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Overcoming the intentional act exclusion and other coverage hurdles.

In wrongful discharge or discrimination claims, the employer's liability insurer may raise a variety of coverage defenses. These may include exclusions for intentional acts, for bodily injury or personal injury coverage, and for injury in the "course of employment" or by a coemployee or coinsured. If the insurer succeeds on any of these defenses and the employer's resources do not cover the resulting judgment, it is the injured plaintiff who suffers. Thus, it is important to understand why these defenses are inappropriate in many, employment cases.

Insurance coverage disputes involving individual claims for wrongful discharge and discrimination have increased markedly. In addition to commercial general liability (CGL) policies, employers may find coverage for employment claims available under m employment practices liability (EPL) policy or an employers' liability (EL) policy.

The EPL is specifically aimed at providing coverage for employment-related claims for a separate premium. But it is generally, available at lower policy limits than the standard CGL liability policy. Unlike the EPL, the EL policy is not specifically aimed at employment practices but acts as an extension to basic workers' compensation coverage. The policy protects the employer against liability from traditional physical injury torts that may be brought by an employee.

EL policies are often combined with workers, compensation policies in a package. The language of a CGL or an EL permits a policyholder to claim coverage. An EL policy typically provides coverage for an "accident" arising out of, and in the course of, employment,(1) suggesting that coverage is available for unintended or "accidental" discrimination.

The language of many liability policies, however, only provides coverage for the defense of suits against the policyholder. Some courts have held that this language excludes the insurer from having to defend administrative claims.(2) Absent extremely clear policy, language and other indicia of party intent, this restriction on coverage is almost certainly erroneous.

The standard CGL was drafted by, the Insurance Services Office, an organization created by property and casualty insurers to draft policy language and collect underwriting data. The basic CGL has long provided defense and indemnity coverage for arbitration or other forms of dispute resolution. Under these circumstances, precluding coverage for administrative proceedings -- even when the policy only defends against suits -- is unfair to policyholders and abrogates coverage that was likely intended by the parties.

Conduct Unbecoming

In coverage litigation over discrimination claims, insurers typically argue that the employer's conduct brought an expected or intended loss or was otherwise nonfortuitous and uninsurable on public policy grounds. Determining whether an insurer had a duty to defend requires examining the specific allegations of the underlying claim. Whether the insurer has a duty to indemnify win depend on the actual facts established at trial.

Courts finding for insurers in coverage disputes have spoken too broadly in suggesting that employment claims routinely fall within certain exclusions. Even if policies are interpreted in the manner insurers suggest, the decision should turn on the content of the complaint and the underlying facts of the dispute.

For example, a typical case alleging discrimination may involve

1. legitimate employer conduct,

2. negligent or even stupid (but not discriminatory) personnel actions,

3. blatant racist or sexist conduct by the employer or its agents,

4. subconscious racism or sexism, or

5. employer action based on business regulations that are facially neutral.

One scenario might involve a complaint against ail employer with a hiring preference for graduates of an academy that is racially biased in its operations. Does the intentional act exclusion apply? That depends on which of the five reasons given above explains the adverse employment decision, not the mere presence of the word "discrimination" in the complaint.

In fact, only, one of the five reasons that arc cited above would likely trigger the exclusion blatant discrimination. The exclusion focuses on whether the loss not the triggering event) is "expected or intended from the standpoint of the Insured." Manx, courts have found this defense persuasive.(3) Others have rejected it.(4)

In addition, a number of courts have found that claims of psychological injury do not satisfy the bodily injury requirement.(5) Others have found that these damages, if proved, are sufficient to trigger coverage." When emotional or mental injury is convincingly demonstrated, accompanying physical injury should not be required in order to satisfy the bodily injury requirement.

These latter court cases present the correct view: "Bodily injury" under a commercial general liability policy should not require physical or tangible injury. Depression or mental anguish induced by an employer's mistreatment can cause substantial injury to the employee even if obvious physical manifestations are not present.

Some courts have taken a middle view. They permit defense coverage so long as further adjudication holds the possibility that the claimant mill prove physical as well as mental injury.(8) Other courts favor case-by-case analysis over a rule.(9) Case law appears to have uniformly adopted the view that lost wages or benefits do not constitute property damage under the standard CGL policy.(10)

These insurers also may claim that coverage is barred when the policy has a course-of-employment exclusion. This bars coverage for bodily injury to an employee of the insured arising out of and in the course of employment by the insured ... regardless of whether the insured may be liable as an employer or in any other capacity."(11)

Some decisions have invoked this exclusion to deny coverage for wrongful discharge and discrimination claims.(12) Insurers also may argue against coverage by asserting that disgruntled employees are coinsureds under the policy and that suits between insureds are beyond the scope of third-party commercial general liability coverage.

