Horace Mann Ins. Co. v. Barbara B.

Opinion

PANELLI, J.

We granted review in this case to address the question of whether an insurer may owe a duty to defend a teacher who is insured under an educator’s liability policy in a minor student’s action seeking damages resulting from the teacher’s sexual and other misconduct. Relying on our decision in J. C. Penney Casually Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, 1019 [278 Cal.Rptr. 64, 804 P.2d 689], the Court of Appeal concluded that the insurer had no duty to defend, and affirmed the decision of the trial court awarding summary judgment to the insurer in its declaratory relief action.

The lower courts erred. Because the evidence adduced in the summary judgment proceedings demonstrated the existence of unresolved factual issues as to the insurer’s potential liability under the policy based on misconduct separable from the sexual molestation, the insurer remained under a duty to defend the underlying action. The judgment of the Court of Appeal is, accordingly, reversed.

Factual and Procedural Background

During the 1986-1987 school year, Barbara B. was a 13-year-old student at Kramer Junior High School in the Placentia Unified School District (the District). Barbara B. and her parents sued her seventh grade band teacher, Gary Lawrence Lee, alleging she had suffered injuries caused by Lee’s intentional and negligent conduct toward her.¹ The conduct was alleged to have consisted of sexual molestation and other harassing conduct.²

Lee, who pleaded nolo contendere to one count of violating Penal Code section 288, subdivision (a), arising out of his molestation of Barbara, was insured under an educator’s liability policy issued by Horace Mann. The policy covered damages “which the insured shall become legally obligated to pay as a result of any claim arising out of an occurrence in the course of the insured’s educational employment activities, and caused by any acts or omissions of the insured . . . .” The policy excluded coverage of civil suits arising from criminal acts other than corporal punishment. It contained a promise to defend Lee in “any civil suit against the insured seeking damages which are payable under the terms of this policy even if such suit is groundless, false or fraudulent. . . .”

Horace Mann accepted tender of defense in Barbara B.’s suit against Lee, reserving its rights to disclaim coverage or an obligation to defend. In its reservation-of-rights letter, Horace Mann took the position that in light of Lee’s criminal conviction, the allegations of the complaint did not fall within policy coverage of educational activities.³ Horace Mann also cited the policy’s exclusion for civil suits arising out of an act, other than corporal punishment, that has been held to be a crime and the exclusion for occurrences involving damages that are the intended consequence of action taken by the insured.

Horace Mann filed a declaratory relief action, seeking a determination of its duty to defend or indemnify Lee in Barbara B.’s suit. Contending that as a matter of law its policy provided no coverage because Lee’s conduct was intentional within the meaning of Insurance Code section 533⁴ and unrelated to educational activities, Horace Mann moved for summary judgment. In support of the motion, it submitted a copy of Lee’s plea of nolo contendere in file felony case. Barbara B. opposed the motion, submitting a proposed second amended complaint—alleging that Lee “negligently, carelessly, recklessly, and wantonly engaged in sexual and nonsexual acts with the minor plaintiff’—and a letter written by her attorney, detailing acts of misconduct by Lee not amounting to molestation (ante, fn. 2). Before the trial court issued its ruling, the proposed second amended complaint was filed in the underlying action.

The trial court granted the motion for summary judgment, determining that all of Lee’s acts were either sexual or intentional in nature, and entered judgment for Horace Mann. Barbara B. appealed, and the Court of Appeal affirmed.

Discussion

It is by now a familiar principle that a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 [54 Cal.Rptr. 104, 419 P.2d 168] (Gray).) As we said in Gray, “the carrier must defend a suit which potentially seeks damages within the coverage of the policy.” (Id. at p. 275, italics in original.) Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded. (Id. at p. 278; Signal Cos. v. Harbor Ins. Co. (1980) 27 Cal.3d 359, 367 [165 Cal.Rptr. 799, 612 P.2d 889, 19 A.L.R.4th 75]; Saylin v. California Ins. Guarantee Assn. (1986) 179 Cal.App.3d 256, 263 [224 Cal.Rptr. 493].)

