Filed 10/4/13 Mid-Century Ins. Co. v. Zamora CA3
                                          NOT TO BE PUBLISHED
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.




           IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
                                     THIRD APPELLATE DISTRICT
                                                    (San Joaquin)
                                                            ----



MID-CENTURY INSURANCE COMPANY,                                                            C069644

                   Plaintiff, Cross-defendant and                       (Super. Ct. No. 39-2009-00222363-
                   Respondent,                                                      CU-IC-STK)

         v.

ROBERT ZAMORA et al.,

                   Defendants, Cross-complainants
                   and Appellants.




         In this action with cross-prayers for declaratory relief regarding the obligation of
plaintiff Mid-Century Insurance Company (Mid-Century) to defend eight defendant car
dealerships and their principal (to whom we will refer only collectively as defendants) in
an underlying action for wage/hour violations of state and federal law, the trial court
concluded potential coverage did not exist under Mid-Century‟s commercial general
liability policy—in particular, its “Employee Benefit Liability” (EBL) endorsement—and
therefore Mid-Century did not have any duty to defend defendants in the class action.

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The trial court concluded the wage/hour class action arises from the employment
practices of defendants and not the administration of employee benefit plans that the
endorsement covers. It accordingly entered judgment in October 2011 in favor of Mid-
Century (and against defendants on their cross-complaint), issuing a declaration to this
effect. Defendants filed a timely notice of appeal.1

       The gist of defendants‟ arguments on appeal rests on their characterization of their
alleged conduct in the underlying action as being deliberate but nonetheless negligent and
lacking any intent to injure the class. They claim this presents the possibility of coverage
under the EBL endorsement for acts of negligence, under well-settled law. This entirely
misses the point of the trial court‟s ruling that the employment practice of wage-setting,
even if it has a proportionate effect on the preset calculation of benefits based on the rate
of wages, is not negligent conduct having any nexus to the administration of employee
benefit plans.2 We therefore will affirm the judgment.

                  FACTUAL AND PROCEDURAL BACKGROUND

       The parties submitted this matter to the trial court on stipulated facts and exhibits.
We draw our facts from this source.




1 Preparation of the record and briefing thereafter took 16 months.

2 Indeed, defendants do not even address the question of whether this interpretation of
the endorsement by the trial court is correct until their reply brief, which forfeits the issue
entirely. (Sourcecorp, Inc. v. Shill (2012) 206 Cal.App.4th 1054, 1061, fn. 7.) The fact
that we exercise de novo review does not mean that the trial court is “ „a potted plant‟ ” to
be disregarded. (Claudio v. Regents of the University of California (2005)
134 Cal.App.4th 224, 230.) Even in their reply brief, defendants do not address the trial
court‟s ruling that the conduct alleged in the underlying class action does not have any
nexus with benefit administration. They have consequently conceded that their
challenged actions regarding the wages of their mechanics were not negligent conduct
with any nexus to the benefit administration.


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       This protracted litigation stems from these few words in the coverage section of
the EBL endorsement, which adds the following coverage to the main policy‟s general
liability coverage for property damage or bodily injury: “d. damages includes those
damages sustained by your[3] [prospective, current, or] former employee . . . caused by
your negligent act or omission, or [¶] e. those damages caused by any other person for
whose acts you are legally liable in the „administration‟ of your „Employee Benefit
Programs‟ as defined below.” The covered benefit programs are group life and health
insurance; profit sharing, pension, and stock subscription plans; workers‟ compensation,
unemployment insurance, social security, and disability; and travel, savings or vacation
plans. The policy definition of administration includes counseling employees about the
plans; interpreting the plans; maintaining plan records; and processing plan enrollments,
terminations, and cancellation.

       Mid-Century issued identical commercial general liability policies to defendants,
all of which included the EBL endorsement quoted above. The portion of the premium
allocated for general liability with EBL coverage was about 2 percent of the total
premium.