Despite the success of these defenses in courtrooms, neither the course-of-employment nor coinsured exception seems to apply in employment claims. The course-of-employment exclusion was clearly intended to exempt workers' compensation claims from CGL coverage but not to bar other types of claims.

Indeed, many discharged workers incur injuries from termination -- not from employment. Injuries claimed -- particularly by harassment plaintiffs -- often stem from personality, clashes, stereotyping, and unwanted sexual overtures rather than from actual work performed by the employee.

Discrimination claims by unsuccessful job applicants clearly he outside this exclusion. Applicants are not employees, so their injuries are related to whatever barriers are keeping them from being hired.

Nor does the coinsured exclusion apply. Employees acting within the scope of their employment are usually insureds for purposes of liability claims brought by, outsiders. But when an employee is making the claim, rather than operating as an instrument of vicarious liability against the employer, the exclusion's purpose of preventing collusion between insureds is not served.

Also, the exception for suits by a coinsured or coemployee does not properly apply to most employment claims. Why? Because these claims grow out of a legitimate grievance by a former employee and are not the result of collusion between the employer and employee. Even the course-of-employment exclusion may be inapt for some claims in which a worker alleges discrimination that results from something that is beyond a workplace incident.

Intentional Acts?

Courts apply the intentional act exclusion differently depending on whether the exclusion is assessed according to an objective or subjective standard.(13) Under the objective test, courts ask whether a reasonable person or entity in the policyholder's position would have been practically certain that loss would befall the victim. Under the subjective test, courts ask whether the actual policyholder was aware that the resulting injury was likely to occur.

The subjective test is preferable. As long as the policyholder does not actively bring about the loss or know of its certainty, coverage should apply. Any lower standard penalizes the policyholder for negligence because an entity is negligent when it causes reasonably foreseeable damage. Barring coverage for this type of liability would be absurd since liability insurance is bought to protect from the legal consequences of negligence.

Although an employer knows that adverse job action will not be pleasant for the employee, this knowledge alone does not amount to an intention to harm the employee. The adverse job action often stems from some other motivations, including cutting costs or improving business performance.

The intentional act exclusion must be harmonized with other legal factors, including the employment-at-will doctrine, which provides that businesses may ordinarily fire workers for any reason. This prerogative would be gutted if the exclusion were applied too broadly to preclude coverage for employment claims. When the adverse employment decision is not discharge but failure to promote or a similar setback, it makes even less sense to think that the employer specifically intended to hurt the employee.(14)

When applying the intentional act or other exclusions to employment claims, courts have differed markedly on questions of coverage. Vienna Family Medical Associates, Inc. v. Allstate Insurance Co.(15) illustrates the tensions in this area effectively. The majority and the dissent diverge on the issue of coverage.

The case involved a former office manager who alleged that her doctor employers had wrongfully discharged her for refusing to provide a taped statement about a dissident employee. She sued in state court, alleging harassment, discrimination, and constructive discharge (she was replaced while on sick leave for stress over the incident). The employer settled for $30,000. But the liability insurer, which had rejected a duty to defend, refused to indemnify the employer.

The policy provided for coverage when the policyholder was obligated to pay damages arising out of an accidental event." According to standard intentional act and occurrence language, an accidental event "means an accident, including continuous and repeated exposure to substantially the same conditions, resulting in bodily injury" that was not "intended or expected by any persons insured, except for the use of reasonable force to protect persons or property."

The court saw the question as "whether the commingled allegations of negligent and intentional acts [by the insured] qualify as an accidental event."(16) Citing state law that had rejected coverage for claims of sexual harassment or battery of students by teachers, the court viewed the negligence pleading as a "transparent attempt" to create coverage because the claim was premised on the defendant's intentional conduct, which created a hostile workplace.

In dissent, Judge J. Harvie Wilkinson took issue with the majority's characterization of the complaint and underlying events. He emphasized different aspects of insurance law doctrine to advance his argument that the insurer owed the policyholder a defense.

In construing the scope of that policy,

we must interpret any ambiguities in

favor of the insured and any exclusions

narrowly against the insurer.

