Umbrella Insurer Held Required To “Drop Down” And Defend Discrimination Claims

Umbrella Insurer Held Required To “Drop Down” And Defend Discrimination Claims

10.15.2012

In Federal Insurance Company vs. Steadfast Insurance Company, ___ Cal.Rptr. 3d ___, 2012 WL 4336237 (9/24/2012), the U.S. Department of Justice sued a landlord under the anti-discrimination provisions of the federal Fair Housing Act. The insureds were alleged to have engaged in discriminatory housing practices against non-Koreans, African-Americans and families with children, by refusing to rent to them, providing them with inferior services, misrepresenting the availability of units and publishing rental advertisements that expressed a preference for Koreans and discrimination against African-Americans and families with children. The alleged discriminatory practices also included entering a tenant’s apartment without notice or knocking and evicting tenants with children.

The insureds sought defense and indemnity coverage under primary policies issued by Steadfast Insurance Company and Liberty Surplus Insurance Corporation and under umbrella policies issued by Federal Insurance Company. The primary policies and the Federal umbrella policies provided coverage for personal injury, defined to include “wrongful eviction from, wrongful entry into or invasion of the right or private occupancy of a room, dwelling or premises that a person occupies . . . .” The Federal umbrella policy’s definition of “personal injury” further included “discrimination, harassment or segregation based on a person’s age, color, national origin, race, religion or sex.” 
 
Federal and Steadfast defended the insureds at different times, and Steadfast paid to settle on behalf of the insureds. In the equitable contribution action that ensued, the parties filed cross-motions for summary judgment/adjudication. Federal asserted that the action involved “wrongful eviction from, wrongful entry into or invasion of the right or private occupancy of a room, dwelling or premises that a person occupies . . . .” within the primary policies’ definition of “personal injury” and that the duty to defend thus arose under the primary policies. 
 
The Court disagreed. The Court explained that “[a]lthough the discrimination alleged in the [] action may have been based in part on acts that might involve wrongful evictions, wrongful entries, or invasions of the right of private occupancy, the gravamen of the action itself solely was for housing discrimination under the Fair Housing Act.” The Court explained further that the action could not be construed as asserting common law theories of wrongful eviction, wrongful entry, or invasion of the right of private occupancy because “[o]nly the tenant can claim wrongful eviction, wrongful entry, or invasion of the right of private occupancy.” 

For its part, Liberty contended that its intentional act exclusion and Insurance Code §533’s exclusion for willful acts negated any coverage otherwise provided under its primary policy. Liberty's policies excluded “personal injuries” that were “[c]aused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’” 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 Court rejected Liberty’s contention, noting that the policy and statutory exclusions did not apply because the complaint alleged vicarious liability as well as liability for the insureds’ own acts. The Court cited a case holding that “neither Insurance Code § 533, nor related policy exclusions for intentionally caused injury or damage, precluded a California insurer from indemnifying an employer held vicariously liable for an employee’s willful acts.”

Nevertheless, the Court explained, since the United States had no right of occupancy or property right required for a claim of wrongful eviction, wrongful entry or invasion of the right of private occupancy, Liberty and Steadfast had no duty to defend. Because the action was based on discrimination and only the Federal umbrella policies provided coverage for discrimination claims, the Court held the umbrella policies had to “drop down” to fill the gap in the Steadfast and Liberty policies and provide primary coverage in the action.