In Career Systems Development Corp. v. American Home Assurance Co., No. C 10-2679 BZ, 2011 U.S. Dist. LEXIS 103999 (N.D. Cal. Sept. 14, 2011), Magistrate Judge Zimmerman granted an insured summary judgment finding that the insurer had a duty to defend based on the facts pled in the underlying litigation.  This opinion is a reminder to policyholders that, under California law, an insurer’s duty to defend is determined based on the facts alleged in the complaint, not the causes of action that the plaintiff has chosen to plead.  In other words, for a duty to defend to exist, underlying complaints need not specifically allege a covered cause of action, so long as the facts alleged within the complaint could give rise to a potentially covered claim.

The insured in this case, Career Systems Development Corporation (“Career Systems”), sought coverage from its insurer, American Home Assurance Company (“American”), for two underlying lawsuits brought against Career Systems by two terminated independent contractors.  The policy provided Career Systems “with coverage for personal and advertising injury arising from ‘oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, productions or services,’ (i.e., coverage for defamation).”

One of the terminated contractors alleged that Career Systems made “false and damaging statements concerning” the contractor’s termination which caused the contractor “harm to his professional reputation.”  The other contractor alleged that a Career Systems employee subjected the contractor “to a series of harassing comments and actions that harmed her reputation, such as accusing her of working outside of her contract without permission, improperly billing her time, and telling a co-worker that she was having a nervous breakdown due to the harassment.”  Neither complaint alleged a cause of action for defamation, or all the elements of a claim for defamation.

Although American initially defended both lawsuits, it ultimately withdrew its defense, forcing Career Systems to defend itself.  After Career Systems prevailed in both of the underlying suits, it brought suit against American.  Both Career Systems and American moved for summary judgment.  American argued that “it did not have a duty to defend [Career Systems] because both underlying complaints failed to allege a covered claim under the insurance policy.”

Magistrate Judge Zimmerman rejected American’s argument and ruled that, under California law, the contractors’ allegations “triggered [American’s] duty to defend because they created the potential that both claimants could have recovered for the alleged defamatory statements made by” Career Systems.  The Court noted that, contrary to American’s “argument, the duty to defend in California does not require the underlying lawsuits to specifically allege” a covered cause of action.  Therefore, the fact that neither complaint specifically alleged a cause of action for defamation or alleged all of the elements of a claim for defamation was not determinative of American’s duty to defend.  Because the factual allegations created a potential that a covered claim for defamation would be asserted, American had a duty to defend.

Although not breaking any new ground, the Career Services opinion is a reminder to policyholders that they might have coverage when they do not realize it.  As shown, coverage exists where pled facts create the potential that a covered claim will be asserted against the insured, even if a covered cause of action has not yet been pled.