Fraudulent concealment claims.

The insurance battle to win coverage

California businesses pay millions of dollars in insurance premiums for protection against claims by employees for work-related injuries. So, when confronted with an employee's civil lawsuit alleging fraudulent concealment of a workplace injury, can the company be confident that its workers' compensation carrier or commercial general liability ("CGL") carrier will defend and indemnify it against the claim? Unfortunately for the company, the answer is a resounding "no."

Inevitably, the company's fight against the employee's fraudulent concealment lawsuit generates another, but equally critical, battle -- one with the insurance carrier for payment of the costs of the defense and of the settlement and/or judgment. This second dispute cuts across various disciplines and emphasizes the need for a coordinated approach among them all. For example, the risk manager must be consulted with respect to the effects of a possible insurance fight on existing insurance relationships, future premiums, and current insurance applications and negotiations. Defense counsel and workers' compensation counsel must be monitored so that the company does not take legal positions or make factual admissions that jeopardize coverage or the company's leverage to have the carrier pay for a settlement. However, coverage counsel must be careful not to emphasize the insurance issues to the detriment of the defense. These balancing efforts persist throughout the fraudulent concealment suit and beyond.

When sued, the company should review all potentially applicable policies, which normally include workers' compensation and CGL policies, and tender the claim to the applicable carriers. Securing a defense or indemnity will probably require a fight with the carrier, whose policy has placed a land mine of insurance definitions and exclusions in the path to protection.

Most CGL policies require the insurer to pay all sums which the company shall become legally obligated to pay as damages because of bodily injury caused by "an occurrence." But, that obligation is significantly diluted by the typical definition of "occurrence" as an accident, including continuous or repeated exposure to conditions which result in bodily injury neither expected nor intended from the standpoint of the insured. Is an injury aggravated by fraudulent concealment caused by an "occurrence" under this definition?

CGL policies commonly contain an exclusion for obligations for which the insured may be held liable under any workers' compensation law. But, since fraudulent concealment is not a typical workers' compensation claim, is that exclusion applicable? The CGL policy may also contain troubling exclusions for bodily injury to an employee of the named insured arising out of and in the course of his employment and for bodily injury arising out of the non-accidental release of toxic chemicals or pollutants.

Coverage under the "Employers' Liability" section of a workers' compensation policy also is becoming problematic because of a recent trend to exclude coverage for injuries intentionally aggravated by the employer from the general coverage for damages because of bodily injury by accident or disease arising out of and in the course of employment. For that reason, the company may need to make arguments based on past policies, which are less likely to have disqualifying provisions. That introduces another dilemma, however: the facts that a company may prove to obtain coverage under past policies may be facts the company seeks to disprove in defending the lawsuit.

Quite apart from express policy exclusions, an inevitable tension exists between a fraudulent concealment claim and California public policy, embodied in Insurance Code Section 533, prohibiting insureds from purchasing insurance against their own "wilful acts" (whatever that means), but not their negligent acts. Punitive damages awarded under California law for "fraudulent," "malicious," or "oppressive" conduct, which may be awarded in a fraudulent concealment case, cannot be paid by insurance. And, although a 1988 California appellate court held that Insurance Code Section 533 did not entitle an insurer to refuse to defend a fraudulent concealment case, the premise of that decision has been eroded by subsequent cases. Since the law regarding the precise level of intent necessary to trigger liability for fraudulent concealment is still up in the air, the company's ability to secure a defense, regardless of policy provisions, is an open issue.

The target of the first inevitable coverage battle is winning a carrier's agreement to defend. Winning that battle is the key to resolving the case at the carrier's expense, even though the carrier may not agree to indemnify the company against liability. Not only does the company avoid defense costs, but it also may use the leverage of anticipated legal fees or exposure risks to force the carrier to pay a settlement before any ultimate determination of liability. An insurer has a duty to settle a case in good faith within policy limits once it has acknowledged a duty to defend.

The company's arsenal in the coverage battle includes a California law requirement that insurers provide a defense, even though ultimate coverage is contested, if any potential for coverage exists. Generally, the employee's allegations control the duty to defend -- even if those allegations are groundless, false, or fraudulent. The ultimate facts determining the company's eventual liability are not relevant to the duty to defend analysis. The price tag for a carrier's wrongful failure to defend under this broad duty is a subsequent suit by the company for costs of a settlement or judgment, even on a claim which is not covered and even if the settlement or judgment exceeds the policy limits.