The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy. (Gray, supra, 65 Cal.2d at p. 276.)

Once the defense duty attaches, the insurer is obligated to defend against all of the claims involved in the action, both covered and noncovered, until the insurer produces undeniable evidence supporting an allocation of a specific portion of the defense costs to a noncovered claim. (Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 564 [91 Cal.Rptr. 153, 476 P.2d 825]; Republic Indemnity Co. v. Superior Court (1990) 224 Cal.App.3d 492, 498 [273 Cal.Rptr. 331]; California Union Ins. Co. v. Club Aquarius (1980) 113 Cal.App.3d 243, 248 [169 Cal.Rptr. 685].) (Horace Mann has not attempted to establish such an allocation.) Any doubt as to whether the facts give rise to a duty to defend is resolved in the insured’s favor. (CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 607 [222 Cal.Rptr. 276].)

During the pendency of the appeal in this case, we addressed the question whether a liability insurer owes a duty to indemnify an insured in an action for damages arising out of child molestation. We answered in the negative. In J. C. Penney Casualty Ins. Co. v. M. K., supra, 52 Cal.3d 1009 (J. C. Penney), the liability insurer sought a declaratory judgment that it was not required to indemnify its insured, who had pleaded guilty to violation of Penal Code section 288, subdivision (a), in the child victim’s action seeking damages for sexual molestation. We held that as a matter of law Insurance Code section 533 precludes coverage in such a case. (Id. at pp. 1019, 1021.) Because child molestation is inherently harmful, we rejected the argument that a molester’s lack of subjective intent to harm the victim can avoid the bar of Insurance Code section 533. We emphasized the narrowness of our holding, stressing we were addressing only child molestation and no other type of wrongdoing. (Id. at p. 1028.)

Horace Mann relies heavily on J. C. Penney, supra, 52 Cal.3d 1009, to support its position in this case. Reduced to its essence, Horace Mann’s argument runs thus: Barbara B. alleges that Lee’s sexual and other misconduct injured her; the evidence of Lee’s plea of nolo contendere to one count of violating Penal Code section 288, subdivision (a), establishes that he sexually molested her; under J. C. Penney, supra, Horace Mann has no duty to indemnify Lee for claims arising out of that sexual molestation; Lee’s other alleged misconduct was directly related to the uninsurable molestation and was not in the course of his educational employment activities; therefore, under this scenario, Horace Mann has no duty to defend or indemnify Lee against the other allegations of misconduct.

The flaw in Horace Mann’s reasoning is its unsupported assumption that the other alleged misconduct necessarily was part of the molestation and not in the course of Lee’s educational activities. The evidence presented in support of the summary judgment motion fails to clearly establish the inferences necessary to sustain the ruling. Indeed, the evidence supported the potential for liability apparent on the face of the complaint and, with it, Horace Mann’s duty to defend.

As noted above, Gray teaches that when facts extrinsic to the complaint, gathered from the insured or other sources, suggest that the claim may be covered under its policy, the insurer is held to a duty to defend the action. (Gray, supra, 65 Cal.2d 263, 276.) The courts of appeal have expressed varying views on the question of whether the insurer must defend when the complaint on its face shows a potential for coverage but extrinsic facts are to the contrary. (Compare State Farm Mut. Auto. Ins. Co. v. Flynt (1971) 17 Cal.App.3d 538, 548 [95 Cal.Rptr. 296] [holding extrinsic evidence justified denial of defense], Saylin v. California Ins. Guarantee Assn., supra, 179 Cal.App.3d 256, 264 [same] and Fire Ins. Exchange v. Jiminez (1986) 184 Cal.App.3d 437, 442 [229 Cal.Rptr. 83] [same] with CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d 598, 606 (CNA) [holding extrinsic evidence may create, but not eliminate, duty to defend], Jenkins v. Insurance Co. of North America (1990) 220 Cal.App.3d 1481, 1489 [272 Cal.Rptr. 7] [citing CNA with approval] and California Ins. Guarantee Assn. v. Wood (1990) 217 Cal.App.3d 944, 948 [266 Cal.Rptr. 250] [same].)

