes libel and slander (and therefore defamation),^[3] the term “employment-related” is ambiguous, the exclusion is ambiguous because it could be construed as either “related to employment” or “related to employment practices” and could be construed as either “ ‘directly related’ or ‘indirectly related’ to the employment or to the employment practice.” (Italics in original.)

We are unpersuaded by Frank and Freedus’s argument the exclusionary language is ambiguous. The fact the policy’s general definition of the term “personal injury” encompasses defamation does not set up a fatal inconsistency or ambiguity because in another section of the policy coverage is excluded for certain personal injuries, including defamation, in a particular context. An insurance policy may exclude coverage for particular injuries or damages in certain specified circumstances while providing coverage in other circumstances.

Nor is the term “employment-related” ambiguous because it is not specifically defined in the policy. The term is not technical in nature. It is used in its ordinary sense, i.e., related to employment. As a term, it modifies the specified acts (including defamation) as well as the terms “practices, policies, acts or omissions.” The clear meaning of subdivision (2) of the exclusion is coverage for practices, policies, acts or omissions which are related to employment, including employment-related defamation.

The defamation here was clearly employment-related. The statement was made in the context of Caprow’s employment and its content is directed to

termination.” (Loyola Marymount University v. Hartford Accident & Indemnity Co., supra, 219 Cal.App.3d 1217 , 1223.)

Frank and Freedus seek to distinguish the Loyola case on the basis the policy in Loyola excluded personal injuries “ ‘directly or indirectly related to the employment’ ” (Loyola Marymount University v. Hartford Accident & Indemnity Co., supra, 219 Cal.App.3d at p. 1222, italics added), while Allstate’s policy makes no reference to acts or practices indirectly related to employment. This difference in policy language does not compel a different result. First, the defamation here was directly related to Caprow’s employment, i.e., the statement was made in the context of Caprow’s employment and its content directly related to Caprow’s performance as an employee. Second, as in Loyola, the exclusionary language is clearly broader than Frank and Freedus contend and is not limited to acts (including defamation) occurring during the term of employment.^[4] By its terms, the exclusion applies to all personal injuries arising not only during employment but also due to a “refusal to employ” and to “termination of employment.” The contrary interpretation urged by Frank and Freedus is neither supported by the policy language nor is semantically reasonable.

We conclude the Allstate policy excluded coverage for Frank and Freedus’s alleged defamation of Caprow and therefore Allstate had no duty to defend. The trial court properly granted summary judgment to Allstate.

Summary Judgment as to State Fund

Frank and Freedus contend we must reverse the grant of summary judgment in favor of State Fund because State Fund’s summary judgment motion was improperly limited to the complaint in the Caprow action^[5] and ignored additional facts in Frank and Freedus’s cross-complaint establishing two theories giving rise to a duty to defend, “namely: 1) State [Fund] accepted the tender of defense in the Caprow action, undertook that defense and payment therefore, and then without justification or notice breached that agreement and abandoned that defense; and 2) the Caprow complaint and the extrinsic evidence revealed facts which brought the action within the terms of the policy.” (Italics in original.)

Initially, we note the judgment here was based on a finding there was no coverage under the State Fund policy. Frank and Freedus do not dispute that finding. They do not point to any language in the State Fund policy supporting potential coverage or a duty to defend. Their arguments are based solely on a theory State Fund was not entitled to summary judgment because it failed its burden of negating all of Frank and Freedus’s causes of action.

While State Fund had the burden of proving its right to summary judgment below, on appeal, Frank and Freedus, as the appellant, bears the burden of showing error. (See Maggio, Inc. v. United Farm Workers (1991) 227 Cal.App.3d 847 , 878 [ 278 Cal.Rptr. 250 ].) In the absence of such a showing, we presume the judgment is correct. (See Cox Cable San Diego, Inc. v. City of San Diego (1987) 188 Cal.App.3d 952 , 968 [ 233 Cal.Rptr. 735 ].) Further, in order to obtain a reversal, the appellant must establish the error resulted in a miscarriage of justice. (Cal. Const., art. VI, § 13.)

Thus, here, we begin with the presumption the judgment and the court’s finding that there was no potential for coverage under the State Fund policy was correct. By not demonstrating any language in the State Fund policy provided a potential for coverage and thus a duty to defend, Frank and Freedus have not demonstrated any miscarriage of justice occurred due to an alleged failure by State Fund to address theories in Frank and Freedus’s cross-complaint.^[6]

Further, we find no merit to Frank and Freedus’s specific arguments. Frank and Freedus’s first argument seems to be based on a theory that once State Fund undertook the defense, it was thereafter forever barred from challenging coverage under the policy or a duty to defend. Such is not the law. The law permits an insurance company to condition an acceptance of defense on a later right to contest coverage or to seek reimbursement of defense costs. (See Insurance Co. of the West v. Haralambos Beverage Co. (1987) 195 Cal.App.3d 1308 , 1319 [ 241 Cal.Rptr. 427 ]; Val’s Painting & Drywall, Inc. v. Allstate Ins. Co., supra, 53 Cal.App.3d 576 , 586.)

The undisputed facts, as conceded by Frank and Freedus in their separate statement of undisputed facts in opposition to State Fund’s summary judgment motion, establish State Fund so reserved its rights. On appeal, Frank

and Freedus assert State Fund may not now raise this issue because State Fund waived the issue by not pleading a reservation of rights as an affirmative defense in its answer to Frank and Freedus’s cross-complaint. Frank and Freedus have cited no authority to support this assertion nor have we found any. This issue was raised below. State Fund in its memorandum in reply to Frank and Freedus’s opposition to summary judgment, specifically cited the reservation of rights. Both parties submitted correspondence containing the reservation of rights and the issue was conceded by Frank and Freedus in its statement of undisputed facts.

Frank and Freedus also contend there was a factual dispute as to whether State Fund abandoned their defense. Frank and Freedus, however, cite no facts to support this contention.^[7] Nor is there any claim any acts by State Fund prejudiced Frank and Freedus’s defense; Frank and Freedus obtained a verdict in their favor in the underlying Caprow action. (Cf. Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169 , 191 [ 231 Cal.Rptr. 791 ], recognizing an insurance company may be liable in damages for an inadequate defense even when there is ultimately a determination the insurance company had no duty to defend.)

As to Frank and Freedus’s second argument, that there existed some “extrinsic evidence” which supported a duty to defend, Frank and Freedus merely assert such evidence existed. They neither cite to the record nor make "any argument about how this unspecified extrinsic evidence established a potential for coverage under the policy. They have failed to meet their burden of presenting a reviewable issue. (See Cox Cable San Diego, Inc. v. City of San Diego, supra, 188 Cal.App.3d 952 , 968.) To the extent Frank and Freedus’s argument is based simply on State Fund’s alleged error in failing to address the allegations in Frank and Freedus’s complaint, we note that those allegations fail to specify any additional extrinsic evidence. While in defending against a demurrer, a party may rely on the allegations of the complaint which must be accepted as true (here, that such extrinsic evidence existed) (see Alcorn v. Anbro Engineering, Inc. (1970) 2 Cal.3d 493 , 496 [ 86 Cal.Rptr. 88 , 468 P.2d 216 ]), in defending against a summary judgment motion, the opposing party asserting a material factual dispute must present the facts through declarations or affidavits; a mere assertion in a complaint that such evidence exists is not sufficient to raise a