Injuries that are negligently

inflicted [as alleged repeatedly in plaintiff's

complaint] are not "intended or

expected" and fall within the definition

of an accident" under the policy.

In deciding otherwise, the majority

picks apart the plaintiff's claims and

determines that they ultimately allege

intentional conduct. Such conclusions

cannot be drawn from the face of this

Moreover, a complaint by its very

nature will characterize the defendants'

conduct in the least favorable light.

... After reviewing the evidence,

however, a jury could well find that the

injuries were not intentionally inflicted.

[This is] a far cry from ... direct

sexual advances by the employer].(17)

Vienna Family Medical charts the different judicial approaches to employment claim coverage. Wilkinson's dissent is persuasive and serves as a yardstick for assessing other employment claims.

For example, circumstances in the case suggest shabby treatment of the plaintiff if her allegations arc borne out. But as in most cases, there are probably two sides to the story.

Separating the insensitive or negligent from the intentional attacks or vendettas seldom can be decided at the pleading stage. Personnel management is always a sensitive aspect of business operation. Aggressive supervision of employees can easily lead to misunderstanding by the employee or overstepping by the policyholder or its agents. When this happens, the essential purpose of business liability insurance is undermined if coverage -- at least of defense costs -- is not provided.

Courts rejecting coverage often appear to have forgotten the distinction between the duty to defend and the duty to indemnify. It is hornbook law that an insurer's duty to defend is broader than its duty to indemnify, just as the duty to defend is determined by the allegations of a plaintiff's complaint, not by the court's notions of public policy or even its sense of revulsion regarding behavior by the policyholder or its agents.(18)

Accurately assessing the facts in the case is usually difficult until discovery, and perhaps trial, is completed. As Justice Oliver Wendell Holmes remarked, "Even a dog distinguishes being stumbled over and being kicked."(19)

If the case settles short of formal fact finding -- as with Vienna Family Medical -- the insurer will ordinarily be responsible for indemnification up to the settlement amount if the claim is within coverage as framed by the claimant and the settlement is reasonable. When the question of coverage is relatively close, as it is in many employment claims, insurers are understandably concerned about deals between the policyholder and the claimant that are designed to foist the financial burden on the insurer.

But insurers who fail to shoulder their defense obligations cry crocodile tears if they complain when the parties settle and indemnity is sought from the insurer. When an insurer wishes to avoid being whipsawed, it need only exercise its contractual right to control defense of the matter. When an insurer is cocksure about its lack of a defense obligation, it necessarily assumes the risk of indemnity liability for reasonable settlements when a court disagrees about the duty to defend.(20)

It is tempting to suggest that denying coverage for wrongful discharge and discrimination claims is analogous to denying coverage for sexual assault and child molestation claims because all these claims are based on the insured's alleged voluntary or "intentional" conduct. But employment matters differ from these other causes of policyholder liability.(21) And concerns that coverage encourages intentional wrongdoing are probably overstated, at least for the purposes of job discrimination claims.(22)

Many adverse employment decisions result from circumstances unrelated to an employer's understanding of potential impact. For example, courts and regulators have often found express disparate impact discrimination cases to be within standard liability coverage.(23) There is also a concern that despite "intent" nomenclature in discrimination law, most discrimination is not consciously intentional but is disparate treatment based on stereotypes, appearances, or social connections rather than a desire to harm.(24)

Employers act through agents. Just because an employee has discriminated does not mean that the employee's intentionally harmful conduct will be attributed to the employer. But it is also true that many insurance policies, specifically exclude intentional acts committed by the employee at the direction of the employer.(25)

Although most insurance coverage litigation focuses on the bodily injury and property damage aspects of the commercial general liability policy, the personal injury section provides a potential source of coverage for employment claims. For example, an Idaho fire chief alleging wrongful demotion and subsequent mental anguish filed a claim under this section and collected a sizable judgment.(26)

However, the policy included in its definition of personal injury "mental anguish" and "mental injury," two terms normally missing from the Insurance Services Office personal injury language. The language usually addresses false arrest, malicious prosecution, wrongful eviction, defamation, and invasion of privacy. When the alleged discrimination is accompanied by defamatory statements or an arguable invasion of privacy, the policyholder may qualify for coverage(27) since the personal injury segment of the policy does not contain an intentional act exclusion.