Here, we need not address the circumstances under which extrinsic evidence might defeat the duty to defend. As of the time of the summary adjudication proceedings, there remained unresolved factual disputes concerning Gary Lee’s conduct apart from his molestation of Barbara, and, with those disputes, the potential for liability under the policy. Therefore, Horace Mann failed to meet its burden of showing it was entitled to judgment as a matter of law, and the trial court erred in awarding it summary judgment. (Code Civ. Proc., § 437c, subd. (c).)

Barbara B.’s second amended complaint, on its face, alleged injury resulting from Lee’s “negligent], careless[], reckless[], and wanton[]. . . sexual and nonsexual” conduct. Although lacking in specificity, the complaint evinced a possibility that Gary Lee would be held liable for damages within the coverage of the policy stemming from Lee’s negligent nonsexual conduct in his public relationship with Barbara.

Any doubts as to whether the complaint gave rise to a duty to defend Lee were resolved by the materials adduced in the summary judgment proceedings. Extrinsic proof that Lee had been convicted of violating Penal Code section 288, subdivision (a), certainly established that there had been at least one instance of sexual misconduct outside the policy coverage under the rule of J. C. Penney, supra, 52 Cal.3d 1009, and thus outside of any duty to defend. The same proof also demonstrated that Lee’s sexual misconduct occurred outside the course of his educational employment activities and was therefore not covered under the terms of the policy. (See Horace Mann Ins. Co. v. Analisa N. (1989) 214 Cal.App.3d 850, 853-856 [263 Cal.Rptr. 61].) However, the fact of Lee’s conviction could not eliminate the duty to defend against the other allegations of misconduct, not amounting to criminal molestation. Nothing in the complaint or the materials submitted in connection with the summary judgment proceedings enabled Horace Mann to determine that those allegations were related to the molestation, or that the other alleged misconduct was outside the course of Lee’s educational employment activities. A teacher’s educational role requires constant, close interaction with students; it is not always easy for a court to draw the line between appropriate and inappropriate interaction. Neither precedent nor logic dictates that a molester cannot also be liable for torts of negligence against the victim which are apart from, and not integral to, the molestation.

It bears emphasis that this case reaches us in somewhat of a factual vacuum. We must not lose sight of the record before us. The record is devoid of evidence which establishes the chronology or sequence of events comprising the alleged misconduct or that these actions were integral to the molestation. For instance, the record is devoid of evidence demonstrating that Lee’s acts of public embarrassment of Barbara occurred in such close temporal and spatial proximity to the molestation as to compel the conclusion that they are inseparable from it for purposes of determining whether Horace Mann owed a duty to defend Lee. This being so, unlike the dissent, we cannot, at this point and on this record, confidently conclude that no such duty existed. Under the law of this state, we must resolve the uncertainty in the insured’s favor. (CNA, supra, 176 Cal.App.3d at p. 607.)

Horace Mann contends that Lee’s alleged misconduct apart from the molestation could not possibly give rise to liability because the admitted molestation is the “dominant factor” in this case. The argument misconceives the role of the court in determining the duty to defend. We look not to whether noncovered acts predominate in the third party’s action, but rather to whether there is any potential for liability under the policy. (Gray, supra, 65 Cal.2d at pp. 275-276.) Since an insurer has a duty to defend the entire third party action if any claim encompassed within it potentially may be covered (absent allocation, as noted above), the mere fact that Horace Mann could not indemnify Lee for the molestation did not eliminate its duty to defend other, possibly covered claims. (Hogan v. Midland National Ins. Co., supra, 3 Cal.3d 553, 564 [91 Cal.Rptr. 153, 476 P.2d 825]; see also State Farm Fire & Casualty Co. v. Eddy (1990) 218 Cal.App.3d 958, 965 [267 Cal.Rptr. 379] [“[Although a determination on the merits might show that there was intentional conduct... the [underlying] complaint alleged both negligent and intentional torts; therefore, State Farm must defend . . . .”].)

