Infinet Marketing Services v. American Marketing Insurance Services
(2007) __ Cal.App.4th ___, 07 C.D.O.S. 4489

Labor Code Section 3602 Does Not Confer Third Party Beneficiary Status On Broker Under Workers Compensation Policy Issued To Employee Leasing Company

The California Court of Appeal determined that an insurance broker that introduced a company to an employee leasing company was not a third party beneficiary of a workers compensation insurance policy issued to the employee leasing company because, as a matter of law, the broker could not demonstrate the policy was expressly intended for its benefit.

The underlying claims giving rise to the coverage dispute involved three companies (the "client companies") that allegedly leased workers from either Omne Staffing Services, Inc. or Omne Staff Leasing Services, Inc. (collectively "Omne"), an employee leasing company, pursuant to an agreement by which Omne was to obtain worker's compensation insurance covering the leased workers. In 2002, the predecessor of American Motorist Insurance Company (AMICO) issued a worker's compensation and employer's liability policy (hereafter, "the policy") to Omne. The policy required AMICO to pay all worker's compensation benefits and to defend the named insured in any proceeding against it for those benefits. Although the client companies paid Omne fees which included the client companies' worker's compensation premiums, Omne failed to obtain the promised worker's compensation insurance coverage. Omne was the only named insured on the policy, and the policy contained no provision for coverage of alternate or additional employers.

The workers leased by the client companies were injured, but were denied worker's compensation coverage under the policy. After determining Omne had not procured worker's compensation insurance covering their leased employees, the client companies sued Infinet Marketing Services, Inc. (Infinet), an independent broker that introduced the client companies to Omne. In general, the complaints alleged Infinet agreed and was obligated to provide workers compensation coverage for the leased workers but failed to do so. Omne was not named as a defendant; it appeared to be in bankruptcy, its assets had previously been seized by the federal government and criminal proceedings had been commenced against it.

Infinet tendered its defense to AMICO contending it was a third party beneficiary of the worker's compensation policy issued to Omne. After AMICO refused a defense, Infinet cross-complained against AMICO claiming AMICO breached the policy's duty to defend and implied covenant of good faith and fair dealing by refusing to defend and indemnify Infinet on the underlying client companies' complaints and in various worker's compensation proceedings. AMICO asserted there was no potential for coverage for Infinet because Infinet was not a named insured on the policy and Infinet failed to establish it was an intended third party beneficiary.

The Court of Appeal agreed with AMICO. The AMICO policy covered worker's compensation claims against Omne, the only "named insured" under the policy. There was no other language identifying additional insureds. The Court concluded AMICO had met its initial burden to establish there was no coverage for Infinet and the burden then shifted to Infinet to demonstrate the policy was expressly intended for its benefit. (Civ. Code, § 1559 ["[a] contract, made expressly for the benefit of a third person, may be enforced by him"].) Because Infinet could not show the policy was procured expressly for its benefit, or that it was a member of the class of persons for whose benefit the policy was procured, it could not qualify as a third party beneficiary of the policy or enforce the contract merely because it would receive some benefit from its performance. The Court also explained that it was not enough that a literal interpretation of the policy would result in a benefit to Infinet.

Infinet attempted to establish coverage by invoking California Labor Code section 3602, subdivision (d). California Labor Code section 3602(d) allows an employer that leases or borrows an employee from another employer to fulfill its statutory obligations to obtain worker's compensation insurance by contracting with the other employer for the other employer to obtain such coverage. However, section 3602(d) requires a valid and enforceable agreement with the other employer under which the other employer agrees to obtain, and has, in fact, obtained workers' compensation coverage for those employees.

Infinet argued pursuant to this section, as a matter of law, it was in the class of person for whose benefit the insurance contract between Omne and AMICO was made. Infinet's argument was premised on the claim that it is or might be a co-general employer of the injured workers and that under section 3602(d), if an employee has more than one employer, if any one of those employers has worker's compensation insurance, then all employers, special or general, are deemed third party beneficiaries of the policy.

The Court disagreed. The Court explained that even if Infinet was acting as a co-general employer, it did not make Infinet an intended third party beneficiary of the AMICO policy by virtue of section 3602(d). Infinet had not established it satisfied any of the statute's requirements - it did not contract with Omne to lease employees, nor did it contract with Omne to obtain worker's compensation insurance to cover workers Infinet had borrowed. The Court distinguished Diamond Woodworks, Inc. v. Argonaut Inc. Co., 109 Cal.App.4th 1020 (2004), which held that section 3602(d) conferred third party beneficiary status as a matter of law on companies whose leased employees are injured, finding that nothing in Diamond Woodworks suggested all possible general employers are third party beneficiaries of the policy as a matter of law.

Because Infinet was neither a named insured nor a third party beneficiary of the AMICO policy, its cause of action for breach of the implied covenant of good faith and fair dealing also failed. The court reiterated the well-established rule that privity of contract with the insurer is essential to an implied covenant action against the insurer.

Likewise, Infinet's declaratory relief cause of action also failed. While Code of Civil Procedure section 1060 allows any person interested under a contract, including an intended beneficiary, to bring an action for a declaration of his or her rights, this rule did not extend to Infinet because it was not an intended beneficiary of the policy. Accordingly, it had no standing to assert any rights under the policy.

This opinion is not final. Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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