EMPLOYMENT CORNER

A carrier sought a declaratory judgment that there was no duty or obligation under its Employment Practices Liability Section (EPL) or its Directors, Officers and Private Company Liability Section (D&O) to pay for a judgment obtained from its insured by the insured’s former employees. The carrier sought to preclude coverage based on the wage exclusion or in the alternative the breach of contract exclusion contained in both sections of its policy.

The EPL’s wage exclusion included a carve back for retaliation claims. The employees argued their termination was retaliatory based on a series of emails presented in the underlying litigation and therefore their judgment should not be excluded by the policy. While the D&O policy does not contain a similar carve back, the employees’ bonuses and commissions at issue, although potentially qualifying as wages, constitute severance pay in the context of their employment agreements, which is not payment for services rendered and therefore not wages.

The court found that the characterization of the termination as retaliatory required factual inquiries and therefore the issue was not appropriate for resolution on summary judgment. Similarly, the categorization of the bonuses or severance pay were disputed, fact-intensive, and not appropriate to be decided.

As for the contract exclusion, both the EPL and D&O sections contained a carve back for liability that would attach in the absence of an express contract. The employees argued that regardless of their employment agreements, liability would attach based on a statutory duty under the applicable state wage law.

The court agreed, finding that the fact a breach of contract was alleged did not change the underlying nature of the claim, which was for unpaid wages. Independent of the employment contract, state law establishes a duty to pay wages and, therefore, the breach of contract exclusion could not bar coverage for the underlying judgment.

In a recent decision, an appellate court upheld the state’s statutory deadline for payment of arbitration fees. As a result, an employer (“the Employer”) lost its right to arbitrate claims made by its former employee (“the Employee”). 

The Employee alleged multiple claims of sexual harassment and assault against the Employer, who successfully asked the court to compel arbitration. Pursuant to the relevant state statue, the Employer was required to pay its arbitration fees by a specific deadline. Although the Employer sent a check relatively timely, one day before the deadline to pay the fees, the arbitrator received payment from the Employer two-days after the statutory deadline passed. So, the court vacated its previous order which allowed the Employer to arbitrate. 

In its analysis, the court strictly enforced the statutory deadline imposed upon the Employer by the state and allowed the Employee to avoid arbitration. Specifically, in its decision the court relied on the state’s arbitration (“the Act”), which provided “that arbitrator fees must be “paid within 30 days after the due date.” Within the meaning of the Act, the court held that “paid” meant actual receipt of the payment by the arbitrator and not the date on which payment was sent. 

Even though the Employer sent the check timely, it was not received until the deadline had passed; therefore, the payment of fees was late. The court added, “[w]e do not find that the proverbial check in the mail constitutes payment.” As a result of the late fees, the court ruled in favor of the Employee and the Employer lost its right to arbitrate the Employee’s assault and harassment claims. 

In a recent decision, the Second Circuit Court of Appeals affirmed a district court’s decision to dismiss a case brought by a company’s employee against the company’s insurer for its coverage denial. The court held that the coverage sought by the insured company’s employee (the “Employee”) was barred by the insured v. insured provision in the insured company’s Directors and Officers Liability (“D&O”) policy.

The Employee was alleged to have used his position within the insured’s company to defraud multiple entities affiliated with the company. In the insured company’s lawsuit against the Employee, the Company requested that the insurer cover his defense costs. However, the insurer refused to issue coverage based on the policy’s exclusion of coverage for “suits involving one insured person against another insured person” (the “Exclusion”). According to the insurer, because insured individuals were the ones bringing claims against the insured-Employee, coverage was excluded by the “insured versus insured” exclusion.

In their rebuttal to the insurer’s denial, the Employee relied heavily on the Allocation Clause of the policy, arguing that it required the insurer to allocate coverage between covered and uncovered portions of this matter. The Employee noted that one of the individuals in the suit was neither insured nor a security holder of the company. The court rejected this argument and explained that the Exclusion specifically referenced claims brought by insured persons against other insureds “controls over the allocation clause, which only generally reference[s] [c]laims with ‘covered and uncovered matters’.” The court relied heavily on state contract law and held that the Exclusion barred coverage for the entire litigation and not only a portion of the suit for which the Employee sought defense costs coverage.