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KING V. DALLAS FIRE AND THE DUTY TO DEFEND "NEGLIGENT" EMPLOYERS WHOSE EMPLOYEES COMMIT INTENTIONAL ACTS
By David L. Plaut

In a recent decision, King v. Dallas Fire Ins. Co., 45 Tex. Sup. Ct. J. 1224 (Aug. 29, 2002), the Texas Supreme Court addressed the question of whether an insurer owes a duty to defend an insured from claims arising out of the insured's negligent hiring and supervision of an employee, who intentionally assaults another individual. The case broadly addressed the "core allegation" approach to the duty to defend and the implications of the "separation of insureds" clause of the standard CGL policy. The Texas Supreme Court rejected the Fifth Circuit's approach to these questions and held that the intentional conduct of an employee would not be automatically "imputed" to the employer such that the employee's intentional and assaultive conduct preclude any duty to defend the employer.

Overview of King v. Dallas Fire

In an underlying lawsuit, Greg Jankowiak sued Carlyle King for injuries he received when one of King's employee's (Lopez) attacked him. In addition to a claim of respondeat superior, Jankowiak sued King directly for negligent hiring, training, and supervision. King sought a defense from Dallas Fire, his CGL insurer.

The question the Texas Supreme Court addressed was whether an employer's alleged negligent hiring, training, and supervision constitute an "occurrence" under the terms of the insurance policy, even though the injury was directly caused by the employee's intentional conduct. If the employer's alleged negligent hiring, training, and supervision constitute an "occurrence," then Dallas Fire was required to defend King. The trial court concluded that Dallas Fire did not owe King a duty to defend.

The Houston Court of Appeals determined that the plaintiff's allegations, in effect, charged King with creating the circumstances that produced Lopez's intentional tort. Under these allegations, the court held it was required, notwithstanding the separability clause, to impute Lopez's intentional act to King. Almost apologetically, the Houston Court of Appeals concluded, "[w]e do not write on a clean slate . . . and we therefore conclude there was no 'occurrence' within the meaning of the Dallas Fire policy definition and that Dallas Fire had no duty to defend King against the claims asserted against." The Texas Supreme Court granted the petition for review and reversed, rejecting a number of Texas and Fifth Circuit cases going the other way.

The "Core Allegation" Approach as Previously Articulated in Texas and Federal Courts

In focusing on factual allegations rather than the imaginative pleading of alternative legal theories, a number of Texas appellate and federal courts had adopted a "core allegation" approach to assessing the duty to defend. These courts held that when a petition alleged only facts that are excluded from coverage, there was no duty to defend based on a "related and interdependent" cause of action, such as negligence. Holding this approach was part and parcel of the "eight corners rule," these courts looked to the facts alleged against the insured rather than the legal theories cobbled together by creative lawyers. A number of cases in Texas had adopted this "core allegation" approach to the duty to defend. See, e.g.,

  • American Guarantee and Liability Insurance Co. v. 1906 Company, 129 F.3d 802, 810 (5th Cir. 1997);

  • Cornhill Insurance PLC v. Valsamis Inc., 106 F.3d 80, 86 (5th Cir. 1997) (holding that where Aliability premised on negligence is related to and interdependent of other tortious activities, the 'ultimate issue' is whether the tortious activities themselves are encompassed by the 'occurrence' definition");

  • Canutillo Indep. School Dist. v. National Union Fire Ins. Co., 99 F.3d 695, 704 (5th Cir. 1996) (recognizing that under Texas law "where a claim against an insured would not exist 'but for' conduct explicitly excluded by the policy, the dependent claims are also not covered under the policy, regardless of whether the insured against whom the derivative claims are directed actually engaged in the excluded acts");

  • New York Life Ins. v. Travelers Ins. Co., 92 F.3d 336, 339 (5th Cir. 1996) (excluding claims for negligent hiring, training, and supervision against employer that were "related to" and "interdependent on" claim of fraud by employee because employee's intent is imputed to employer);

  • Columbia Mutual Ins. Co. v. Fiesta Mart, Inc., 987 F.2d 1124, 1128 (5th Cir. 1993) (where insured's liability was clearly "related to and interdependent" upon fraud of another related party, no duty to defend because the "ultimate issue" was whether the policy covered the fraudulent activities);

  • Acceptance Ins. Co. v. Jedjo, Inc., 897 F. Supp. 978, 979-980 (S.D. Tex. 1995) (holding that negligence claims against a nightclub arose out of an excluded assault and parents of a man who was killed by club bouncers "never would have raised these claims about the hiring practices at the [club] absent the beating of their son");

  • Old Republic Insurance Company v. Comprehensive Health Care Associates,Inc., 786 F. Supp. 629, 632 (N.D. Tex. 1992), aff=d, 2 F.3d 105 (5th Cir. 1993) (finding no coverage because the negligence allegations advanced against a medical clinic were "related to and interdependent" upon a supervisor's sexual harassment of clinic employees and noting that without the underlying sexual harassment, there would have been no injury and thus "no basis for a suit against [the clinic] for negligence");

  • Adamo v. State Farm Lloyds Co., 853 S.W.2d 673, 676 (Tex. App. -- Houston 1993, writ denied) (facts giving rise to the claims were of "ultimate importance" in determining the duty to defend"; while the insured's claims were "creative" they were "without merit");