       In March 2008, Jose Ontiveros filed the underlying complaint in federal court.4
As summarized in Mid-Century‟s brief, the most recent pleading alleges defendants did


3 Id est, the named insured defendants.

4 Plaintiff Ontiveros filed two subsequent amended pleadings in June and November
2008. After defendants answered, the federal court granted stays of the action for
mediation, an indefinite stay at the request of the parties from July 2010 to July 2012
pending trial in the present matter, and has recently stayed the action in April 2013
pending the appeal of a defendant from its order refusing to compel individual arbitration.
While the matter is stayed pending the federal appeal, the federal trial court has taken a
motion for class certification off calendar. (Ontiveros v. Zamora (E.D.Cal. Apr. 25,
2013, No. Civ. S-08-567 LKK/DAD) 2013 WL 1785891, *1, *7, 2013 U.S.Dist. Lexis
59621.)


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not comply with multiple Labor Code sections, wage orders, and Department of Labor
Standards and Enforcement regulations, which resulted in an underpayment of wages for
all hours worked and misstatements in the records of these hours and wages. The
pleading also alleges that the proposed class suffered damage in the form of reduced
social security benefits as a result of these violations. Although put on notice of these
improprieties, defendants refused to remedy them. To quote an order of the federal trial
court in the underlying action, “The gravamen of plaintiff‟s complaint is that auto
mechanics employed by defendant[s] . . . are paid on what is essentially a piece[-]rate
system, one that leaves them unpaid for time when they are not working on a repair job,
but are still required to be at work.” (Ontiveros v. Zamora (E.D.Cal. Feb. 14, 2013,
No. Civ. S-08-567 LKK/DAD) 2013 WL 593403, *1, 2013 U.S.Dist. Lexis 20408 [order
denying motion to compel individual arbitration].) In support of the pending motion for
class certification, six declarants all averred that their claims against defendants were
based solely on a failure to pay them for all the hours that they worked.

       Defendants submitted a copy of the complaint to their insurance broker in March
2008 by copying him on a forwarded e-mail from their attorney, requesting that it “be
submitted to insurance companies for the company” (without further specification of a
particular company). The broker submitted a claim to Gotham Insurance Company, with
whom defendants had a policy for employment practices liability. When defendants
inquired about the status of the claim in May 2008, the broker assured them he would
look into the matter, reminding them the claim was filed with Gotham under the
employment practices policy and not Mid-Century. Gotham denied coverage in August
2008 on the ground that wage issues come within an exclusion of coverage. In April
2009, the broker informed defendants that he would submit a claim to Mid-Century “to
see if they can find anything in our policy language that would at least trigger defense.”
(Italics added.) Mid-Century sent a receipt acknowledging the claim in April 2009.



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       Mid-Century accepted defense of the putative class action with a reservation of
rights in July 2009, informing defendants it would promptly be filing this action because
it did not believe the underlying action involved any conduct coming within the coverage
of the policy or the EBL endorsement; as it construed the pleadings, the conduct was
intentional rather than negligent and did not involve the administration of benefits.
Within two weeks, Mid-Century filed the present action. Defendants cross-complained
in August 2009. Before trial, defendants unsuccessfully moved to stay the present action
pending the outcome of the underlying matter, and for summary adjudication of their
right to independent counsel in the underlying action (Civ. Code,§ 2860) and of Mid-
Century‟s duty to defend.

       In their arguments on submission of the matter to the trial court, the parties
demonstrated their divergent views of the “duck-rabbit” (Perry v. Robertson (1988)
201 Cal.App.3d 333, 335, fn. 1) that the EBL endorsement represents to them. Mid-
Century asserted, “[A]s the Court knows, . . . the [EBL] Endorsement [attaches only]
where there is a negligent act or a negligent omission by the insure[d] that . . . causes
some kind of miscalculation of the employee benefits that are provided to the particular
employees in this case. And that is not the case here. [¶] There isn‟t any allegation of
miscalculation”; “the coverage promise here is limited to negligent acts and negligent
omission in the calculations of the employee benefits, essentially. And there‟s no
question that that two[-]page endorsement . . . is intended to apply to anything other than
employee benefits. [¶] That is the caption at the top of the document” (italics added);
and “[it] talk[s] about both the Defendant and the administrators so that . . . if [the latter]
make some mistake and . . . the employer gets sued because it didn‟t provide the
employee with the right calculation of their employee benefits, the employer is protected
for that kind of claim. So it‟s a very narrow coverage for negligent acts and negligent




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omissions in the employee benefits area and the administration of these employees‟
benefits plan.”

