Public Entity That Defends Employee under Reservation of Rights As to Fraud, Corruption or Malice May Decline to Indemnify Judgment Based on Employee's Malice

In Chang v. County of Los Angeles, published July 1, 2016, the Second District Court of Appeal, Division 5, reversed summary adjudication and judgment granted in favor of employees suing the county for indemnity.  The employees were sued for alleged assault and battery.  The county entered into a written reservation of rights agreement with each employee.  The agreements expressly reserved the county's right to obtain indemnification from the employees if the county paid the judgments against them unless the county failed to establish that the employee acted or failed to act because of actual fraud, corruption or actual malice.  The employees were found liable and punitive damages were assessed against them.  The county declined to pay the judgment against them.  The employees sued the county under Government Code sections 814 and 825 for indemnification of the non-punitive economic damages awards against them.  The county argued that it was not obligated to indemnify the employees because the jury had found that the employees acted with malice.  The trial court concluded that the county was obligated to indemnify the employees.

The appellate court interpreted Government Code section 825.2 as relieving the county of any statutory obligation to indemnify the employees.  Section 825.2 provides that if an employee is defended under a reservation of rights, the employee pays the judgment, and the employee then seeks indemnification from the employer public entity, the employee may recover only if the public entity fails to establish that the employee acted out of actual fraud, corruption, or actual malice.  The court interpreted the statute to provide the entity a defense from indemnification if a public employee seeks indemnification, the employee acted with actual malice, and the entity reserved its rights regarding actual malice.  The county's reservation of rights to seek indemnity from the employee if the employee acted with actual malice was a sufficient reservation to permit the county to invoke section 825.2 as a complete defense to indemnification.