  • National Union Fire Insurance Co. of Pittsburgh v. National Convenience Stores, Inc., 891 S.W.2d 20 (Tex. App.--San Antonio 1994, no writ) (allegation that an employer "negligently" trained and supervised an employee's supervisor, who allegedly physically abused the employee, did not require the insurer to defend the employer);

  • Duncanville Diagnostic Center, Inc. v. Atlantic Lloyd's Insurance Co. of Texas, 875 S.W.2d 788, 791-92 (Tex. App.-- Eastland 1994, writ denied) (holding that the "professional services" exclusion precluded coverage of a child's death due to administration of an overdose of a sedative and failure to diagnose the overdose and rejecting the argument that allegations of negligent hiring, training, supervision, and inadequate policies and procedures brought the claim within the coverage of the policy).

In American Guarantee and Liability Insurance Co. v. 1906 Company, 129 F.3d 802, 810 (5th Cir. 1997), the Fifth Circuit affirmed that the "core allegation" approach to duty to defend issues is predicated on agency principles. The case involved the manager of a photography studio who had secretly videotaped models getting dressed and undressed. After discovering this invasion of their privacy, a number of the models sued the studio's manager and parent company (a Coca-Cola bottling company) and the parent company's CEO (who happened to be the manager's father). The plaintiffs sued the studio and its manager for invasion of privacy, outrage, intentional infliction of emotional distress, fraud, negligence, and exploitation of minors, as well as the parent company and its CEO for a host of negligence-based torts, including negligent entrustment, negligent supervision, and negligent hiring. Id. at 804. The Fifth Circuit held that because the injuries stemming from the improper videotaping were intended or expected from the manager's standpoint, the related negligence claims of the studio's parent company and its CEO were excluded under the applicable CGL policy.

Citing New York Life Insurance Company. v. Travelers Insurance Company,1 the Fifth Circuit predicated its finding of non-coverage on "agency principles and imputed intent." Id. at 810. The court reiterated that "[w]hen an agent intends or expects an injury, such intent and knowledge will be imputed to the principal for purposes of determining whether there is an occurrence." Id. (citing New York Life and Fiesta Mart). Recognizing past inconsistency in addressing the separation of insureds clause2 particularly where claims against one insured were closely related to claims against another3 , the Fifth Circuit nevertheless applied the "core allegation" approach to preclude any duty to defend or indemnify. It is interesting to note that none of the Fifth Circuit coverage cases "imputing" the bad acts and intent of agents to principals consider the question of whether such acts were ultra vires. Under Texas law, an agent cannot bind a principal by its actions unless they were done within the authority or scope of employment. Perry v. Texas A & I University, 737 S.W.2d 106, 109 (Tex. App.--Corpus Christi 1987, writ ref'd n.r.e.).

Employer's "Negligent Hiring, Training, and Supervision" was an "Occurrence" Under the Standard CGL Policy Despite Employee Intentional Conduct

In rejecting the "core allegation" approach discussed above, the Texas Supreme Court in King v. Dallas Fire viewed the question of whether or not there was an "occurrence" from the standpoint of the employer B and not the employee whose conduct was at issue.

The court determined that Texas law required it to look at the pleadings' allegations and the insurance policy's language from the separate insured's standpoint to determine the duty to defend. Those allegations are to be considered without reference to the truth or falsity of such allegations. In reviewing Texas precedent, the court concluded that the Fifth Circuit improperly imputed the employee's intent to the employer-insured. The court specifically determined that whether one who contributes to an injury is negligent is an inquiry independent from whether another who directly causes the injury acted intentionally. Essentially, the employee/actor's intent is not imputed to the insured in determining whether there was an "occurrence" or accident. The Texas Supreme Court held this was the better approach. 45 Tex. Sup. Ct. J. at 1228.

ENDNOTES

  1. 92 F.3d 336, 339 (5th Cir. 1996) (excluding claims for negligent hiring, training, and supervision against employer that were "related to" and "interdependent on" claim of fraud by employee because employee's intent is imputed to employer).

  2. The typical CGL "separation of insureds" clause provides: "[e]xcept with respect to the Limits of Insurance, and any right or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies . . . [a]s if each Named Insured were the only Named Insured . . . and . . . [s]eparately to each insured against whom claim is made or 'suit' is brought." American Guarantee, 129 F.3d at 809 n.4.

  3. Compare Western Heritage Ins. v. Magic Years Learning Ctrs. & Child Care, Inc., 45 F.3d 85 (5th Cir. 1995) (holding negligence claims against employer related to sexual molestation of child by employee were not excluded by intentional acts exclusion, in part because the policy contained a separability clause) with New York Life, 92 F.3d at 340 n. 4 (declining to follow Magic Years because the portion of the opinion related to the intentional acts exclusion was an alternative holding, and because it failed to acknowledge and is inconsistent with the Fifth Circuit's prior opinion in Fiesta Mart, which was binding as prior precedent). See also 7A J. Appleman, Insurance Law and Practice ' 4492.01 at 20 (Berdal ed. 1979) ("The severability clause added to standard liability policies in 1955 is not usually recognized in most of the litigation regarding intentional or negligent acts that result in liability to the insured. It would seem that its implications are not recognized adequately by the litigants or the courts.").

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