       Defendants, on the other hand, focused on the “or” between the two clauses in the
EBL endorsement to argue that under the first clause “Mid-Century agreed to defend and
indemnify suits where . . . damages include those damages sustained by an employee and
caused by a negligent act or omission. . . . [N]o causal nexus to Employee Benefit
Program.” Defendants then devoted the rest of their argument to the point that “the
question is not whether the Defendants deliberately made a decision to adopt a certain
pay plan, but the question is whether the decision was made negligently or with intent to
harm the Ontiveros‟ plaintiffs,” arguing the underlying complaint included conduct
coming within the former and thus within the coverage as defendants framed it.

       As noted above, the trial court interpreted the EBL endorsement in the same
manner as Mid-Century, finding indicia supporting this interpretation in the small amount
of premium allocated to general liability coverage carrying the EBL endorsement, the
availability of other insurance covering employment practices (even though, as we note,
this excluded this particular type of claim), and the conduct of the parties in looking
initially to this other insurance before tendering the claim to Mid-Century with the hope
that coverage existed. As the underlying action did not involve any conduct with a nexus
to the administration of employee benefit plans (a point, as we have noted, that
defendants do not contest on appeal), the court issued a declaration in favor of Mid-
Century and against defendants on the duties to defend and indemnify, and (in the
absence of any duty to defend) found that defendants were not entitled to independent
counsel.

                                      DISCUSSION

       To reiterate, defendants‟ arguments regarding whether their conduct can come
within coverage for negligent acts in the abstract (for which reason their briefing and oral

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argument aim their primary focus on Montrose Chemical Corp. v. Superior Court (1993)
6 Cal.4th 287, 295 (Montrose)) are irrelevant if the EBL endorsement covers only
negligent acts with a nexus to administering employee benefits. Limiting our focus to
this issue, we find the trial court‟s adoption of this interpretation was correct and
consequently do not reach the remainder of defendants‟ arguments (including their
contentions regarding the date on which the duty to defend arose or their entitlement to
independent counsel).

       “The construction of the policy before us is one of law because it is based on
stipulated evidence and the terms of the insurance contract. We thus are not bound by
the trial court‟s interpretation” and review the matter de novo. (Royal Globe Ins. Co. v.
Whitaker (1986) 181 Cal.App.3d 532, 536, italics added.) The insured bears the initial
burden of demonstrating that a claim comes within the scope of a policy‟s coverage.
(Id. at p. 537.) If an insured demonstrates that there is a potentially covered claim in
an action against the insured, whether based on the allegations themselves or extrinsic
evidence, then the insurer has a duty to defend the action in its entirety, from the date of
the tender of the claim to the conclusion of the action (or a point at which facts determine
that coverage does not exist), even if ultimately its duty to indemnify is not triggered.
(Buss v. Superior Court (1997) 16 Cal.4th 35, 49; Montrose, supra, 6 Cal.4th at p. 295.)
It is because insureds consider the duty to defend to be of at least equal importance as
indemnification that we are “solicitous” of this expectation. (Montrose, at pp. 295-296.)
An insurer, on the other hand, must affirmatively demonstrate the absence of any
potential for coverage in order to prevail. (Id. at p. 300.)

       To the extent defendants address the issue of interpreting the EBL endorsement in
their briefing at all, it again rests on the use of “or” between the two coverage clauses (as
they argued below). They suggest this disjunctive posits a distinction between “damages




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. . . caused by [the insureds‟] negligent act or omission” and damages for which insureds
are vicariously liable in the administration of employee benefits.

