Opinion ID: 2611826
Heading Depth: 3
Heading Rank: 2

Heading: Application of Principles to Industrial's Policy

Text: (7a) La Jolla asserts that it reasonably expected that its workers' compensation insurer would defend it from a superior court action filed by an employee alleging claims potentially compensable under the Workers' Compensation Act. As noted earlier, part 1 of the policy in this case provides in pertinent part, We will pay promptly when due the benefits required of you by the workers compensation law.... We have the right and duty to defend at our expense any claim, proceeding or suit against you for benefits payable by this insurance. We have the right to investigate and settle these claims, proceedings or suits. [¶] We have no duty to defend a claim, proceeding or suit that is not covered by this insurance. In Gray, we held that an insurance carrier has a duty to defend when the policy is ambiguous and the insured would reasonably expect such coverage based on the nature and kind of risk covered by the policy. ( Gray v. Zurich Insurance Co., supra, 65 Cal.2d at pp. 273-275; Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 299.) To the extent that, by focusing on its reasonable expectations, La Jolla argues that the part 1 policy language is ambiguous, we disagree. Given the statutory definition of compensation, which expressly includes the payment of benefits, and the corresponding definition of damages, which expressly excludes compensation, the policy's language is susceptible of no other objective construction than providing coverage solely for workers' compensation benefits, or claims, proceedings, or suits for such benefits, and not for civil suits for damages. (Lab. Code, §§ 3207, 3209; Ins. Code, § 11630.) Thus, contrary to the Court of Appeal's conclusion, an express exclusion of civil suits for damages was unnecessary. Moreover, `language in a contract must be construed in the context of that instrument as a whole, and in the circumstances of that case, and cannot be found to be ambiguous in the abstract.' ( Bank of the West v. Superior Court, supra, 2 Cal.4th at p. 1265, italics omitted.) Here, the instrument as a whole contained two parts, the workers' compensation insurance and the employers' liability insurance. The employer's liability policy afforded coverage for all sums you legally must pay as damages because of bodily injury to your employees, and promised to defend any claim, proceeding or suit against you for damages payable by this insurance. It excluded damages arising out of the discharge of, coercion of, or discrimination against any employee in violation of law, and any obligation imposed by a workers compensation ... law. As noted above, employer's liability policies operate as gap-fillers, providing protection to the employer in those situations where the employee has a right to bring a tort action despite the provisions of the workers' compensation statute or the employee is not subject to the workers' compensation law. ( Producers Dairy Delivery Co. v. Sentry Ins. Co., supra, 41 Cal.3d at p. 916.) Generally, these two kinds of coverage are mutually exclusive. ( Ibid. ) Thus, if any part of the policy would provide La Jolla with defense and indemnification of Saleh's action, it is, absent any applicable exclusions, the employer's liability, not the workers' compensation portion. Construing the workers' compensation portion to also include the duty to defend any claim asserted by an employee, including civil suits for damages, renders the employer's liability section superfluous. We do not believe this result is what the parties reasonably intended or expected. La Jolla asserts, however, that an expectation of coverage under part 1 is justified where the policy clearly and broadly provides that a workers' compensation insurer ... will defend any claim or suit. However, the policy in this case does not require Industrial to defend La Jolla in any proceeding. Rather, by its express language, the policy requires Industrial to defend La Jolla in any claim, proceeding or suit ... for benefits payable by this insurance. (See Bank of the West v. Superior Court, supra, 2 Cal.4th at p. 1265, italics in original [policy does not purport to cover `unfair competition' in the abstract; instead, it covers `damages' for `advertising injury' caused by `unfair competition'].) La Jolla also asserts that It is vitally important to assure the seamless insurance protection that California businesses expect through their subscription to, and substantial premium payment for, Comprehensive General Liability ... and workers' compensation insurance policies. There is, however, no evidence that La Jolla expected seamless insurance protection when it purchased the workers' compensation portion of its policy. In fact, the limitations of part 1 apparently induced La Jolla to purchase part 2, or the employers' liability coverage, as a gap-filler with the expectation that the workers' compensation provisions would not provide coverage for every claim, and in particular would not provide coverage for any claim, proceeding or suit against [La Jolla] for damages. (Pt. 2, par. D.)