Horace Mann argues that every sexual molestation case is susceptible to allegations of misconduct not rising to the level of sexual molestation, and that, as a consequence, recognition of a duty to defend in this case would encourage parties to “plead around” J. C. Penney. Along similar lines, the Court of Appeal characterized much of the misconduct recited in counsel’s letter as “parasexual” and therefore inseparable from the molestation.

We think such an argument misses the point of the allegations contained in counsel’s letter. The gravamen of each of the so-called “parasexual” actions—“[allowing Barbara B[.] to sit on his lap in front of other students,” “[k]issing Barbara B[.] on the forehead in front of other students,” “Mugging Barbara B[.] in front of other students,” “[p]utting his arm around Barbara B[.] in front of other students”—was its commission in front of other students. Horace Mann has not shown that any of those public acts were inherently harmful or amounted to sexual molestation, so as to come within J. C. Penney’s bar to indemnity. The possibility of a duty to indemnify remains because the alleged acts arose from Lee’s interaction with students in the course of his educational activities. While one might reasonably question the appropriateness of teachers engaging in such behavior in the classroom, we cannot say, as a matter of law on the record before us, that such conduct does not raise a possibility of a duty to indemnify under the policy of insurance which was issued to Lee.

If the parties to a declaratory relief action dispute whether the insured’s alleged misconduct should be viewed as essentially a part of a proven sexual molestation, or instead as independent of it and so potentially within the policy coverage, and if the evidence pertaining to the alleged misconduct that the parties submit does not permit the court to eliminate either of these views, then factual issues exist precluding summary judgment in the insurer’s favor. Indeed, the duty to defend is then established, absent additional evidence bearing on the issue. (See Hogan v. Midland National Ins. Co., supra, 3 Cal.3d at p. 564.) Here, the parties disputed not only whether the acts alleged to be harassment constituted part of the molestation, but also whether those acts actually occurred. The latter dispute implicates the insurer’s duty to defend groundless claims.

In many cases the plaintiffs allegations of molestation and other misconduct may be inseparably intertwined (e.g., when the molestation allegedly was carried on in secret, without any distinct injury to the plaintiff’s social relations). Lee’s nolo plea to one count of violating Penal Code section 288, subdivision (a), established his sexual molestation of Barbara, but his alleged public embarrassment of Barbara B. affected a different interest.⁵ Horace Mann failed to make the showing necessary to eliminate its duty to defend.

We note, too, that if facts known to the insurer suggest a possibility that what plaintiff alleges to be sexual molestation may be found to be merely a negligent touching (see, e.g., State Farm Fire and Cas. Co. v. Nycum (9th Cir. 1991) 943 F.2d 1100), then there is potential coverage and consequently a duty to defend. This was the posture of Gray, supra, in which the plaintiff alleged that the insured had “ ‘wilfully, maliciously, brutally, and intentionally assaulted’ ” him, while the insured contended he had acted in self-defense. We held that the possibility of a judgment based on nonintentional conduct entailed a duty to defend. (Gray, supra, 65 Cal.2d 263, 276.)

The Court of Appeal characterized the other conduct listed in counsel’s letter as “genuinely nonsexual conduct which cannot possibly give rise to any damages.” The Court of Appeal concluded that “[i]f facts stated in the complaint or otherwise brought to the attention of the insurer will not support any damages within the scope of the policy, there is no potential for coverage and therefore no duty to defend.” (Italics in original.)

