EMPLOYMENT CORNER

Four police officers sued a California county (the “County”) and its sheriff’s department, alleging that the officers were retaliated against after they complained about workplace harassment and discrimination. The County tendered the complaint to its Employment Practices Liability Insurance carrier, who defended the case under a reservation of rights. After a jury found in favor of the officers and awarded several million dollars in damages, the carrier withdrew its defense, stating that Section 533 of the California Insurance Code (“Section 533”) obviated its indemnity obligation. The case ultimately settled, and the County filed suit against the insurance carrier alleging breach of contract and bad faith.

Section 533 provides that “[a]n insurer is not liable for a loss caused by the willful act of the insured.” Furthermore, Section 533 “is an implied exclusionary clause which by statute is to be read into all insurance policies.”

The County argued that it was merely vicariously liable for the willful acts of its employees, rather than directly liable. Therefore, the County asserted that Section 533 did not bar indemnity under the policy. Furthermore, the County argued that it was entitled to an exemption to Section 533 as a public employer. However, a Ninth Circuit Panel (the “Panel”) held that vicarious liability was not the actual basis of liability imposed upon the County according to the trial court record. In fact, the Panel noted that prior to trial in the underlying action, counsel for the County acknowledged that the County was “[t]he proper party defendant . . . rather than the Sacramento County Sheriff’s Department.” Lastly, the Panel stated that the question regarding the applicability of the statute to public employers was a question for the legislature. Accordingly, the Panel held that the carrier was not required to indemnify the County in this matter.

This dispute arose after California enacted a law (Assembly Bill 51, or “AB 51”) which prohibited an employer to require a current or prospective employee to consent to arbitration of claims as a condition of employment. The rationale behind the bill was to protect employees from “forced arbitration.” A group of trade associations and business groups filed a suit, arguing that the Federal Arbitration Act (or “FAA”), which promotes arbitration agreements, preempted AB 51 in California. The court agreed, and the matter went to appeal before a higher court, the Ninth Circuit.

In reviewing the case, the court analyzed both the history of the FAA and the purpose of AB 51. The legislature had tried to craft AB 51 to prevent employers from requiring employees to consent to arbitration agreements, while not running afoul of the FAA which favors arbitration. The FAA was written to give preference to the arbitration process in employment disputes. Any state law that discriminates against arbitration on its face or “covertly accomplishes the same objective by disfavoring contract agreements,” is, arguably, in conflict with the FAA. AB 51 deters an employer from including non-negotiable arbitration requirements in employment contracts by imposing civil and criminal sanctions on any employer who does so, which has an obvious deterrent effect on employers’ ability to require arbitration agreements. The court noted that AB 51 prohibits only the contract formation regarding arbitration, but that the arbitration agreement (if executed) was still enforceable. The Ninth Circuit panel, applying the principle that state law must yield to the congressional FAA, found that the FAA pre-empted AB 51, and upheld the preliminary injunction in favor of the trade associations and business groups.

A New York federal judge ruled in favor of an investment firm that sought reimbursement of defense costs it incurred in an arbitration proceeding with its former CEO. 

An investment firm merged with a company, creating a joint venture. Several years after the merger, the joint venture’s CEO asserted that the joint venture engaged in corporate misconduct, mishandled intellectual property and confidential information, breached fiduciary duties, and interfered with his ability to perform the CEO functions. The CEO demanded a mediation pursuant to the joint venture’s operating agreement and indicated that arbitration may become appropriate down the road. Several days later, the CEO issued another demand letter, reiterating his allegations, and alleged that he had been retaliated against and constructively discharged. The CEO then sent e-mails to the joint venture’s executives, advising them of his resignation. After a failed attempt at mediation, the joint venture notified its insurance carriers of the ongoing matter. The carrier accepted the notice as Wrongful Acts of Wrongful Termination under the underlying policy. 

A few years later, the now-former CEO commenced an arbitration proceeding against the joint venture. The arbitration, among other things, asserted two counts of breach of the operating agreement, one count of a breach of employment agreement, violation of a fiduciary duty, and a shareholder oppression. The joint venture prevailed in the arbitration and the company reinstated its request for coverage under the policy. 

In the interim, the insurance carriers issued a coverage letter stating that coverage was not available for the mediation because of the Insured v. Insured (“I v. I”) exclusion. The policy’s I v. I exclusion contained a carve-back for an “Employment Practices Wrongful Act.” However, the carrier argued that the carve-back was not triggered for the purpose of arbitration, treating the arbitration and mediation as separate matters for the purposes of that coverage analysis. Coverage litigation followed. 

The joint venture argued that the mediation demand, arbitration, and other oral and written demands constituted one claim for purposes of the policy. Additionally, it argued that the center of the case was the CEO’s loss of power as an employee, and not his shareholder status, thus, the I v. I’s carve back was triggered. The carrier argued that the arbitration proceeding fell under the I v. I exclusion because the arbitration (not to be confused with mediation) arose out of a shareholder dispute, and not the employment practices wrongful act. The court disagreed and ruled in favor of the joint venture. 

The court explained that the policy provides that claims “alleging, arising out of, based upon or attributable to the same facts, circumstances, situations, transactions [,] or events . . . will be considered to be a single Claim and will be considered to have been made at the time the earliest such Claim was made.” Accordingly, the multiple demands and proceedings stemming from the same facts should be viewed as one claim for coverage purposes. Moreover, the court noted that the carrier stated the same in their brief, acknowledging that “[a]lthough the Arbitration was filed after the Policy Period, [the joint venture and the carrier] agree that the Arbitration is deemed part of a single Claim first made during the Policy period, at the time of the Mediation Demand, pursuant to Policy Condition (C).” Although the court agreed that an amended complaint filed in a civil proceeding supersedes an original complaint, an arbitration does not “replace” the allegations made in a mediation demand. Because the underlying claim included allegations of improper constructive termination from the beginning, the court held that the I v. I carve back, and therefore coverage was triggered. 

While working at a grain facility negotiating sales contracts on behalf of her employer an employee engaged in an embezzlement scheme. As part of the scheme, the employee misrepresented the price she could sell grain, entered false sales contracts into the accounting system, manipulated other records to reflect such sales and then sold the grain at prices below those in the employer’s records. The company then shipped the grain under the impression it sold at the inflated prices the employee claimed. The company’s loss included the money the employee deposited in her bank account and the freight costs associated with shipping the grain. 

The employer submitted the claim under its commercial crime policy, which provided coverage for employee “theft,” which was defined as “the unlawful taking of property to the deprivation of the Insured.” Additionally, the insured’s loss must have resulted “directly from” employee theft to be covered by the policy. Although “Taking” was not defined in the policy, both parties relied on the same definition: “[t]he act of seizing an article, with or without removing it, but with an implicit transfer of possession or control.” 

In the ensuing coverage dispute, the insurance company argued that only the amount the employee pocketed was covered and that her control over the grain sales was not a taking of the grain. However, the court disagreed and held that the employee “took implicit control over the grain such that her conduct constituted an unlawful taking.” Specifically, the employee exercised her authority to direct the transfer and sale of the grain, lied to her employer and manipulated its financial records to induce the company to ship grain under the impression it sold the grain at inflated prices. Further, the employee “controlled the pricing and recordkeeping elements of the sale of the grain and if not for her misrepresentations, the employer would have shipped only a minimal amount of grain.” Consequently, although the employee never physically seized the grain, this exercise of control amounted to an unlawful taking under the insurance policy.