'But I Have Insurance to Cover that Claim!'

Trotter's complaint alleged three counts under ERISA, one count under The Fair Labor Standards Act (FLSA), and five counts under various state wage and hour laws. Because Perdue had a $10 million insurance policy covering certain ERISA claims, it notified the carrier, Travelers Casualty and Surety Company, of Trotter's claims and requested the insurance company to provide a defense to those claims.

Travelers determined that because the complaint alleged certain ERISA claims, there was a potential of coverage, requiring the insurance company to defend Perdue. Travelers did, however, reserve its rights to refuse any settlements or judgments, to decline to defend non-covered wage and hour claims, and to seek reimbursement for defense costs expended on those non-covered claims. During the next several years, Travelers paid over $4.4 million defending Perdue against these various claims.

In June 2002, Perdue settled with Trotter and a class of similarly situated employees for $10,000,000 and limited injunctive relief. Neither party admitted the validity of the other side's claims or defenses, but the employees withdrew any allegations that Perdue engaged in willful misconduct. The settlement agreement did not indicate how much of the $10,000,000 was attributable to the ERISA or FLSA claims. Approximately $3 million was assigned to the employees' class counsel for fees and costs, $775,000 compensated employees asserting only wage and hour claims, and $907,954 was distributed to employees asserting only ERISA claims. The balance of the $10,000,000 ' some $5 million ' was distributed to employees asserting both ERISA and wage and hour claims.

Perdue Files Lawsuit

Perdue requested that Travelers indemnify it for the full $10 million settlement. Travelers refused, claiming that the settlement was based primarily upon non-covered wage and hour claims. Perdue thereafter filed a lawsuit seeking indemnification for the full settlement amount, minus $775,000 paid to employees asserting only wage and hour claims and $98,000 in attorneys' fees related solely to those claims.

Travelers Files a Counterclaim

Travelers filed a counterclaim against Perdue seeking reimbursement of that portion of the approximately $4.4 million in defense costs, attributable to non-covered wage and hour claims. Both parties moved for summary judgment.

The Decision

The trial court held that Travelers could not obtain any reimbursement for its defense costs and that Perdue was entitled to indemnification for the full settlement, minus those sums clearly earmarked for employees asserting only wage and hour claims. Travelers had contended that because ERISA did not contain a remedy for back pay, much of the settlement must have been due to violations of wage and hour laws, not covered by the ERISA policy. The trial court disagreed, reasoning that Travelers was required to compensate Perdue for the settlement because Perdue was 'potentially liable' under ERISA.

According to the trial court, Perdue faced potential liability for this covered claim because the Supreme Court had yet to determine whether back pay constitutes an appropriate remedy under ERISA. The trial court further held that Travelers was liable for the entire amount Perdue requested because the non-covered wage and hour claims were 'reasonably related' to the covered ERISA ones. With respect to Travelers' counterclaim for defense costs, the trial court held that no such right of partial reimbursement existed.

On appeal, the Fourth Circuit attempted to sort out some of these interesting insurance concepts and apply them to the facts at hand. According to the court, the case involved two separate concepts in the law of insurance ' the duty to defend and the duty to indemnify. The duty to defend, according to the court, refers to an insurer's obligation to defend its insured when a third party files suit. This duty arises at the outset of litigation, whenever the underlying complaint and other appropriate extrinsic evidence reveals claims that are even 'potentially' covered under the insurance policy. According to the court, in order for an insurer to be obligated to defend an insured, the underlying suit need only allege an action that is potentially covered by the policy no matter how attenuated, frivolous or illogical that allegation may be.

The duty to indemnify, by contrast, refers to an insurer's responsibility to pay a monetary award when its insured has become liable for a covered claim. The duty to indemnify depends upon liability and is narrower than the duty to defend. While an insurer must frequently defend both potentially covered claims and claims that are not covered under an insurance policy, it is only required to indemnify covered claims for which liability is incurred.

In the instant matter, the court first considered Travelers' request for reimbursement of certain defense costs, which it claimed were unrelated to the ERISA-covered claims. According to the court, while jurisdictions differ on the soundness of an insurer's right to reimbursement of defense costs, the court could not find one case that extends this right to insurers. Under law, if an insurance policy potentially covers any claim in an underlying complaint, the insurer must typically defend the entire suit, including non-covered claims. To permit a carrier to seek reimbursement of defense costs incurred in defending non-covered claims would, according to the court, 'serve only as a backdoor narrowing of the duty to defend and would appreciably erode a long-held view that the duty to defend is broader than the duty to indemnify.'

Thus, the court rejected Travelers' attempt to recoup some of its $4.4 million spent defending the lawsuit. The court then considered Travelers' duty to indemnify Perdue for the settlement. Here, the Fourth Circuit reversed the trial court and found that the insurance company can only be required to indemnify the insured for those claims covered by the insurance policy and not others that might also be in the litigation. Here, the court found that the employees, in effect, were raising two claims under ERISA and federal and state wage and hour laws, claims that provide for distinct and separate remedies. The duty to indemnify would not, according to the court, cover the wage and hour claims, even if they were 'reasonably related' to the covered ERISA claims.