In the alternative, we have held that a duty to defend arises when the suit  potentially seeks damages within the coverage of the policy. ( Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 275, italics in original; Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 299.) We recognized, however, that the insurer need not defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage. ( Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 276, fn. 15.) No such potential existed in this case. Regardless of the merit of the claims alleged in Saleh's complaint, the superior court never had jurisdiction to award workers' compensation benefits. Rather, the award of such benefits is within the exclusive jurisdiction of the WCAB. (Lab. Code, § 5300.) Thus, a civil suit for damages is no more a claim for workers' compensation benefits than a criminal or disciplinary action is a civil suit for damages. (See Perzik v. St. Paul Fire & Marine Ins. Co., supra, 228 Cal. App.3d at pp. 1276-1278; United Pacific Ins. Co. v. Hall, supra, 199 Cal. App.3d at p. 556; Hackethal v. National Casualty Co., supra, 189 Cal. App.3d at p. 1110; Jaffe v. Cranford Ins. Co., supra, 168 Cal. App.3d at p. 934.) La Jolla argues that such potential did exist in this case because the civil suit provided the opportunity to resolve virtually all of the factual preconditions to entitlement to workers' compensation benefits. Nothing in Gray or its progeny, however, suggests that the duty to defend one action is triggered by the prospect that the insured may face a claim for materially different relief in some other action brought in a distinctly different forum, merely because the two actions are premised on similar factual allegations. Indeed, such a rule would render the duty to defend virtually unlimited. There is always some possibility that facts alleged in one forum could, in the future, form the basis for a covered claim in a different action. Were this the test, however, any judicial or administrative action involving an employer-employee relationship could be characterized as a predecessor claim for workers' compensation benefits. Workers' compensation insurers would thus be required to defend employers in criminal prosecutions because the alleged acts may have resulted in harm to their employees, in Equal Employment Opportunity Commission investigations because that agency has the authority to issue right to sue letters, and in grand jury proceedings due to that body's power to recommend the filing of civil actions, which could then, conceivably, lead to the filing of a workers' compensation claim. (8) Rather, the test is whether the underlying action for which defense and indemnity is sought potentially seeks relief within the coverage of the policy. ( AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d at p. 843 [not clear as a matter of law that all of the relief for which insured potentially liable in the underlying suits cannot be deemed covered]; Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 302 [underlying suit sought damages of the nature and kind covered by the policy]; Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 276 [instant action presented the potentiality of covered judgment].) (7b) Thus, the Court of Appeal fundamentally misconstrued the kind of potential coverage that gives rise to a duty to defend when it concluded that Industrial had a duty to defend the civil action merely because Saleh might, at some indeterminate time in the future, file a workers' compensation claim that did fall within Industrial's coverage. Likewise, we reject La Jolla's argument that The employer faces the risk that any settlement of the civil suit will include payment of the workers' compensation loss. It may be that some employers will elect to foreclose any possibility of a subsequent workers' compensation claim by including such claims within the terms of their individual settlement. Such an agreement between the employer and ex-employee does not, however, modify the terms of the insurance contract, or create a duty to defend the civil action on the part of the workers' compensation insurer. Relying on AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d 807, La Jolla also asserts that any reliance on the statutory distinction between compensation, and thereby benefits, and damages, fashions a strained, technical reading of the Policy. Not so. The issue in AIU was whether the phrase legally obligated to pay as damages (or ultimate net loss) incurred because of property damage in a comprehensive general liability (CGL) policy encompassed the insured's liability under the Comprehensive and Environmental Response, Compensation, and Liability Act (CERCLA) (42 U.S.C. § 9601 et seq.) and other federal and state laws for environmental response costs and injunctive relief which were arguably equitable in nature. ( AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d at pp. 814, 815, 824.) We concluded that such costs and relief, to the extent they were not prophylactic in nature, were damages incurred because of property damage and were therefore covered. ( Id. at p. 843.) First, we declined to interpret the phrase legally obligated as providing coverage for only those actions traditionally brought at law and not in equity. ( AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d at pp. 824-825.) We observed that because the distinction between law and equity in California had generally been abolished, even a legally sophisticated policyholder might not anticipate that the term `legally obligated' precludes coverage of equitably compelled expenses. ( Id. at p. 825.) Thus, as a matter of plain meaning, the term `legally obligated' cover[ed] injunctive relief and recovery of response costs. ( Ibid. ) Moreover, even if the phrase raised doubts about whether a law-equity distinction was intended, it would be unreasonable to conclude that it unambiguously incorporated this sophisticated distinction into the policies. Thus, any ambiguity was resolved in favor of coverage. ( Ibid. ) Second, we determined whether the various forms of relief sought were damages, and as relevant to La Jolla's argument here, concluded that reimbursement of government response costs was covered under the CGL damages provision. ( AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d at p. 830.) In particular, we rejected the argument that because CERCLA distinguishes response costs from damages, it mandates the same distinction in the insurance context because the agencies [did] not seek `damages' as prescribed by statute. ( Ibid. ) Contrary to AIU's assertion, we did not interpret CERCLA as intending that reimbursement of response costs be treated as conceptually distinct from recovery of damages. ( Id. at pp. 830-831.) More significantly, we determined we were not bound by distinctions or definitions contained in CERCLA itself, if such distinctions do not reflect the intent of the parties to the CGL policies at the time of their formation. ( Id. at p. 831.) We noted, The parties' intent in entering the CGL policies could not possibly have been influenced by the niceties of statutory language adopted many years after the policies were drafted. ( Ibid. ) The application of these factors to this case compels a contrary result. Here, unlike law and equity courts, the jurisdiction of the WCAB and the superior court has always been and remains distinct. Moreover, the workers' compensation statutes expressly contrast the terms compensation and damages. (Lab. Code, §§ 3207, 3209.) Unlike CERCLA, which was not enacted until after the policies in AIU were drafted, this distinction long preceded the policy here, and is reflected on the face of the parties' contract, which contains mutually exclusive parts for workers' compensation benefits and the employer's liability for damages in civil suits. Finally, La Jolla asserts that a failure to find a duty to defend on the part of Industrial under part 1 effectively eviscerates the decisions of this Court, beginning with Shoemaker ... and its progeny, holding that such claims are compensable exclusively in the workers' compensation jurisdiction. It does not. If anything, these decisions clarifying which claims fall within the WCAB's jurisdiction, and which do not, support our conclusion that the civil and workers' compensation systems are distinct, and therefore a workers' compensation insurer which promises to pay claims for benefits does not have a duty to defend civil actions seeking damages.