Even if the company is successful in convincing the insurer to provide a defense, difficult questions remain with respect to who will represent the company and who will control the defense. Control is critical because resolution of the coverage disputes may depend upon how the defense frames and resolves the issues.

For example, one issue that may control both the company's liability to its employees and the carrier's obligations to the company is the level of intent that the employee must prove to impose liability on the company for fraudulent concealment. The law is not well developed on this point. Cases suggest, without much critical analysis, that the company must have actual knowledge of the concealed injury, and that the company may act to conceal with something less than a preconceived design to inflict injury. But how much less? Is actual fraudulent intent required? Negligent misrepresentation and a fiduciary's mere failure to disclose have been characterized as "fraud" or "constructive fraud" by some California cases. Moreover, the relationship between a company and its employees has been characterized as a fiduciary one by some California cases. Thus, the debate over the level of intent needed pits the company's desire for insurance protection against the company's desire to prevail on the merits. If the company argues that actual fraudulent intent is required to trigger liability, and it losses, the company may well argue itself out of insurance coverage. If the company argues that negligent misrepresentation or nondisclosure by a fiduciary (without regard to actual intent) is sufficient, the company may increase its chances for insurance protection, but doom its case on the merits.

The same tension between the merits and insurance coverage exists in taking a position on what constitutes an "injury" and when it came into "existence." Typically, the employee will try to prove that the concealed injury existed prior to the time it became manifest and known to the employee. Otherwise, the employee cannot viably argue that he was ignorant of the "concealed" injury. For example, the employee will try to prove that the concealed injury was bone marrow injury, however slight, and that the aggravation of that initial injury for which he seeks compensation is the leukemia which developed from the progressively injured bone marrow. On the other hand, the company will want to prove that the injury did not exist or occur until much later, when it was diagnosable or manifest. The company will want to prove that the injury did not occur on first exposure or during undiagnosable incubation. For example, the company will try to prove that the concealed injury is the leukemia, not the damage to the bone marrow, and that the employee learned he had leukemia before the company, thereby defeating a claim of company concealment. However, to maximize insurance coverage, the company may want to prove that the injury occurred as far back in time as possible, even before it became manifest. The further back the injury occurred, the more insurance policies may be implicated and the more coverage can be stacked up against a potential judgment.

The company's control over the proper balance between these defense and insurance coverage strategies is subjected to further carrier pressure through its control of purse strings. Typically in these situations, an insurer who provides a defense will do so subject to a full reservation of rights not to pay any eventual judgment if the company is found liable, and even a reservation of rights to recapture defense costs. Although the company will have the right to select counsel of the company's choice at the insurer's expense (so-called Cumis counsel), the company's choices are often hampered by the insurer's right to limit fees to the rates which are actually paid by the insurer to attorneys retained by it in the defense of similar actions. Moreover, the insurer may appoint separate counsel in addition to the company's Cumis counsel, thus complicating control of the defense.

Control of the defense leads to control of any settlement and who ultimately pays -- the company or the insurance carrier. If there is no settlement, control of the defense impacts on the specific insurance-sensitive issues which are tried and how they are resolved -- for or against coverage. The ultimate outcome of the fraudulent concealment case, either by settlement or judgment, affects the strength of the company's position against the carrier in any subsequent suit by the carrier for reimbursement or a declaration of non-coverage, or by the company for insurance bad faith.

When faced with a serious fraudulent concealment suit, winning the long and difficult insurance battle may be just as important to the company as winning the lawsuit.

Mr. Kaiser is a partner in the Litigation Department of Mitchell, Silberberg & Knupp. Mr. Kaiser graduated magna cum laude and with honors in mathematics from UCLA in 1972, and graduated Order of the Coif from UCLA Law School in 1975. Mr. Kaiser specializes in civil litigation, and has represented employers in mass toxic tort litigation involving hundreds of employees suing for fraudulent concealment of injuries under Labor Code 3602(b)(2).