Thus, Travelers would have no obligation to indemnify Perdue for any amounts paid in settlement of any claims asserting wage and hour violations. In order to determine how the trial court should proceed on remand, the court suggested that a rough apportionment of settlement amounts among covered and non-covered claims would be most appropriate. Some of the factors that should be considered in making this determination would include reviewing how the parties characterize the claims in the underlying complaint and settlement agreement, the intent of the parties entering into the settlement and the relative merits of the underlying claims.

The court also acknowledged that this task could have been easily avoided if, in the settlement agreement, the parties had specified how liability was allocated between the covered and non-covered claims. According to the court, such a scenario arises with some frequency and the apportionment of settlement amounts between covered and non-covered claims is typically resolved through negotiation and private agreement. Here, however, the parties apparently could not agree, resulting in additional litigation.

Practical Pointers

As this case highlights, insurance policies are as varied as the types of claims that employees can bring in litigation. Therefore, it is essential that all employers be familiar with the specific types of insurance policies that are in force and exactly what types of employment claims are covered under those policies. Depending upon how the claims are described in the complaint, the insurance company may have an obligation to provide a defense to those claims, even for ones not specifically covered under the insurance policy, but your right to seek indemnification for any ultimate judgment and/or settlement will depend upon the nature of the claim involved.

To be sure, in the event any matter covered by insurance is ultimately settled, it would be prudent to come to some agreement with the carrier as to how the claims should be characterized, if at all possible. Your failure to do so, as indicated in this case, can result in more costly litigation, something most employers would like to avoid at all costs!

Kevin C. McCormick, a member of this newsletter's Board of Editors, is a partner at Baltimore's Whiteford, Taylor & Preston.

As many of you know, there are various insurance policies available to protect against employment-related claims. Although some policies, such as employment practices liability (EPL) policies, cover a variety of claims, many cover only specific claims to the exclusion of all others. A recent decision from the U.S. Court of Appeals for the Fourth Circuit highlights some of the interesting issues that can arise in resolving employment claims covered by an insurance policy. Perdue Farms, Inc., v. Travelers Casualty and Surety Company of America, No. 04-228 (4th Cir., decided May 16, 2006).

Background

In December 1999, Leona Trotter and several other current and former employees of Perdue Farms, Inc., filed suit against Perdue in federal court, challenging as unlawful Perdue's compensation and record-keeping practices. According to Trotter, Perdue's statutory violations stemmed from its practices of not paying hourly chicken processing line workers for time spent putting on, taking off and cleaning protective sanitary clothing and equipment; not paying some chicken processing line workers for some work after the line card for their department had been clocked out; not keeping a record of hours worked, but not paid for, preventing some employees from becoming eligible for retirement benefits; and not contributing to the Perdue supplemental retirement plan for the pay that the employees would have earned had they been paid properly.

Trotter's complaint alleged three counts under ERISA, one count under The Fair Labor Standards Act (FLSA), and five counts under various state wage and hour laws. Because Perdue had a $10 million insurance policy covering certain ERISA claims, it notified the carrier, Travelers Casualty and Surety Company, of Trotter's claims and requested the insurance company to provide a defense to those claims.

Travelers determined that because the complaint alleged certain ERISA claims, there was a potential of coverage, requiring the insurance company to defend Perdue. Travelers did, however, reserve its rights to refuse any settlements or judgments, to decline to defend non-covered wage and hour claims, and to seek reimbursement for defense costs expended on those non-covered claims. During the next several years, Travelers paid over $4.4 million defending Perdue against these various claims.

In June 2002, Perdue settled with Trotter and a class of similarly situated employees for $10,000,000 and limited injunctive relief. Neither party admitted the validity of the other side's claims or defenses, but the employees withdrew any allegations that Perdue engaged in willful misconduct. The settlement agreement did not indicate how much of the $10,000,000 was attributable to the ERISA or FLSA claims. Approximately $3 million was assigned to the employees' class counsel for fees and costs, $775,000 compensated employees asserting only wage and hour claims, and $907,954 was distributed to employees asserting only ERISA claims. The balance of the $10,000,000 ' some $5 million ' was distributed to employees asserting both ERISA and wage and hour claims.

Perdue Files Lawsuit

Perdue requested that Travelers indemnify it for the full $10 million settlement. Travelers refused, claiming that the settlement was based primarily upon non-covered wage and hour claims. Perdue thereafter filed a lawsuit seeking indemnification for the full settlement amount, minus $775,000 paid to employees asserting only wage and hour claims and $98,000 in attorneys' fees related solely to those claims.

Travelers Files a Counterclaim

Travelers filed a counterclaim against Perdue seeking reimbursement of that portion of the approximately $4.4 million in defense costs, attributable to non-covered wage and hour claims. Both parties moved for summary judgment.

