Trial News

After settling three former students’ abuse claims, a California school district’s insurer is entitled to seek reimbursement for a portion of the settlements from the school administrators’ insurer, the Ninth Circuit held. Though California law prohibits public employers from seeking indemnification from their employees, the court ruled that this protection does not extend to the employees’ insurer. (Westport Ins. Corp. v. Cal. Cas. Mgmt. Co., 2019 WL 692668 (9th Cir. Feb. 20, 2019).)

Three former Moraga School District middle school students alleged their teacher abused them between 1993 and 1997. They filed suit in 2013, claiming that although three school administrators had received warnings about the teacher, they failed to do anything. The school district’s insurer, Westport Insurance Corp., and the administrators’ insurer, California Casualty Management Co., settled the students’ claims for $15.8 million. Westport paid the entire settlement, and California Casualty refused to reimburse Westport for its portion of the settlement.

In 2015, Westport sued California Casualty in federal district court, seeking reimbursement for a portion of the settlement. Westport asserted that after it exceeded its $1 million primary insurance policy limits, California Casualty’s excess policies for the three administrators were triggered. The district court found that Westport’s primary policy covered the first $1 million for each student’s claim in each policy period and apportioned the remaining settlement amount to the three administrators and the school district at 25 percent each. The court then determined that California Casualty was obligated to contribute to the settlement at $150,000 per occurrence, per administrator, per policy period, for a total of $2.6 million. A month later, the court amended the judgment to require California Casualty to pay prejudgment interest to Westport at the state’s statutory per annum rate of 10 percent for insurer subrogation claims.

California Casualty appealed, arguing that it was not obligated to contribute to the settlement based on California Government Code §825.4, which prohibits public entities, such as school districts, from seeking indemnification from their employees. California Casualty argued that this protection extends to employees’ insurers.

Determining that the California Supreme Court had not directly addressed the applicability of §825.4 to public employees’ insurers, the Ninth Circuit examined appellate cases and identified three guiding principles. First, lower courts have expressly permitted employees’ personal insurance carriers to pay settlements although their public entity employers had been found liable. (Oxnard Union High Sch. Dist. v. Teachers Ins. Co., 99 Cal. Rptr. 478 (1971); Gov’t Emps. Ins. Co. v. Gibraltar Cas. Co., 229 Cal. Rptr. 57 (1986)). Courts also have differentiated between employees and their insurers for purposes of indemnification, noting that according to §825.4, employees should not “foot the bill.” (Younker v. Cnty. of San Diego, 285 Cal. Rptr. 319 (1991)). Finally, lower courts have found that when an employee’s policy was available to the public entity as an insured, contribution was permissible. (Younker; Gibraltar; Pac. Indem. v. Am. Mut. Ins. Co., 105 Cal. Rptr. 295 (1972).)

Applying these principles, the Ninth Circuit found no evidence that the administrators were required to contribute to the settlement. The court also noted that California Casualty’s policies are “limited to claims arising in the course of employment” and that these policies “contemplate⁠[d] this exact situation” when coverage would be provided on behalf of an insured employee of a public entity. Accordingly, the court affirmed, holding that §825.4 does not preclude a public entity’s insurer from seeking indemnification from an employee’s insurer.

California Casualty also argued that if contribution was not prohibited under §825.4, as an excess insurer it should not be required to contribute until all other insurance policies, including the school district’s excess policy, had been exhausted. In addition, it contended that the district court’s apportionment of liability among the defendants was erroneous, and it objected to the district court’s calculation of prejudgment interest. The Ninth Circuit rejected all these arguments.

Irvine, Calif., attorney John Manly, who has tried many school sexual abuse cases, is not surprised by the Ninth Circuit’s decision. “California courts typically have held insurance carriers to their duty of good faith.” But he noted that one of the difficulties with these types of cases is that “insurers play games and leave abuse victims high and dry. When schools are smart enough to have secured coverage, the Ninth Circuit’s decision will give plaintiffs a hammer.”