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The most important court decisions of the season
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Court Uses Public Policy To Invalidate Part Of An Insurance Policy’s Basic Insuring Clause
Certain Underwriters of Lloyd’s London v. Arch Specialty Insurance Company
(Ct. App. 3rd Dist.), Filed April 11, 2016

Lloyd’s issued CGL insurance to Framecon, Inc., covering the period from October 28, 2000, to October 28, 2001. From October 28, 2002, through October 28, 2003, Arch insured Framecon. Framecon did framing and carpentry work on new homes KB Home was developing in Northern California. A few years after the construction was finished, owners of some of the homes sued KB Home. KB Home cross-complained against Framecon. Lloyd’s agreed to defend Framecon, but Arch declined. The basic insuring provision of the insurance policy Framecon purchased from Arch said: “We have the right and duty to defend you, the Named Insured, against any suit seeking tort damages provided that no other insurance affording a defense against such a suit is available to you.” Arch’s policy also had a more standard “other insurance” provision in the conditions section. Among other things, the “other insurance” condition said “this insurance is excess over any other insurance . . . . When this insurance is excess we will have no duty under Coverage A or B to defend any claim or suit that any other insurer has a duty to defend.” Unlike the Arch policy, the basic insuring provision of the Lloyd’s policy broadly promised to defend any suit seeking potentially covered damages. The conditions section of the Lloyd’s policy also had an “other insurance” provision that said the Lloyd’s policy would be excess over other available insurance. Lloyd’s paid over $300,000 to settle the construction defect suits that were initiated against Framecon, and Arch paid almost $150,000. Lloyd’s then sued Arch for equitable contribution toward the defense fees and expenses Lloyd’s had paid to defend the construction defect lawsuit. Citing its limited defense basic insuring provision, Arch had declined to defend Framecon. Arch successfully moved for summary judgment in the trial court. The trial court emphasized that the basic insuring provision in Arch’s policy afforded a limited defense obligation and that the limited defense obligation did not attach to suits that were being defended by another insurer. After noting that it would refer to the Arch policy’s basic insuring agreement as an “other insurance” clause, the appellate Court reversed. Broadly speaking, the Court of Appeal applied the reasoning of Underwriters of Interest Subscribing to Policy Number A15274001 v. ProBuilders Specialty Insurance Company, 241 Cal.App.4th 721 (2015). The Court in Arch decided that because Arch’s policy was designed as primary insurance, Arch could not limit the duty to defend based on the availability of other insurance, even if the limitation was expressly stated in the basic insuring agreement itself. The appellate panel saw its role as answering “specific public policy questions,” rather than as interpreting Arch’s policy language. According to the Court of Appeal, “Arch’s policy made Arch liable for defense costs, but then purported to extinguish that obligation when other insurance affording a defense.” This implies that the way Arch structured its basic insuring agreement turned part of the basic insuring agreement itself into “an escape clause that must be disregarded.” While the Court acknowledged that Framecon, the insured, was fully protected because Lloyd’s defended and both Lloyd’s and Arch contributed to the settlement, the Court reasoned that “the risk of leaving an insured stranded without coverage is not the only public policy consideration.” Instead, the Court reasoned that it would be bad public policy to force a primary insurer with a broad duty to defend basic insuring agreement to fund the entire defense of a common insured just because the other primary insurer’s policy articulated a more limited defense obligation in its policy’s basic insuring provision. This Arch decision and the recent ProBuilders decision stand out as significantly different from prior cases involving “other insurance” clauses in the conditions section of the various policies. Earlier cases that had refused to enforce “other insurance” clauses generally condemn the practice of providing broad primary protection in the basic insuring provision, and then quietly trying to elevate the policy to excess status 15 pages later in the policy’s conditions section (based on the fortuity of other available insurance). Assuming Arch petitions for California Supreme Court review, the outcome should be interesting, particularly since two separate appellate courts have recently announced a willingness to apply public policy to negate basic insuring agreements in commercial policies.

