Sex, lies and indemnity: unsavory actions on the job bear insurance implications for both the perpetrator and his employer.

The insurance world often seems to mirror the world at large. Take, for example, one of the salacious sideshows of the recent midterm elections involving a Congressman's transmission of inappropriate e-mails to a young intern. Coincidentally, the insurance implications of various sordid misdeeds--including inappropriate text messages--was reviewed in a Sept. 6 decision from a federal court in Virginia.

The insurer in this case was State Farm Fire and Casualty Co. (I've identified the case by only the insurer because the allegations against the other party were troubling).

In this case, a female manager brought a sexual harassment suit against one of her supervisors and the company employing them both. This supervisor had allegedly harassed the employee through jokes, insults, unwelcome flirtations, and invitations to both a closed amusement park and an overnight trip. In addition, the supervisor allegedly sent the manager inappropriate text messages--as many as 39 lewd messages in one day.

The employer then brought a suit against its insurer demanding defense and indemnification.

The insurance coverage suit begs two very basic questions: First, how does this conduct still happen? I would think that everyone in the world knows this type of behavior is bad, and the repercussions are even worse. Thirty-nine lewd text messages--what was this supervisor thinking (or not thinking)?

The second overriding question is, of course, insurance coverage. Is this covered? The coverage was sought under "Business Policies" rather than a policy that was specifically devoted to workplace claims.

The policies provided that the insurer will pay "those sums that the insured becomes legally obligated to pay as damages because of bodily injury." The policies also provided, through exclusions that were very similar though not identical, that coverage does not apply to claims for bodily injury to "any employee of the insured arising out of and in the course of employment."

The employer argued that the claims were for bodily injury and thus covered, while the insurer argued that the claims were subject to the employment exclusion.

The employer made three arguments challenging the exclusion.

First, the employer argued the insurance policy exclusion had language similar to the Virginia workers' compensation statute, which covers claims "arising out of and in the course of the employment." This statutory language has been interpreted as not applying to sexual assault. The employer argued since the language in the statute does not include sexual assault, the similar language in the policy must not exclude sexual assault.

The court, however, pointed to Virginia precedents holding that statutory definitions in the statute should not be applied to terms in insurance policies "unless the policy provides by reference to the specific state that the statutory definition is intended to be applied." The statute does not control the insurance contract. The court, therefore, held that it would apply the "plain meaning" of the exclusion, and the court rejected the effort to limit the exclusion.

Second, the employer argued that the phrase "out of and in the course of" employment meant that the exclusion only barred coverage for workers' compensation claims. The court noted that the exclusion expressly addressed, among other things, the "refusal to employ." Since refusal claims could not possibly involve workers' compensation claims, the workers' compensation interpretation could not be right.

Third, the employer argued that the language was ambiguous. The court, however, said it did not find the language reasonably susceptible to the employer's interpretation.

Rejecting all of the employer's arguments, the court cited several cases that had applied similar exclusions to bar coverage for workplace harassment, and held that this exclusion applied. The claims were not covered.

This case illustrates some important lessons.

First, if you want coverage for claims by employees, purchase coverage specifically for such claims. This coverage is available.

Second, courts enforce the specific exclusions for employees' claims. Courts' willingness to enforce employment exclusions may well be strengthened because of point one--courts know that coverage for employment claims is available. Under these circumstances, courts seem less willing to rewrite policies to add in a coverage component that the insured declined to buy.

Alan S. Rutkin, a Best's Review columnist, is a partner at Rivkin Radler LLP, Uniondale, N.Y. He may be reached at [e-mail].