This conclusion ignores the insurer’s promise to defend the insured against groundless, false, and fraudulent claims. An insured buys liability insurance in large part to secure a defense against all claims potentially within policy coverage, even frivolous claims unjustly brought. To adopt the reasoning of the Court of Appeal would be to read out of existence the “groundless, false, or fraudulent” clause that is universally common in liability insurance policies. If Barbara B.’s claims were indeed so insubstantial as not to warrant any damages, Horace Mann should have raised that defense in the underlying action for Gary Lee’s benefit, rather than in this declaratory relief action to his detriment. (Cf. Garriott Crop Dusting Co. v. Superior Court (1990) 221 Cal.App.3d 783, 797 [270 Cal.Rptr. 678].)

Our decision is no license to “plead around” J. C. Penney, supra, 52 Cal.3d 1009. We do not sanction relabelling child molestation as negligence in order to secure insurance coverage for the plaintiff’s injuries. We merely hold to the established rule that a potential for coverage, whether found within the four comers of the complaint or in facts extrinsic to it, gives rise to the defense duty. (Gray, supra, 65 Cal.2d at pp. 275-277.)

Horace Mann raises the specter of a perpetual, indefeasible defense obligation. We believe its fears are exaggerated, for that is not what Gray exacts from insurers. By way of illustration, we note that when the underlying action is a sham, the insurer can demur or obtain summary judgment on its insured’s behalf and thereby obviate the necessity of further defense. And a declaratory relief action remains available when the facts of the underlying lawsuit are indeed not of the nature and kind covered by the policy. (See Gray, supra, 65 Cal .2d at p. 274; United Pacific Ins. Co. v. Hall (1988) 199 Cal.App.3d 551, 556 [245 Cal.Rptr. 99] [policy obligating an insurer to defend action for damages did not obligate insurer to defend insured in criminal or administrative proceedings where damages were not sought]; Insurance Co. of the West v. Haralambos Beverage Co. (1987) 195 Cal.App.3d 1308, 1316-1318 [241 Cal.Rptr. 427] [commercial multi-peril policy; no duty to defend action sounding in contract]; Jaffe v. Cranford Ins. Co. (1985) 168 Cal.App.3d 930, 934 [214 Cal.Rptr. 567] [psychiatrist’s malpractice policy did not obligate insurer to defend its insured in criminal prosecution for Medi-Cal fraud and theft].)

Some may consider the result in this case—that an insurer may be required to defend an insured who has sexually molested a child against claims arising from harassing conduct separable from the molestation and not amounting to criminal activity—to be unfortunate. No one, of course, wants to provide aid and comfort to child molesters. But courts cannot allow legal reasoning to yield to emotionalism when determining the extent of an insurance carrier’s defense duty. It is important to remember that no public policy forbids the defense of claims alleging intentional acts. As we said in Gray, “the statutes forbid only contracts which indemnify for ‘loss' or ‘responsibility' resulting from wilful wrongdoing. Here we deal with a contract which provides for legal defense against an action charging such conduct; the contract does not call for indemnification of the insured if the third party plaintiff prevails. In the second place, as we pointed out in Tomerlin v. Canadian Indemnity Co. (1964) 61 Cal.2d 638, 648 [39 Cal.Rptr. 731, 394 P.2d 571], the statutes ‘establish a public policy to prevent insurance coverage from encouragement of wilful tort.’ ... [A] contract to defend an assured upon mere accusation of a wilful tort does not encourage such wilful conduct.” (Gray, supra, 65 Cal.2d at pp. 277-278, italics added.)

As Horace Mann failed to prove that no potential for liability under its policy arose out of the underlying suit against its insured, the trial court erred in granting summary judgment in Horace Mann’s favor in this declaratory relief action.

Disposition

The judgment of the Court of Appeal is reversed and the action is remanded for further proceedings in accordance with this opinion.