The Decision

The trial court held that Travelers could not obtain any reimbursement for its defense costs and that Perdue was entitled to indemnification for the full settlement, minus those sums clearly earmarked for employees asserting only wage and hour claims. Travelers had contended that because ERISA did not contain a remedy for back pay, much of the settlement must have been due to violations of wage and hour laws, not covered by the ERISA policy. The trial court disagreed, reasoning that Travelers was required to compensate Perdue for the settlement because Perdue was 'potentially liable' under ERISA.

According to the trial court, Perdue faced potential liability for this covered claim because the Supreme Court had yet to determine whether back pay constitutes an appropriate remedy under ERISA. The trial court further held that Travelers was liable for the entire amount Perdue requested because the non-covered wage and hour claims were 'reasonably related' to the covered ERISA ones. With respect to Travelers' counterclaim for defense costs, the trial court held that no such right of partial reimbursement existed.

On appeal, the Fourth Circuit attempted to sort out some of these interesting insurance concepts and apply them to the facts at hand. According to the court, the case involved two separate concepts in the law of insurance ' the duty to defend and the duty to indemnify. The duty to defend, according to the court, refers to an insurer's obligation to defend its insured when a third party files suit. This duty arises at the outset of litigation, whenever the underlying complaint and other appropriate extrinsic evidence reveals claims that are even 'potentially' covered under the insurance policy. According to the court, in order for an insurer to be obligated to defend an insured, the underlying suit need only allege an action that is potentially covered by the policy no matter how attenuated, frivolous or illogical that allegation may be.

The duty to indemnify, by contrast, refers to an insurer's responsibility to pay a monetary award when its insured has become liable for a covered claim. The duty to indemnify depends upon liability and is narrower than the duty to defend. While an insurer must frequently defend both potentially covered claims and claims that are not covered under an insurance policy, it is only required to indemnify covered claims for which liability is incurred.

In the instant matter, the court first considered Travelers' request for reimbursement of certain defense costs, which it claimed were unrelated to the ERISA-covered claims. According to the court, while jurisdictions differ on the soundness of an insurer's right to reimbursement of defense costs, the court could not find one case that extends this right to insurers. Under law, if an insurance policy potentially covers any claim in an underlying complaint, the insurer must typically defend the entire suit, including non-covered claims. To permit a carrier to seek reimbursement of defense costs incurred in defending non-covered claims would, according to the court, 'serve only as a backdoor narrowing of the duty to defend and would appreciably erode a long-held view that the duty to defend is broader than the duty to indemnify.'

Thus, the court rejected Travelers' attempt to recoup some of its $4.4 million spent defending the lawsuit. The court then considered Travelers' duty to indemnify Perdue for the settlement. Here, the Fourth Circuit reversed the trial court and found that the insurance company can only be required to indemnify the insured for those claims covered by the insurance policy and not others that might also be in the litigation. Here, the court found that the employees, in effect, were raising two claims under ERISA and federal and state wage and hour laws, claims that provide for distinct and separate remedies. The duty to indemnify would not, according to the court, cover the wage and hour claims, even if they were 'reasonably related' to the covered ERISA claims.

Thus, Travelers would have no obligation to indemnify Perdue for any amounts paid in settlement of any claims asserting wage and hour violations. In order to determine how the trial court should proceed on remand, the court suggested that a rough apportionment of settlement amounts among covered and non-covered claims would be most appropriate. Some of the factors that should be considered in making this determination would include reviewing how the parties characterize the claims in the underlying complaint and settlement agreement, the intent of the parties entering into the settlement and the relative merits of the underlying claims.

The court also acknowledged that this task could have been easily avoided if, in the settlement agreement, the parties had specified how liability was allocated between the covered and non-covered claims. According to the court, such a scenario arises with some frequency and the apportionment of settlement amounts between covered and non-covered claims is typically resolved through negotiation and private agreement. Here, however, the parties apparently could not agree, resulting in additional litigation.

Practical Pointers

As this case highlights, insurance policies are as varied as the types of claims that employees can bring in litigation. Therefore, it is essential that all employers be familiar with the specific types of insurance policies that are in force and exactly what types of employment claims are covered under those policies. Depending upon how the claims are described in the complaint, the insurance company may have an obligation to provide a defense to those claims, even for ones not specifically covered under the insurance policy, but your right to seek indemnification for any ultimate judgment and/or settlement will depend upon the nature of the claim involved.

To be sure, in the event any matter covered by insurance is ultimately settled, it would be prudent to come to some agreement with the carrier as to how the claims should be characterized, if at all possible. Your failure to do so, as indicated in this case, can result in more costly litigation, something most employers would like to avoid at all costs!

Kevin C. McCormick, a member of this newsletter's Board of Editors, is a partner at Baltimore's Whiteford, Taylor & Preston.