       We do not dispute that the syntax of this provision is not the best. But, as Mid-
Century properly points out, the provision appears in an endorsement, the title and
subject of which is administering employee benefits. As a result, it is unreasonable as
a matter of law to interpret the first clause as relating to negligence unconnected with
administering employee benefits, regardless of how poorly the language of the EBL
endorsement articulates this. Its cumbersome structure in context accordingly promises
to provide EBL coverage for “damages . . . caused by [the insured‟s] negligen[ce] . . . or
. . . damages caused by any other person for whose acts [the insured is] legally liable,”
the “or” thus intending to demonstrate coverage for both types of liability (direct and
vicarious), not two types of unrelated conduct (negligence in the abstract, and damages
incurred in the course of benefit administration). No matter how many times defendants
insist that negligence with a nexus to benefit administration is unnecessary, they do not
give any cogent basis for reading the first clause more broadly than the endorsement in
which it appears.

       The parties cite only two cases involving analogous language from federal
authority. Although the issue in Florists’ Mut. Ins. Co. v. Ludy Greenhouse Mfg. Corp.
(S.D. Ohio 2007) 521 F.Supp.2d 661 is otherwise inapposite, it indicates another reason
why policies might commonly contain a disjunctive between an insured and those for
whom the insured has vicarious liability. Under the better-worded policy at issue in that
case, the insurer agreed to “ „pay those sums that the insured becomes legally obligated to
pay as damages because of any negligent act . . . of the insured, or of any other person for
whose acts the insured is legally liable. The negligent act . . . must be committed in the
“administration” of your “employee benefit program.” ‟ ” (Id. at p. 671, underscoring
omitted.) Because an exclusion in that policy for malicious or criminal conduct applied


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only to the insured and not to those for whom the insured was vicariously liable,5 the
federal trial court found coverage for malfeasance on the part of a third party
administrator. (Id. at p. 674.) Thus, the disjunctive exists not only to expressly embrace
vicarious as well as direct liability, but to distinguish exclusions between the two.

       Of some relevance on the issue that defendants have abandoned, Gulf Resources &
Chemical Corp. v. Gavine (D. Idaho 1991) 763 F.Supp. 1073 involved another better-
phrased policy for fiduciary violations in administering benefit plans that covered
“ „claims [ . . . ] made against the Insureds . . . for an act [ . . . ] committed [ . . . ] by the
Insureds, or by any person for whom the Insureds are legally responsible, in the
management or administration of the Employee Benefit Plan . . . .‟ ” (Id. at p. 1076,
italics omitted.) The court concluded that the employer‟s “ „business decision‟ ” to end
medical benefits for retirees was not a decision involving the administration of the plan,
because it related to the interests in managing the business and not the plan, which is akin
to the choice about wages in the present case. (Id. at p. 1082.)

       As the treatment in these cases indicate, it is not reasonable merely on the basis of
an “or” between the clauses to import negligence coverage utterly unrelated to the subject
of the EBL endorsement, and we have a basis for agreeing with the trial court that wage
decisions do not involve the administration of benefit plans for employees. We thus
agree with the trial court‟s interpretation of the EBL endorsement, based solely on the
language of the EBL endorsement. As a result, we do not need to respond to the
conclusory arguments defendants raise regarding the propriety of inferring this result
from either the small amount of premium attributable to coverage (e.g., Fidelity &
Deposit Co. v. Charter Oak Fire Ins. Co. (1998) 66 Cal.App.4th 1080, 1086 [small



5 The policy at bar has a similar exclusion, which applies to both the insured and others
involved in benefit administration.


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amount of premium indicates that insured is limited to particular business entity and not
all ventures of parent company]), or the conduct of the parties in seeking coverage under
the policy at bar only as a last resort.

                                           DISPOSITION

       The judgment is affirmed. Plaintiff and Cross-defendant Mid-Century shall
recover its costs of appeal. (Cal. Rules of Court, rule 8.278(a)(1), (2).)




                                                               BUTZ                 , J.



We concur:



             RAYE                    , P. J.



             HULL                    , J.




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