Despite California Government Code section 825.4, which generally prohibits public entities from seeking indemnity from employees, a public entity’s liability insurer was entitled to recover from its employees’ liability insurer. (Westport Ins. Corp. v. California Cas. Mgmt. Co. (9th Cir. 2019) 916 F.3d 769)
Facts
During the mid-1990’s, a teacher employed by the Moraga School District sexually molested three middle school students. In 2013, the students sued the District and three school administrators. The students alleged that the school administrators negligently failed to prevent the molestations from occurring, and that the District was vicariously liable for such negligence.
At the time of the molestations, the District and the three school administrators were insured under primary and excess policies issued by Westport Insurance Corporation. In addition, the three school administrators were insured under excess policies issued by California Casualty Management Company.
The three students eventually settled their claims against the District and the school administrators for a total of $15.8 million. Westport funded the entirety of the settlements, with California Casualty refusing to contribute anything.
Westport later filed suit against California Casualty in federal court. The federal district court ruled that Westport was entitled to recover $2.6 million plus prejudgment interest of about $755,000 from California Casualty. California Casualty appealed.
Holding
The Ninth Circuit Court of Appeals, applying California law, affirmed the ruling that Westport was entitled to recover from California Casualty.
California Casualty argued that Westport’s lawsuit against California Casualty was barred by California Government Code section 825.4, which provides that “if a public entity pays any claim or judgment against itself or against an employee … for an injury arising out of an act or omission of the employee …, he [the employee] is not liable to indemnify the public entity.” However, the Ninth Circuit held that section 825.4 did not bar Westport’s claim against California Casualty because section 825.4 “is not wholly inconsistent with contribution from an employee’s insurer….” In other words, section 825.4 “does not contain a blanket ban on an employee’s insurer contributing to the employee’s defense and settlement costs.”
Next, California Casualty argued that the California Casualty excess policies applied only when all other insurance policies had been exhausted, and the Westport excess policies had not been exhausted. The federal appellate court disagreed. The California Casualty excess policies broadly covered all damages “in excess of the required underlying primary collectible insurance,” while the Westport excess policies only covered damages in excess of “any other collectible insurance available to the insured.” Thus, the California Casualty excess policies applied upon exhaustion of the Westport primary policies, not upon exhaustion of all other insurance.
California Casualty also challenged the manner in which the district court had apportioned liability amongst the District and the three school administrators. The district court: (1) divided each molestation victim’s settlement equally across the policy periods in which she was molested; (2) then reduced each policy period amount by 25% to reflect the District’s liability; (3) then deducted $1 million from each policy period in accordance with the limits of each Westport primary policy; and (4) then assessed liability against California Casualty up to its policy limit of $150,000 for each administrator in each policy period. This methodology resulted in California Casualty owing $2.6 million of the $15.8 million settlement amount paid to the three sexual molestation victims. According to the appellate court, given the underlying facts and the language of the various policies, the district court did not err in apportioning liability in this fashion.
Last, California Casualty argued that prejudgment interest on the principal amount should have been calculated at seven percent rather ten percent. The appellate court rejected that argument as well. Westport’s action against California Casualty was based on a contract, and pursuant to California Civil Code section 3289, a party who is entitled to recover under a contract is also entitled to prejudgment interest at ten percent. Thus, the district court had properly awarded Westport prejudgment interest of approximately $755,000.
Comment
In some prior cases, California appellate courts had likewise held that notwithstanding Government Code section 825.4, a public entity could recover under an employee’s liability policy. (See, e.g., Government Employees. Ins. Co. v. Gibraltar Cas. Co. (1986) 184 Cal.App.3d 163 and Younker v. County of San Diego (1991) 233 Cal.App.3d 1324.) However, in those prior cases, the public entity was an “additional insured” on the employee’s policy, and thus the appellate courts were largely able to sidestep section 825.4. Here, by contrast, the public entity (the District) was not an additional insured on the employees’ (the school administrators’) policy through California Casualty. Thus, the Ninth Circuit had to deal head-on with section 825.4. Ultimately, the federal appellate court held that while section 825.4 relieves an employee of any obligation to personally contribute to any settlement or judgment, the statute does not relieve the employee’s insurer of any such obligation.