West American Insurance v. California Mutual Insurance

Citations: 195 Cal. App. 3d 314; 240 Cal. Rptr. 540; 1987 Cal. App. LEXIS 2190Docket: B024979

Court: California Court of Appeal; October 2, 1987; California; State Appellate Court

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Two insurance companies, West American and California Mutual, were involved in a dispute over their obligations to defend and indemnify their insured, John A. Clapham, in a personal injury lawsuit following an incident at his home. The trial court ruled that West American was exempt from its duties due to an employment exclusion in its policy, while California Mutual was solely responsible because its business pursuit exclusion was deemed inapplicable. California Mutual appealed, arguing that the trial court lacked sufficient evidence to support its findings regarding both exclusions.

The Court of Appeals found merit in California Mutual's arguments, noting that Clapham's employees were engaged in voluntary social activities, which did not arise from their employment but were related to Clapham’s business pursuits. Therefore, the court reversed the trial court's judgment, ruling that West American must defend and indemnify Clapham. 

The factual background detailed the social dynamics at Clapham's home, where employees gathered weekly for payday, often consuming alcohol and socializing. On May 18, 1984, a fight broke out during such a gathering, leading to personal injury lawsuits against Clapham by two employees who alleged negligence in alcohol service and maintaining control over his premises. Clapham had a homeowners policy from California Mutual that excluded coverage for injuries arising out of his business activities.

West American issued a general liability insurance policy in 1983 for Clapham's cement and masonry business, which includes a duty to defend against bodily injury claims. However, the policy excludes coverage for bodily injuries to any employee arising out of their employment. West American sought declaratory relief against Cal Mutual, which cross-complained, with both denying obligations to defend or indemnify Clapham. The trial court determined that both insurers provided coverage for claims from Iriarte and Gamboa, but concluded that Iriarte's injuries arose during his employment, relieving West American of liability while assigning responsibility to Cal Mutual. 

Cal Mutual appealed, asserting that the evidence did not support the court's findings, arguing that Iriarte was injured off duty while on Clapham's premises, suggesting the injury did not arise out of his employment. Cal Mutual also contended that if the injury did arise from employment, it must also stem from Clapham's business pursuits, thus negating coverage from both policies. The court noted that simply being on Clapham's premises does not confirm Iriarte was engaged in his employment at the time of the injury, emphasizing that the incident occurred outside of work hours and not while providing services. The discussion highlighted the lack of definitive case law regarding the phrase "arising out of and in the course of employment" in the context of private liability insurance.

West American's reliance on workers' compensation and respondeat superior law is misplaced due to differing underlying policies and rules of construction in private liability insurance law. The employment exclusion clause in question mirrors statutory language for workers' compensation claims, requiring injuries to arise out of and occur in the course of employment. "In the course of employment" pertains to the time and place of the injury, while "arise out of employment" indicates a causal connection to the employment. The Supreme Court case McCarty v. Workmen's Comp. Appeals Bd. established that social or recreational activities on company premises, with employer approval, may be considered within the course of employment if they benefit the employer. However, Labor Code section 3600(a)(9) excludes injuries from off-duty recreational activities unless required or expected by the job, casting doubt on McCarty's holding. 

In the context of respondeat superior, employers are liable for employee torts committed within employment scope, sharing a rationale with workers' compensation. The test for vicarious liability aligns closely with whether an injury arises out of employment, with foreseeability as a critical factor in determining if an employee's conduct is unusual enough to warrant exclusion from employer liability.

Rodgers' interpretation of the McCarty test asserts that if social or recreational activities on an employer's premises occur with the employer's permission and could benefit the employer—or have become customary in the employment relationship—employees engaged in these activities remain within the scope of employment. Although this test is no longer applicable for workers' compensation liability under Labor Code section 3600, subdivision (a)(9), it is relevant for establishing respondeat superior liability. Labor Code section 3202 mandates resolving doubts regarding whether an injury arose from employment in favor of the employee. The doctrine of respondeat superior allows employers to manage risk through insurance, as noted in case law.

In assessing private liability insurance policy exceptions, these should be interpreted narrowly to favor the insured's reasonable expectations. The evidence in this case was insufficient to justify the trial court's conclusion that Iriarte's injury occurred in the course of his employment. While his presence at Clapham's was employment-related, he was not working at the time of the injury and had no obligation to be present. Clapham's social gatherings aimed to enhance employee relations, but this does not equate to employees being on the job during injuries sustained at these events. Consequently, it is reasonable for Clapham to assume that the employment exclusion in his insurance policy would not apply to injuries resulting from non-work-related activities, such as an argument during a game. The trial court also ruled that Iriarte's injury did not fall under the "business pursuit" exception, as Clapham's intent for the gatherings included both social and business elements.

The court determined that the exclusion related to Clapham's business pursuits did not apply because the activity leading to the injury was not entirely dependent on those pursuits. Referencing State Farm Fire, Casualty Co. v. Drasin, the court emphasized that the applicability of the business pursuit exclusion hinges on the profit motive, and that regular activities aimed at earning a profit qualify as business pursuits. California Revenue and Taxation Code section 6013 defines business as any activity aimed at gaining direct or indirect benefits. Clapham's actions in inviting employees for beer and recreation were deemed a business pursuit, as they were intended to improve employee relations, which is beneficial for any business. The court clarified that the business pursuit exception is broader than the employment exception, encompassing any activity arising from employee employment. Clapham's intent, even if partially social, did not negate the business nature of the gathering. The court rejected West American's argument regarding the "concurrent causation" doctrine, affirming that the mixed social and business nature of the activities does not constitute independent causes of injury. The court held that the employment exclusion in West American's policy was inapplicable while the business pursuit exception in Cal Mutual's policy was applicable, thus placing the responsibility for defense or indemnification of Clapham in the Iriarte suit on West American. The judgment was reversed, with each party bearing its own costs on appeal.