SAN FRANCISCO – In a decision issued last Friday, the U.S. Court of Appeals for the Ninth Circuit upheld a trial court’s decision that the State Compensation Insurance Fund (the “State Fund”) does not have a duty to defend Cybernet Entertainment LLC, the parent company of Kink.com, in three state court actions filed against Cybernet under a workers’ compensation and employer’s liability insurance policy.

In November 2017, U.S. District Judge Yvonne Gonzalez Rogers held that the State Fund had no duty to defend Cybernet because “either (i) plaintiffs’ claims are exclusively governed by California’s workers’ compensation system or (ii) the claims which allege Cybernet intentionally caused damages pursuant to the Policy are barred thereunder.”

In reviewing the case, the three-judge appellate panel considered “whether two policy exclusions bar coverage under the Employer’s Liability portion of the Policy for the claims asserted in the State Court Actions.”

Under one of the exclusions examined by the court, “Exclusion 4,” the employer’s liability portion of the policy “does not extend to ‘any obligation imposed by a workers’ compensation… law,’” the appellate panel noted. “Workers’ compensation in California provides the exclusive remedy for any claims within the ‘compensation bargain’… A claim is outside of this bargain if it arises from employer conduct that ‘had a questionable relationship to employment, and [was] neither a risk, an incident, nor a normal part of’ employment.”

The other exclusion, “Exclusion 5,” provides that “coverage under the Employer’s Liability portion of the Policy does not extend to ‘damages or bodily injury intentionally caused or aggravated by’ Cybernet.”

Upon review, the appellate court found that both exclusions bar coverage of Cybernet under the policy.

“In the State Court Actions, the plaintiffs’ causes of action for negligence, negligence per se, breach of the implied covenant of good faith and fair dealing, negligent supervision, and negligent hiring and/or retention alleged, in essence, that Cybernet did not take adequate steps to protect its performers and prevent the spread of sexually transmitted diseases (STDs) and HIV during pornographic shoots, causing injury,” the appellate panel stated in its ruling. “The plaintiffs alleged that Cybernet did not provide adequate personal protective equipment, such as condoms, to performers; did not test certain performers; and otherwise violated California regulations meant to prevent the spread of STDs and HIV in pornographic shoots. We hold that the acts and injuries alleged in the foregoing causes of action fall within the compensation bargain because the gravamen of each is that Cybernet did not maintain a safe workplace. The remedy for such workplace-safety claims is workers’ compensation.”

While the panel found that there was one sense in which Exclusion 4 was inapplicable – because the “California’s workers’ compensation scheme does not preempt the state-court plaintiffs’ claims for intentional/fraudulent misrepresentation or conspiracy to commit fraud” – this fact is immaterial because “Exclusion 5 bars coverage for those claims.”

The panel observed that at trial, the plaintiffs alleged that “Cybernet intentionally misrepresented to plaintiffs that it had safety measures in place to protect them during shoots.”

“A performer induced to perform by a false representation that Cybernet had safety measures in place to protect performers could foreseeably contract an STD as a result of the false inducement,” the panel wrote. “And because the complaint alleged that the misrepresentation was intentional, Cybernet acted ‘with knowledge that damages were highly probable or substantially certain to result’… Exclusion 5 bars coverage as a consequence.”

Throughout the ruling, even when the panel found that California’s workers’ compensation scheme did not provide the exclusive remedy for the plaintiffs’ claims, one of the two Exclusions barred coverage anyway.

For example, with respect to the claims of sexual battery against Cybernet by the state-court plaintiffs, the panel found that the “compensation bargain does not include sexual battery by an employer or its agents against an employee.”

“For this reason, California’s workers’ compensation scheme does not provide the exclusive remedy for the state-court plaintiffs’ battery claims and Exclusion 4 is inapplicable,” the panel wrote. “Nonetheless, Exclusion 5 bars coverages. Because the tort is one of ‘intentional sexual misconduct,’ courts have held that California Insurance Code § 533 bars coverage for such claims… so too does Policy Exclusion 5.”

Ultimately, the panel concluded that because “either Exclusion 4 or Exclusion 5 bars coverage under the Employer’s Liability portion of the Policy for each of the causes of action alleged against Cybernet in the State Court Actions, State Fund did not have a duty to defend Cybernet in those actions.”