A liability policy may specifically exempt employment claims.(28) Recently, insurers have taken to writing these exclusions into liability policies, but they have also offered special endorsements or separate policies for employment practices liability.(29)

A current CGL endorsement is designed to eliminate CGL coverage for employment claims. This exclusionary endorsement has been upheld against charges that it is unconscionable or otherwise violates public policy.(30) However, the availability of this exclusionary language suggests that other language in the standard CGL did not clearly exclude employment claims.

Although insurers have experienced considerable success in avoiding coverage for job claims, a closer analysis frequently will enable counsel to succeed in establishing coverage. The results of these efforts may prove vital in securing redress for wrongful discharge or job discrimination plaintiffs.

Jeffrey W. Stempel, a professor at Florida State University College of Law in Tallahassee, is the author of Interpretation of Insurance Contracts: Law and Strategy for Insurers and Policyholders (1994).


(1) See, e.g., Lumbermens Mut. Casualty Co. v. S-W Indus., Inc., B F.3d 970, 979, (6th Cir.), cert denied, 115 S. Ct. 190 (1994) (applying Ohio law), and the language of Commercial Union Insurance Company, Workers, Compensation and Employers Liability Insurance Policy WC 00 00 00 A (Aug. 1991).

(2) See, e.g., Campbell Soup Co. v. Liberty Mut. Ins. Co., 571 A.2d 1013, 1021 (N.J. Super. Ct. 1988), aff'd, 571 A.2d 969 (N.J. Super. Ct. App. Div. 1989), cert. denied, 584 A.2d 230 (N.J. 1990).

(3) See, e.g., Commercial Union Ins. Co., v. Sky, Inc., 810 F. Supp. 249 (W D. Ark. 1992) (sexual harassment); Sage Co. v. Insurance Co. of N. Am., 480 N.W.2d 695 (Minn. Ct. App. 1992) (wrongful discharge).

(4) See, e.g., Mutual Serv. Casualty Ins. Co. V. Coop, Inc., 699 F. Supp. 1438 (D. Mont. 1988) (wrongful discharge); Meadowbrook, Inc. v. Tower Ins. Co., 543 N.W.2d 418 (Minn. Ct. App. 1996), review granted, 1996 Minn. LEXIS 242 (Apr. 1, 1996) (sexual harassment).

(5) See, e.g., Aetna Casualty & Sur. Co. v. First Sec. Bank of Bozeman, 662 F. Supp. 1126 (D. Mont. 19878) (lost earning capacity and damage to reputation not covered in policy that requires tangible" property loss for coverage).

(6) See, e.g., EEOC v. Southern Publishing Co., Inc., 894 F.2d 785 (5th Cir. 1990) (applying Mississippi law, to a claim of embarrassment, humiliation, and emotional distress causing physical pain qualifies as bodily injury).

(7) See Lavanant v. General Accident Ins. Co. of Am., 595 N.E.2d 819 (N.Y. 1992) (purely emotional injury sustained by tenants from ceiling collapse covered under landlord's CGL). See also United Pac. Ins. Co. v. McGuire, 281 Cal. Rptr. 375 (Ct. App. 1991).

(8) See, e.g., Maine Bonding a Casualty, Co. v. Douglas Dynamics, Inc., 594 A.2d 1079 (Me. 1991).

(9) See, e.g., SL Indus., Inc. v. American Motorists Ins. Co., 607 A.2d 1266 (N.J. 1992).

(10) See, e.g., Lapeka, Inc. v. Security Nat'l Ins. Co., 814 F. Supp. 1540, 1549 (D. Kan. 1993); Coop Supply, Inc., 699 F. Supp. 1438, 1441-42.

(11) See, CL 701 (10-93) CG 21 47 10 93, Employment-Related Practices Exclusion, reprinted in Joseph P. Monteleone, Coverage Issues Under Commercial General Liability and Directors, and Officers, Liability Policies, 18 W NEW ENG. L. REV. 47, 69 (1996).

(12) See e.g., Old Republic Ins. Co. v. Comprehensive Health Care Assoc., Inc., 2 F.3d 105, 108 (5th Cir. 1993) (applying Texas law) (sexual harassment); Ottumwa Housing Auth. v. State Farm Casualty Co., 495 N.W.2d 723 (Iowa 1993) (sexual harassment).

(13) Compare Armstrong World Indus., Inc. v. Aetna Casualty, & Sur. Co., 52 Cal. Rptr. 2d 690 (Ct. App. 1996) (subjective test) and Stonewall Ins. Co. v. Asbestos Claims Management, 73 F.3d 1178, 1205, modified, 85 F.3d 49 (2d Cir. 1996) (subjective test), with Mottolo v. Fireman's Fund Ins. Co., 43 F.3d (1st Cir. 1995) (objective test). See also JEFFREY W. STEMPEL, INTERPRETATION OF INSURANCE CONTRACTS ch. 24 (1994 and Supp. 1996).