Party Who Agrees To Dismiss Claims In Exchange For Monetary Settlement Is Deemed Prevailing Party Entitled To Cost Recovery
deSaulles v. Community Hospital of the Monterey Peninsula
(Cal. Sup. Ct.), filed March 10, 2016

Former patient business services registrar Maureen deSaulles sued Community Hospital of the Monterey Peninsula for seven employment claims, including retaliation and a failure to accommodate. The hospital moved for summary adjudication and also filed motions in limine. After the trial court’s rulings on the motions limited deSaulles’ case to only her breach of contract and bad faith causes of action, the parties entered into a settlement agreement, on the record. The parties agreed that Community Hospital would pay $23,500 to settle the two remaining causes of action. The parties further agreed that the hospital would prepare a judgment dismissing the other five causes of action with prejudice and preserve the right to appeal the trial court’s rulings on the motions. The parties further agreed not to file any motions or memoranda for costs or fees until the appeal was complete. DeSaulles filed an appeal and the Court of Appeal affirmed. The parties returned to the trial court, both arguing that they were the prevailing party who was entitled to a cost award. The trial court commented that it had the discretion to determine the prevailing party, and found the hospital to be prevailing party because it had prevailed on the significant causes of action and then settled the remainder of the claims. The Court of Appeal reversed, finding that since deSaulles received monetary recovery, she should be the prevailing party. The California Supreme Court granted review. The Court noted that while Section 1032 provided the default rule for calculating costs, it recognized that when parties settle a case, “they are free to allocate costs in any manner they see fit, although they must do so in language specifically addressing such allocation.” The Supreme Court ultimately held that in “light of section 1032’s basic purpose of imposing costs on the losing party, and in light of the case law that the statute was intended to incorporate, we conclude that the definition of ‘prevailing party’ as ‘a defendant in whose favor a dismissal is entered’ was not intended to encompass defendants that entered into a monetary settlement in exchange for dismissal.” However, the Supreme Court cautioned that “its holdings establish a default rule that applies only when the parties have not resolved the matter of costs in their settlement agreement or have not stipulated ‘to alternative procedures for awarding costs.’”

California Supreme Court Confirms Employers Must Provide Seating For Employees
Kilby v. CVS Pharmacy, Inc.
(Cal. Sup. Ct.), filed April 4, 2016

The California Supreme Court was asked to determine the Ninth Circuit’s certified questions surrounding a wage order’s seating requirements. The questions were related to two separate district court cases: Nykeya Kilby worked as a CVS Pharmacy customer service representative. Kilby was told during her interview and training that she would be expected to stand while completing her duties. Her tasks included operating the cash register, organizing and stocking products, vacuuming, taking out the trash, and gathering shopping baskets. She was not provided a seat for these tasks. Kilby filed a class action alleging that CVS should have provided the employees “with suitable seats when the nature of the work reasonably permits the use of seats.” The wage order also required that an “adequate number of suitable seats shall be placed in reasonable proximity to the work area and employees shall be permitted to use such seats when it does not interfere with the performance of their duties.” The district court granted summary judgment in CVS’ favor, finding that the employee’s range of duties should be considered in determining whether a seat should be permitted. Since many of Kilby’s duties required standing, summary judgment was proper. In a related case, Kemah Henderson and other Chase Bank tellers filed a class action against Chase for violating the same seating requirement. The tellers noted that their duties were primarily associated with their teller stations, but they were also required to escort customers to safety-deposit boxes, working the drive-up teller window, and checking on ATM machines. The district court denied the class certification. The California Supreme Court’s analysis focused on breaking down the statute into two phrases. It first examined the “nature of the work” in relation to the seating requirements. It noted that this analysis would include both “an employee’s actual or expected tasks.” The Court emphasized that in circumstances where the “tasks are performed at a discrete location, those tasks should be considered together in evaluating whether work there reasonably permits use of a seat.” Turning then to the “reasonably permits” requirement, the Court rejected the employers’ approach (which only looked to the tasks without regard to the factors that would affect these tasks, such as frequency, duration, or location). Instead, the Court noted that the factors should be weighed based on the circumstances. The Supreme Court analyzed 3 factors: (1) business judgment; (2) physical layout; and (3) physical differences between employees. In terms of business judgment, both employers argued that customers perceived better customer service when the employees stood. While the Court acknowledged that an employer may “define the duties to be performed by an employee,” it noted that this should also be balanced against whether the nature of the task would reasonably allow for a seat in a particular location. Next, the Court concluded, “the physical layout of a workspace may be relevant in the totality of the circumstances inquiry.” It cautioned, however, “an employer may not unreasonably design a workspace to further a preference for standing or to deny a seat that might otherwise be reasonably suited for the contemplated tasks.” Looking to the “physical differences between employees,” the Court observed that Section 14(a) “requires a seat when the nature of the work reasonably permits it, not when the nature of the worker does.” Finally, the Court placed the burden on the employer to show “compliance is infeasible because no suitable seating exists.” This case confirms that the seating requirement statute should be applied on a case-by-case basis. Each factor must be applied to the specific characteristics of the job in light of the location and the job’s duties.


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