Employment Practices

A New York court ruled that an employer’s liability insurer was obligated to provide a defense of a lawsuit brought by a former employee.

Church Law and Tax2003-07-01

Employment practices

Key point 10-16.7. A liability insurance policy provides a church with a legal defense to lawsuits claiming that the church is responsible for an injury, and it will pay any adverse settlement or judgment up to the limit specified in the policy. Liability insurance policies exclude a number of claims. For example, some policies exclude injuries based on criminal or intentional acts and claims for punitive damages. A church has an obligation to promptly notify its insurer of any potential claim, and to cooperate with the insurer in its investigation of claims.
Negligence as a Basis for Liability

* A New York court ruled that an employer’s liability insurer was obligated to provide a defense of a lawsuit brought by a former employee despite an “employment practices exclusion.” An employee (Sherry) was allegedly terminated by her employer for disclosing confidential information obtained through her attendance at board meetings. Following her termination, Sherry accused her former employer of employment discrimination and wrongful discharge and demanded severance pay and a bonus check to which she claimed she was entitled. The employer offered a lump sum settlement in the amount of $1,500 in exchange for Sherry’s execution of a release agreement. Sherry refused to sign the document, and the employer did not make the lump sum payment. Sherry was replaced by another female employee, who later discovered that over $50,000 was missing. The suspected theft was confirmed by an accounting firm, and reported to the police. Sherry was prosecuted for theft, but was found not guilty. She later sued her former employer alleging malicious prosecution, negligently accusing her of stealing money, and emotional distress. The employer turned the lawsuit over to its insurer, but the insurer denied coverage for Sherry’s claims since they all “arose out of the termination of the plaintiff’s employment.” The employer’s insurance policy excluded coverage of any employee termination or “employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, or discrimination directed at that person.” The employer sued its insurer in an attempt to force it to provide a defense of Sherry’s claims.

The court concluded that the policy provided coverage of Sherry’s claims, despite the employment practices exclusion. It based this conclusion on the following two grounds:

(1) The policy covered “bodily injuries,” and the courts of New York have interpreted this term to include emotional distress. Therefore, Sherry’s emotional distress claim was covered under the employer’s policy.

(2) The policy defines “personal injuries” as including, among other offenses, “malicious prosecution.” Sherry’s lawsuit contained a claim of malicious prosecution against her former employer, and so “the plain language of the policy dictates that this is a personal injury claim requiring defense by [the insurer].”

The court conceded that the employment practices exclusion denied coverage for claims arising out of employee terminations. The insurer insisted that Sherry’s claims would not have arisen but for her termination. It alleged that Sherry was fired for disclosing confidential information, which led to her employer reporting the theft in retaliation for her failure to sign a release of claims after her termination, which led to the malicious prosecution claim. The court concluded that the insurer had failed to prove that the employment practices exclusion barred coverage of Sherry’s claims. It observed, “[Sherry’s] malicious prosecution claim may have arisen only out of her employer’s decision to report her alleged embezzlement to the police. The insurer has not established a connection between the termination for disclosing confidential information and Sherry’s subsequent lawsuit.”

The employment practices exclusion also denied coverage for “demotion, defamation, harassment, and discrimination.” But each of these examples “deals with either the ordinary incidents of the job or the working environment provided by the employer. None of these employment related practices would seem to be applicable here.” The court concluded, “Certainly when an employee steals from his or her employer, at the moment of the theft, the employee abandons the role of employee and becomes that of [wrongdoer] as against the employer’s property. Thus, the activity could not be related to her employment.”

Application. This case illustrates two important points. First, most general liability policies exclude coverage or claims arising out of the employment relationship. Such claims represent a significant source of church litigation today, and so church leaders should be certain to review their insurance policy to see if they have coverage. If not, discuss with your agent how you can obtain it. Second, as this case illustrates, an employment practices exclusion does not necessarily bar coverage of all claims brought by former employees. Burns Glass Services v. Travelers Indemnity Company, 2002 WL 31817916 (N.Y. Sup. 2002).

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