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Thou shalt not slander: Workplace insurance may not foot the bill.

Byline: Susan Massman

While Abraham Lincoln may have said, "Truth is generally the best vindication against slander," many also gain some satisfaction by filing a defamation suit.

When defamation occurs in the workplace, insurance may or may not foot the bill if the company is sued. Sometimes coverage hinges on whether the defamed claimant was considered an employee or if the defamation occurred in an employment situation.

For instance, in Peerless Indem. Ins. Co. v Moshe & Stimson LLP, 22 N.E. 3d 882 (Ind. App. 2014), an attorney sued her former law partner for defamation. Moshe and Stimson were a sister-brother law partnership, and after Moshe told Stimson that she intended to leave the firm, Stimson--among other unbrotherly things--began making negative statements about Moshe's integrity and competence, so she filed suit against him for defamation.

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Stimson made a claim under the firm's policy, which was issued by Peerless, for defense and indemnification. Peerless denied the claim, stating that the allegations in Moshe's complaint constituted employment-related practices and were excluded from coverage under the employment-related practices exclusion that included defamation. The exclusion applied "whether the insured may be liable as an employer or in any other capacity."

Stimson, though, argued that the exclusion did not apply because Moshe had been a partner at the firm, not an employee. He claimed that in order to be considered employment-related, defamation must meet two standards: (1) the author of the defamation must be the plaintiff's superior--defamation by a peer does not constitute employment-related defamation; and (2) the subject of the defamation must be the plaintiff's performance during the employment--an insult by a former supervisor does not constitute employment-related defamation. Since Stimson provided no citation or authority for these standards, the court did not adopt his reasoning.

The court said that "we need not determine in what capacity Sarah [Moshe] was employed by the firm. Instead, the issue is whether Justin's [Stimson's] alleged actions, particularly his alleged defamation of his sister, were 'employment-related.'"

Applying plain and ordinary definitions of "employment" and "related," the court concluded that Moshe's claims against her brother were related to her job: after she told him she would be leaving the firm, he began making accusations about her personal integrity and professional competence.

The court ruled, "The policy at issue was designed to protect the siblings in suits brought by third parties--it was not meant to protect one against the other in a suit between the two."

The court did not consider Moshe's employment status key to its finding, even though Stimson's arguments concerned whether his sister was an employee or a partner. Likewise, the court in Ruksznis, v. Argonaut Ins. Co., 774 F.3d 784 (1st Cir. 2014) faced similar arguments and came to the same conclusion.

Photo: gualtiero boffi/Shutterstock

The case of the town plumbing inspector

Frank Ruksznis was the appointed plumbing inspector for the town of Sangerville from 1993 until 2010. Each year he was reappointed for an additional one-year post. Ruksznis described himself as an independent contractor--he set his own hours, provided his own tools, and paid for his own expenses and schooling to update his license.

At a public meeting, Selectman Burgess made negative statements about Ruksznis and decisions he had made while serving as plumbing inspector. At a different meeting, Burgess took actions that caused Ruksznis to be removed from his position as plumbing inspector. Ruksznis filed an action asserting a claim of common law slander and received a judgment of $100,000, which he accepted. After the judgment was entered, Ruksznis brought action against Argonaut to recover for the slander count under the town's CGL policy.

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Argonaut stated that the CGL policy's employment-related practices exclusion applied, but Ruksznis claimed that the exclusion could not apply because he was an independent contractor and not a town employee.

The court, however, found that "the distinction between an employee and an independent contractor, critical in the context of collecting unemployment benefits and workers' compensation, is immaterial in the instant case." The court said that whether he considered himself an independent contractor or a municipal official, the ordinary meaning of "employment" (to hire or engage the services of someone) encompassed his relationship with the town. The court ruled that the defamation was an employment-related dispute and excluded by the CGL policy.

Photo: Oleg V. Ivanov/Shutterstock

Post-employment defamation

On the other hand, claims for post-employment defamation may net different results, such as in Owners Ins. Co. v. Clayton, 614 S.E.2d 611 (S.C. 2015), where the Supreme Court of South Carolina ruled that defamation against a former employee did not amount to an employment-related practice.

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Janette Clayton was the manager of the Lands Inn motel. She was fired for allegedly embezzling funds. After her termination, two individuals who called and asked for her were told that she had been fired for stealing funds. No criminal charges were pressed, and she filed suit against Lands Inn for malicious prosecution, slander and negligence. A jury awarded her $1.25 million.

Lands Inn was covered by a CGL policy issued by Owners Insurance Company. Owners defended the action under a reservation of rights, but filed a declaratory judgment suit stating that the allegations within the suits were excluded by the employment-related practices exclusion.

The court said that "in determining whether post-termination defamations such as the ones here fall within an ERP [employment-related practices] exclusion, courts generally inquire whether the statement was made in the context of employment, and whether the statement's content describes the employee's performance."

The court noted that while the substance of the statements regarding Clayton's termination were employment-related, the context was not. Lands Inn told the callers that Clayton had been fired and why, but the callers were not potential employers asking about her work performance, and the information was not told to other employees to explain Clayton's termination.

Thus, the court found that, because the employment context was not present, the employment-related practices exclusion did not apply. Owners was responsible for indemnifying Lands Inn.

As these cases demonstrate, being in any type of employment situation with the insured and suffering defamation can trigger the employment-related practices exclusion on the CGL form; however, the defamation must be in an employment context.

Susan Massmann, CPCU, is managing editor of electronic publications for the reference division of ALM, the parent company of PropertyCasualty360-National Underwriter. She may be reached at smassmann@alm.com.
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Publication:Property and Casualty 360
Date:Aug 21, 2015
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