• Key point. Church insurance policies often exclude employment-related claims. This represents a significant risk exposure. It means that churches must retain and compensate their own attorney if sued because of an employment-related claim, and they are responsible for paying any jury verdict or settlement. Employment-related claims include wrongful dismissal and various forms of discrimination under federal and state law.
A federal appeals court ruled that a church’s insurance policy did not cover lawsuits arising from the employment relationship. A pastor dismissed his church’s music director. The music director sued the pastor, church, and state denominational agency, claiming that she had been dismissed because she suffered from post-traumatic stress disorder and multiple personality disorder. She insisted that her dismissal amounted to unlawful discrimination based on disability. She also claimed that the pastor had defamed her, and invaded her privacy. The lawsuit alleged that the pastor made several defamatory statements, including the following: (1) she “is very sick and disturbed and needs to be under intense medical treatment”; (2) he had consulted with a psychiatrist who advised him that children should be protected from the music director; (3) after consulting with the psychiatrist he no longer could trust the music director and was afraid to leave her alone with the children; (4) if others learned more about multiple personality disorder they would understand why he had to fire her. The church’s insurance carrier insisted that the church’s insurance policy did not cover the woman’s claims, and it refused to provide the church with a legal defense or to pay any portion of a jury verdict or settlement. A federal district court agreed with the insurance company, and the church appealed.
A federal appeals court agreed that the insurance policy did not cover the woman’s claims. It noted that the policy indemnifies the church for damages resulting from “personal injury,” including injury from defamation. The policy further obligates the company to defend the church in any suit seeking damages covered by the policy. However, the policy excludes from coverage “personal injury sustained by any person as a result of an offense directly or indirectly related to the employment of such person by the named insured.” The court noted that the key question was whether the woman’s lawsuit was for “personal injury” sustained “as a result of an offense directly or indirectly related to her employment” by the church. If it was, then the exclusion applied, and the company had no duty to defend the church against the lawsuit. The court concluded that
defamatory statements providing an explanation for termination or directed to performance are related to employment. Alleged offenses occurring as part and parcel of an allegedly wrongful termination are plainly related to employment. Post-employment defamations can be directly or indirectly related to employment, and thus can fall within an exclusion of the sort at issue here. The statements to which [the lawsuit] refers are comments as to [the woman’s] abilities and job performance. They are explanations as to why [the pastor] terminated [her] employment.
To illustrate, the lawsuit asserted that the woman’s duties included leading the children’s choir, and that the pastor stated that it was not safe for her to be around children. Further, the lawsuit claimed that this was a basis for the decision to dismiss her. The court also found that the alleged statement referring to her as “very sick and disturbed” and “in need of intense medical treatment” also “related to the woman’s ability to perform her job and provides an explanation for the termination of her employment.” The court concluded: “Because the allegations in the complaint contain statements directed to [the music director’s] abilities and job performance and are explanations as to why her employment was terminated, we conclude the offenses are, at the least, indirectly related to [her] employment, if not directly related. In either case, the exclusion applies, and the company has no duty to defend.”
Application. This case illustrates a very important point with which every church leader should be familiar-church insurance policies often contain an exclusion for employment related claims, even if those claims allege personal injuries. With employment-related legal claims becoming more and more common, such an exclusion constitutes a significant risk exposure. If your church has employees, then you should take the following steps: (1) Check your general liability policy to see if employment-related claims are excluded. (2) It they are excluded, talk with your insurance agent about the availability of a separate endorsement covering such claims. (3) Do not take any adverse employment action against an employee or job applicant without first consulting with an attorney. The Parish of Christ Church v. The Church Insurance Company, 166 F.3d 419 (1st Cir. 1999). [Termination of Employees, Negligence as a Basis for Liability].
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