(14) See, e.g., Ranger Ins. Co. v. Bal Harbour Club, Inc., 549 So. 2 1005 (Fla. 1989) (public policy forbids coverage of "disparate treatment" discrimination claims on grounds that this is tantamount to insuring intentional acts). Some state statutes permit insuring these types of claims but limit the coverage under the circumstances. See, e.g., Coit Drapery Cleaners, Inc. v. Sequoia Ins. Co., 18 Cal. Rptr. 2d 692 (Ct. App. 1993). But see School Dist. for the City, of Royal Oak v. Continental Casualty Co., 912 F.2d 844 (6th Cir. 1990) (applying Ohio law), rev'd on other grounds sub nom. In re Grand Jury, 89-4-72, 932 F.2d 481, 487 (6th Cir. 1991) (rejecting notion that insurance encourages illegal behavior in violation of public policy).

(15) 78 F. 3d 580, 1996 U.S. App. LEXIS 3857 (Mar. 5, 1996) (applying West Virginia law). The Federal Reporter citation of Vienna Family Medical is only a notation of a summary reversal. This article examines the case in detail because it touches on an important coverage issue in depth.

(16) Id. at *7.

(17) Id. at *18-*19.

(18) See, e.g., Great Am. Ins. Co. v. Hartford Ins. Co., 571 A.2d 1013 (N.J. Super. Ct. 1988).

(19) OLIVER WENDELL HOLMES, THE COMMON LAW 3 (Mark DeWolfe Howe ed., 1881).

(20) See, e.g., Beckwith Mach. Co. v. Travelers Indem. Co., 638 F. Supp. 1179 (W.D. Pa. 1986); Miller v. Shugart, 316 N.W.2.d 729 (Minn. 1982).

(21) Many courts denying coverage for child molestation or sexual abuse have stated or suggested that the activity is inherently harmful and thus reflects injury expected or intended by the policyholder. See, e.g., J.C. Penney Casualty Ins. Co. v. M.K., 804 P.2d 689 (Cal. 1991).

(22) See Independent Sch. Dist. No. 697 v. St. Paul Fire & Marine Ins. Co., 515 N.W.2d (Minn. 1994).

(23) See, e.g., American Management Ass'n v. Atlantic Mut. Ins. Co., 641 N.Y.S.2d 8002 (Sup. Ct. 1996) (claims of "systematic attempt" to eliminate employee jobs through willful age discrimination by employer do not thwart the duty to defend and possible indemnification as complaint can be also read as asserting disparate impact or unintentional adverse employment decisions).

(24) See, e.g., Solo Cup Co. v. Federal Ins. Co., 619 F.2d 1178, 1187 (7th Cir. 1980) (applying Illinois law); Lapeka, Inc. v. Security Nat'l Ins. Co., 814 F. Supp. 15400 (D. Kan. 1993).

(25) See Clark-Peterson Co., Inc. v. Individual Ins. Assocs., Ltd., 492 N.W.2d 675 (Iowa 1992) (en banc).

(26) See City of Boise v. Planet Ins. Co., 878 P.2d 750, 752 (Idaho 1994).

(27) See, e.g., United States Fire Ins. Co. v. St. Paul Fire & Marine Ins. Co., 511 N.E.2d 127 *Ohio Ct. App. 1986). But see Jefferson-Pilot Fire & Casualty Ins. Co. v. Sunbelt Beer Distribs., 839 F. Supp. 376 (D.S.C. 1993).

(28) See, e.g., Jostens, Inc. v. Northfield Ins. Co., 527 N.W.2d 116 (Minn. Ct. App. 1995). The Jostens umbrella policy expressly disclaimed coverage for statutory discrimination violations if "committed by or with the insured's knowledge or consent." It is not at all clear what degree of top management involvement would trigger the exclusion.

(29) See New EPL Policy, BUS. INS., June 3, 1996, at 43.

(30) See, e.g., Old Republic Ins. Co. v. Comprehensive Health Care Assocs., Inc., 2 F.3d 105 (5th Cir. 1993) (applying Texas law).
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Author:Stempel, Jeffrey W.
Article Type:Cover Story
Date:Dec 1, 1996
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