Lucas, C. 1, Mosk, J„ Kennard, J„ and George, J„ concurred.

1 The complaint also named the District and various other persons as defendants, but for present purposes we are concerned only with Lee as the insured of Horace Mann Insurance Company (Horace Mann).

2 As detailed in a letter written by Barbara B.'s attorney to Horace Mann, and submitted in opposition to Horace Mann’s motion for summary judgment in the declaratory relief action, the other misconduct consisted of the following acts:

“1. Giving tardy notes to Barbara [B.] based upon solely her request for a tardy note;

“2. Pulling her out of class for the entire class;

“3. Allowing Barbara [B.] to sit on his lap in front of other students . . . ;

“4. Kissing Barbara [B.] on the forehead in front of other students;

“5. Hugging Barbara [B.] in front of other students;

“6. Putting his arm around Barbara [B.] in front of other students;

“7. Allowing Barbara [B.] to be in the band room alone[;]

“8. Allowing Barbara [B.] to be in the band room alone with himself and Susan Bowen;

“9. Allowing Barbara [B.] to be in the band room alone with Camry Southern and himself;

“10. Regularly making sexual and sarcastic jokes in regard to Barbara [B.], or impliedly relating to Barbara [B.], in front of the band class, referencing the way a girl dressed, and in making jokes offensive to females. General discussions of sexual conduct in front of the class[;]

“11. Gary Lee’s being alone in his windowed office with Barbara [B.][;]

“12. The allowing and perpetuating of common rumors among students of a relationship between Gary and Barbara as a joke. ‘O, Mr. Lee took Barbara home last Friday.’[]

“13. Barbara [B.] was considered a teacher’s pet of Gary Lee in seventh grade[;]

“14. Gary Lee had a flirtatious behavior towards Barbara [B.][;]

“15. The dollar dance, and insinuation that Barbara could be bought for a dollarf;]

“16. Joking about the girls coming back and seeing him when they are 18[;]

“17. Gary Lee’s joking about his female students in front of his friends[;]

“18. Referring to Barbara [B.] as Pebbles;

“19. Gary Lee had a childish behaviorf;]

“20. Gary Lee was perverted and immature[;]

“21. Gary Lee referred to Barbara [B.] as ‘jail bait,’ or ‘San Quentin jail bait’ in front of students, his friends, band parents and student teachers[;]

“22. Gary Lee had discussions with Barbara’s teachers about Barbara being with him and to assume that she was with him at all times that she was late or absent from their classes[;]

“23. Barbara was teased by students in front of adults as being Gary Lee’s girlfriend, which was also laughed at by the students, adults, and Gary Lee[;]

“24. Attempts on the part of Gary Lee to get Barbara [B.] alone[;] . . . and

“25. Threats by Gary Lee that he would harm himself . . . .”

3 Barbara B. contends that Horace Mann failed to raise the “exclusion for noneducational activities” at the outset of the underlying litigation, and therefore waived it as a matter of law. The contention lacks merit. First, as Horace Mann points out, the policy does not contain an exclusion for noneducational activities; rather, that limitation is expressed in the insuring clause itself. Second, Horace Mann’s reservation-of-rights letter clearly stated its position that the allegations of Barbara B.’s complaint “do not fall within the basic coverage of the policy for educational employment activities.” Moreover, Barbara B. failed to raise this issue below, except in a petition for rehearing.

4 Insurance Code section 533 provides that “[a]n insurer is not liable for a loss caused by the wilful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.” The statute is in effect an implied exclusionary clause that must be read into all insurance policies. (J. C. Penney Casualty Ins. Co. v. M. K., supra, 52 Cal.3d at p. 1019.)

5 In the letter written by Barbara B.’s attorney to Horace Mann, submitted in opposition to Horace Mann’s motion for summary judgment, Lee’s acts of public embarrassment of Barbara are listed in items 3-6, 10, 12, 15-18, and 21-23 {ante, fn. 2).