Calif. 2nd: Retaliation in Police Citation Quota Case May Not Be an Uninsurable ‘Willful Act’

California Labor Code section 1102.5 prohibits employers from retaliating against employees for refusing to participate in unlawful activities.

That explains why, after the city of Whittier paid a $3 million settlement to six police officers who claimed they were disciplined for refusing to comply with an illegal traffic citation quota system, Everest National Insurance Co. and Starr Indemnity & Liability Co. refused to cover the cost. After all, another California law — Insurance Code section 533 — states that insurers have no duty to cover losses caused by an insured’s willful acts.

A Los Angeles County judge agreed with the insurers and dismissed a lawsuit the city filed against them for denying its claim.

But a California appellate court revived the city of Whittier’s lawsuit on Wednesday, holding that employer retaliation against employees isn’t always a “willful” act.

“Because we conclude not all Labor Code section 1102.5 claims involve necessarily willful conduct, but rather some involve conduct more akin to negligence, the trial court erred when it found to the contrary in granting summary judgment in favor of Everest and Starr,” two of the justices on the 2nd Appellate District panel said in their majority opinion.

H. Douglas Galt, an attorney with Woolls Peer Dollinger & Scher who argued the city’s case on appeal, said the ruling is a win for policyholders. According to the 2nd District’s opinion, retaliation complaints are the most common cause of action for employee practice liability cases.

Galt said employers don’t always know when they take actions against employees that they illegally retaliating.

“In general, if an employer is acting in good faith and is taking measures that it considers be lawful and it turns out it was mistaken, that is the kind of liability that should be insurable,” he said.

Six Whittier police officers filed a lawsuit against the city in 2015 alleging that they were disciplined for refusing to participate in fulfilling in the Police Department’s monthly traffic citations quota. The officers contended that such quotas violate state law.

The city decided to pay a $3 million settlement, even though Everest objected. Everest and Starr insured the city through a policy issued to the California Insurance Pool Authority. Each policy provided coverage of up to $10 million after the city paid a $1 million retention.

Attorneys for the city and the risk pool submitted the settlement to Everest and Starr. The insurers denied the claim and the city sued.

The parties agreed to refer the case to a referee, who recommended that the city’s claim be dismissed. Los Angeles County Superior Court Judge Margaret Miller Bernal agreed with the referee. She concluded that the alleged retaliation against the police officers necessarily involved willful conduct, meaning the insurers had no duty to cover the settlement.

The appellate panel said it could find no prior case that decided whether employee practice liability insurers must cover a violation of Labor Code section 1102.5. The panel examined the statute that prohibits law enforcement agencies from using traffic citation quotas and concluded that the city could have reasonably concluded that the “benchmark” system it used to evaluate police officer performance was in compliance with the law.

The appellate panel turned to the policy language to determine whether coverage was owed. The Starr policy provided coverage only for “damages,” the opinion said. Previous California Supreme Court rulings establish that the term “damages” is limited to “money ordered by a court,” the opinion says.

The panel concluded that Starr was not required to pay the city of Whittier’s claim and affirmed that portion of the trial court’s ruling. But the panel said Everest’s policy used different language, so the insurer may still be on the hook.

The Everest policy states that the insurer will pay the “ultimate net loss … that the insured becomes legally obligated to compensate others…” the opinion says. The panel said it reached no conclusion that coverage is owed, but remanded the case back to the Los Angeles County court to make that determination.

Justice Victoria Gerrard Chaney agreed with the decision to affirm dismissal of the lawsuit against Starr, but dissented from the decision to remand the claim against Everest. She said in a separate opinion that the Everest policy does not cover indemnification for unapproved settlements. Instead of reversing the trial court’s ruling, the more “economical” course of action would be to request supplemental briefing on the issue and decide whether coverage was owed under Everest’s policy, Chaney said.