Westport Insurance Corporation v. California Casualty Management Company

In Westport Ins. Corp. v. Cal. Cas. Mgmt. Co., 916 F.3d 769 (9th Cir. Feb. 20, 2019), the Ninth Circuit affirmed the district court’s finding of summary judgment in favor of Westport Insurance Company (“Westport”), holding that Westport was entitled to contribution by the insurance carrier of three school district administrators, California Casualty Management Company (“California Casualty”), towards settlement of a lawsuit brought against the school district and administrators.

On January 29, 2013, two former students (Does 1 and 2) of Moraga County School District filed a lawsuit against the District and three of its administrators. Earlier that month, another former student (Doe 3) filed a lawsuit against the District and the same three administrators. All three plaintiffs alleged that a District employee had sexually molested them in the mid-1990s while he as their middle school teacher, and that the administrators had failed to stop the teacher, despite receiving warnings about his molestation.

Westport was the primary and excess carrier for the District. California Casualty insured the Association of California School Administrators; its policy provided excess coverage for the District’s school administrators.

Doe 3’s lawsuit settled for $1.8 million in August 2013. Does 1 and 2 settled their lawsuit for $7 million each in June 2014. Westport paid the entirety of the settlements to all three plaintiffs, and then sought contribution from California Casualty, but California Casualty refused to contribute. Westport then sued California Casualty for equitable subrogation (incorrectly labeled “equitable contribution” by Westport). The district court entered summary judgment in favor of Westport in the amount of $2.6 million, as well as more than $750,000 in prejudgment interest.

On appeal, California Casualty primarily argued that Westport’s lawsuit was barred by Government Code section 825.4, which prohibits a public entity from seeking indemnification from its employees. California Casualty argued that, because the administrators were public employees, the District was required to defend and pay the entire settlement without its contribution.

The Ninth Circuit analyzed the few California appellate opinions addressing section 825.4, as the California Supreme Court has not addressed the issue. The Ninth Circuit concluded that section 825.4 does not preclude Westport’s claim as it does not contain a blanket ban on an employee’s insurer contributing to the employee’s defense and settlement costs, for several reasons.

First, California case law indicated that indemnification pursuant to section 825.4 was not wholly inconsistent with contribution from an employee’s insurer, as California courts had expressly permitted an employee’s personal automotive insurance to pay the entirety or majority of a settlement, even though the courts had found that the employee’s public entity employer was liable pursuant to the provisions of Government Code section 825.

Second, the Ninth Circuit noted that the employee and his employer did not occupy equivalent positions for the purposes of the indemnification analysis:

In both Younker and Gibraltar, the courts differentiated between the employee and his insurer when considering whether Section 825’s prohibition on a public entity seeking indemnity from its employee required the entities’ insurers to reimburse the employees’ insurers. The courts rejected the employees’ insurers’ position in part because none of the employees had personally contributed to the settlement costs. Younker, 285 Cal. Rptr. at 323 (noting the employee “did not foot the bill”); Gibraltar, 229 Cal. Rptr. at 61 (noting employee “paid nothing” of the settlement).

Third, the Ninth Circuit noted that, “where the employee’s policy is available to the public entity as an insured, contribution to the defense and settlement costs may be permitted,” and there were no policy concerns in having California Casualty contribute to the settlements.

Here, policy concerns regarding the proper placement of the burden of settlement costs are assuaged. The District furnished primary and excess insurance to its Administrators through Westport. There is no evidence in the record, and neither party claims, that any of the Administrators personally contributed to the settlement. That their insurer, California Casualty, is now being called upon to provide its excess coverage to cover the employees’ settlements does not violate the intent behind § 825.4 indemnification. In addition, California Casualty’s policy is limited to claims arising in the course of employment.

Furthermore, Pacific Indemnity held that a “concession” or “contract provision which renders the employee’s insurance available for the satisfaction of the public entity's obligation” would satisfy § 825.4. 105 Cal. Rptr. at 304. California Casualty's policy contemplates this exact situation when it states that the underlying primary insurance must be provided under one of several sections of the Education Code, Cal. Gov’t Code §§ 825 or 825.4 or provided on behalf of the insured by any public educational entity.

For these reasons, we hold that § 825.4 does not preclude Westport’s claim against California Casualty for repayment of a portion of the Settlements.

The Ninth Circuit went on to reject California Casualty’s other arguments that it was not obligated to contribute to the settlements, finding that: (1) by its terms, California Casualty’s policy applied after exhaustion of the $1 million limit of liability of the underlying primary carrier, not after exhaustion of all other insurance; (2) there was no abuse of discretion in allocating liability equally among the District and three administrators as neither the pleadings nor the settlement agreements differentiated liability among the defendants; (3) by its terms California Casualty’s policy only required that the $1 million be exhausted, not that it be exhausted per insured or for the same occurrence and, therefore, California Casualty’s coverage began upon exhaustion of Westport’s primary policy when Westport paid $1 million per policy period, per plaintiff; (4) California Casualty was not entitled to proration of its coverage with Westport’s coverage as they did not have conflicting excess clauses, rather, California Casualty’s coverage was sandwiched between Westport’s primary and excess policies; and (5) prejudgment interest was properly awarded at a rate of 10% from the date Westport paid the settlements.