Employment Practices and Other E&O Policies: The Breadth of Pending and Prior Litigation Exclusions
Insurers and policyholders frequently focus solely on the “litigation” component in what is frequently referenced as a Pending and Prior Litigation exclusion. The exclusion wording at issue in a recent case in Washington was similar to most other iterations of this exclusion and provided as follows.
This insurance shall not apply to, and the [Insurer] shall have no duty to defend or pay Defense Expenses for, any Claim . . . for, based upon, or arising directly or indirectly out of any fact, circumstance, situation, transaction, event or Wrongful Employment Practice . . . underlying or alleged in any prior and/or pending civil, criminal, administrative or regulatory proceeding as of [the date specified in the Declarations] (emphasis added).
In a brief Order granting the insurer partial summary judgment, the court in Wendel v. Travelers Cas. And Surety Co. of America, USDC, E.D. Wash., No. CV-10-0028 (Decided March 10, 2011) upheld the validity of this exclusion under the following scenario.
The plaintiff was a dentist with a practice employing a number of females. On May 5, 2004, employee Wiseman filed an action alleging wrongful termination and emotional distress arising from an affair that plaintiff was having with employee Yount. Wiseman was ultimately fired and her domestic partner thereafter informed plaintiff’s spouse of his affair with Yount. Plaintiff terminated Yount after his wife learned of the affair and Yount committed suicide hours after being terminated. The plaintiff dentist purchased the employment practices liability (EPL) policy at issue in 2005 after the commencement of the Wiseman action. In 2007, during the term of a renewal policy, Yount’s estate sued the plaintiff dentist alleging negligence, sexual harassment, infliction of emotional distress and outrage. The insurer denied coverage for this claim based upon the Pending and Prior Litigation exclusion quoted above.
Plaintiff contended that the exclusion was inapplicable because no factual nexus existed between the prior Wiseman suit and the Yount estate’s suit later brought against him. The Court, however, found it sufficient that the Wiseman suit contained allegations of the Yount affair and her subsequent termination and suicide. The Court held that the insurer was entitled to rely upon the extrinsic evidence of the Wiseman allegations in denying a defense to the complaint brought by the Yount estate because it was not relying upon these allegations as being supportive of the truth or scope of the allegations presently made by the estate.
The Eastern District of Washington is not renowned as an insurer-friendly jurisdiction, but its straightforward interpretation of the exclusionary language and allowing the insurer to rely upon extrinsic evidence to support the application of the exclusion was a refreshingly correct result. Indeed, given the nature of the exclusion, the insurer would always have to consider the allegations in a prior proceeding to deny coverage for the present claim submitted to it for coverage. If the plaintiff dentist had EPL insurance in place at the time of the Wiseman action, he could argue that the suit by the estate is interrelated and seek coverage under that policy. If, however, there was no EPL coverage in place at that time, then both the Wiseman and estate actions should remain uninsured. To draw an analogy, a fire insurer should not be made to provide coverage for the building that is already smoldering.
Comments (1)
Read through and enter the discussion by using the form at the endDonna Ferrara - April 19, 2011 7:17 AM
What a terrible case for all involved.
Not quite as terrible is the language of the policy at issue:" for, based upon, or arising directly or indirectly out of any fact, circumstance, situation, transaction, event or Wrongful Employment Practice . . . underlying or alleged in any prior and/or pending civil, criminal, administrative or regulatory proceeding ". but it is unfortunate.
Using this language as written, the carrier could justify denying coverage for virtually any claim brought. For example, the first plaintiff doubtless alleged that the employer ran a dental practice and hired women. No doubt, the second plaintiff also alleged that the employer ran a dental practice and hired women. In fact, any plaintiff bringing a gender based employment case would also allege that the defendant ran a dental practice and hired women.
A carrier could claim, with some textual justification, that the facts of dental practice and having women employees were facts, circumstances or situations alleged or underlying in all complaints. In effect, having had one claim, covered or not, the insured would never be entitled to coverage again. All employment claims will be related in some way.
Moreover, what if the earlier claim had been a shareholder suit, alleging that the dentist hired attractive women instead of competent ones (not that the two are mutually exclusive)? In that instance, the first claim would not have been covered under an employment policy and most risk managers would not consider them related.
Again, unfortunately, some carriers do overreach in asserting the prior and pending exclusion, if only to gain some form of reduction in their obligation through allocation.
Of course, an alert broker or insured could insist on the removal of the language and many do. Even so, the fact that such language is included an insurance policy is an obstacle during the negotiation process.
Is such broad language really necessary? Could not the carrier be successful in its quest not to insured the burning building (to continue your metaphor) using narrower language that would also allow the coverage of, well, less related claims?
Just a thought.