EPLI and Intentional Acts Exclusions
Over the last several years, employers have increasingly turned to employment practices liability insurance (“EPLI”) for coverage against lawsuits brought by employees under Title VII of the Civil Rights Act of 1964 and other employment-related statutes. However, as with any insurance policy, the key is coverage. Employers, who were generally without insurance for these types of claims, now face a world of coverage options.
Exclusions typically found in EPLI policies include exclusions for Fair Labor Standards Act claims, National Labor Relations Board decisions, ERISA matters, costs of complying with accommodations mandated by the Americans with Disabilities Act, and claims arising out of facts or circumstances known to the employer before the effective date of the policy. Another possible exclusion is for intentional acts. This exclusion generally is intended to eliminate coverage if an employer acts with “wonton, willful, reckless, or intentional disregard for any laws.” This exclusion is a carryover from other policies traditionally offered, including commercial general liability policies and workers compensation policies.
The question that arises is whether an intentional acts exclusion precludes coverage for disparate treatment or sexual harassment claims. By their very nature, disparate treatment and sexual harassment require some type of intentional conduct. If the intentional acts exclusion is interpreted broadly enough, an allegation of disparate treatment or sexual harassment may provide the insurer grounds for denying coverage under the policy.
Coverage Denied in Sexual Harassment Case
At least one court has found that an exclusion for intentional acts applied to deny coverage in a sexual harassment case. In Manganella v. Evanston Insurance Co., 2010 WL 4196040 (D. Mass. Oct. 26, 2010), the district court held that an employer’s EPLI coverage did not cover the actions of the company’s president.
Luciano Manganella founded the clothing store JasmineSola in 1970 (rebranded as Jasmine), and later sold it to Lerner New York in 2005. Under the terms of the stock purchase agreement accompanying the sale, Manganella agreed to continue to serve as Jasmine’s president. After the sale, Jasmine purchased an EPLI policy that included an intentional acts exclusion. In June of 2006, the company terminated Manganella after an investigation revealed that he had harassed four female employees. Both parties claimed the other had breached the stock purchase agreement, which led to arbitration. In April of 2007, a panel of arbitrators found that Manganella “was well acquainted with the company’s policy on sexual harassment and other acts of inappropriate conduct.” They further found that Manganella “did not comply with the policy on sexual harassment and that his refusal was willful.” 2010 WL 4196040 at *5.
In March of 2007, one of the women allegedly harassed by Manganella filed a charge of discrimination against Manganella, Lerner, and Jasmine with the Massachusetts Commission Against Discrimination (“MCAD”). The woman alleged that she had been subject to nearly constant physical and verbal sexual harassment through her employment and had been intimidated into engaging in sexual acts with Manganella on at least five occasions. Manganella requested that his former employer’s EPLI insurer, Evanston Insurance Company, provide him with defense and coverage under the policy for the MCAD proceeding. Relying on the policy’s intentional acts exclusion, Evanston denied coverage. The exclusion stated that coverage was barred for any claim made:
based on conduct of the Insured or at the Insured’s direction that is committed with wanton, willful, reckless, or intentional disregard of any law or laws that is or are the foundation for the Claim, or with criminal or malicious purpose or intent; but this exclusion shall not apply to the strictly vicarious liability of any Insured for the wanton, willful, reckless, or intentional disregard of another of any law or laws that is or are the foundation for the Claim.
Id. at *2.
Willfulness of Conduct Finding Held To Be Conclusive
Manganella then challenged Evanston’s denial and sought a declaratory judgment that the policy covered Manganella’s claim. The district court in Massachusetts, strictly construing the exclusion, determined that Manganella’s conduct excluded coverage in that instance. The court defined “willful” as a “voluntary, intentional violation of a known legal duty.” It cited Judge Learned Hand, explaining “[t]he word ‘willful,’ even in criminal statutes, means no more than that the person charged with the duty knows what he is doing. It does not mean that, in addition, he must suppose that he is breaking the law.” Id. at *13. As a result, the court found the arbitrators’ finding of willfulness to be conclusive. In doing so, the court rejected Manganella’s attempt to draw a distinction between conduct that was intentional and conduct that was undertaken in intentional disregard of the laws that are the foundation of the claim. “To pretend otherwise would be to torture the meaning of the term ‘willful’ beyond recognition.” Id. Thus, the court enforced the intentional acts exclusion and upheld Evanston’s decision to deny coverage.
Given the lack of popularity of the intentional acts exclusion among employers, many carriers no longer include this exclusion in their policies. However, the policies that were written several years ago that include intentional acts exclusions are just now being litigated, and the Manganella case represents the first of what is sure to be many struggles the courts have over the interpretation of such a clause in the EPLI context. Therefore, attorneys should remind their clients to carefully review their existing EPLI policies and to understand all exclusions that may apply, as well as to be mindful of such exclusions when negotiating the purchase of a new EPLI policy.
Amy S. Wilson is an attorney with Frost Brown Todd LLC in the firm’s Indianapolis, Indiana, office, where her practice focuses on labor and employment law. She is coeditor of the TIPS Employment Law and Litigation Committee’s newsletter and a member of the 2011 class of the TIPS Leadership Academy. She can be reached at email@example.com. Michelle R. Maslowski is also an attorney in the firm’s Indianapolis office with a practice focusing on labor and employment law. She can be reached at firstname.lastname@example.org.