Employer's Failure to Give Notice of Claim Bars Insurance Coverage

Background Facts

Westrec Marina Management, Inc. (Westrec), purchased a directors and officers (D&O) liability insurance policy from Arrowood Indemnity Company (Arrowood), formerly known as Royal Indemnity Company. In fact, Westrec had two D&O policies with Arrowood. The first was effective from July 1, 2002, until July 1, 2003, and then a second policy effective July 1, 2003, continuing until July 1, 2004.

Each policy provided coverage for losses incurred in connection with claims first made during the policy period and reported within 30 days after the expiration of the policy.

A claim was defined under the insurance policy as:

• A written demand for civil damages or other relief commenced by the insured's receipt of such demand;
• A civil proceeding commenced by the service of a complaint or similar pleading;
• A formal administrative or regulatory proceeding commenced by the filing of a notice of charges, a formal investigated order or similar document; or
• A criminal proceeding commenced by the insured's receipt of notice of a grand jury investigation.

Betty Clark, a former employee of Westrec, filed a complaint with the California Department of Fair Employment and Housing (DFEH) on April 14, 2003, alleging employment discrimination. In that complaint, Clark also requested a right-to-sue notice.

The DFEH notified Westrec of the complaint and stated that it was closed on April 14, 2003, because the complainant had requested an immediate right-to-sue notice. That notice was issued on April 15, 2003. Westrec did not notify Arrowood of these events within 30 days after the expiration of the first policy, which, by its terms, expired on July 1, 2003.

Thereafter, Clark's attorney sent a letter to Westrec on June 24, 2003. That letter began by stating that he represented Clark and that Clark was subjected to constant discriminatory and demeaning treatment by male supervisors based upon her sex. The letter then described alleged incidents of discrimination and wrongful termination and reminded Westrec that Clark had received a right-to-sue letter from DFEH.

The attorney asked if Westrec would prefer to attempt to resolve to mediate this matter or if it would be necessary to file a lawsuit and have a jury decide the outcome. The letter went on to describe what could occur in the event the matter were litigated and suggested that it was in Westrec's best interest to settle the matter amicably.

Westrec did not notify Arrowood of the attorney's letter within 30 days after the expiration of the first policy.

On Dec. 19, 2003, Clark filed a complaint against Westrec, alleging several counts arising from employment discrimination and wrongful termination. Westrec notified Arrowood of the litigation on Jan. 30, 2004, tendered its defense and requested indemnity. Arrowood declined to defend or indemnify Westrec, asserting that either the complaint to DFEH or the attorney letter, or both, constituted a claim as defined under the policy and that Westrec had waived its coverage by failing to provide timely notice of the claim to Arrowood.

Trial Court Proceedings

Attempting to force Arrowood to provide coverage and/or indemnity for Clark's claims, Westrec filed a complaint in California State Court alleging breach of contract and breach of the implied covenant of good faith and fair dealing. Arrowood moved to have the case summarily dismissed on the grounds that Westrec failed to provide timely notice of Westrec's claims, within 30 days of the end of the first insurance polity.

The trial court agreed and found that while the administrative complaint with DFEH was not a “claim” under the policy, the attorney letter was such a claim because it was a demand for monetary settlement.

On appeal, Westrec contended that its notice of claim was timely because neither DFEH nor the attorney letter were claims within the meaning of the policy, and that even if either of those items were to be considered a claim, the lawsuit was a separate claim that was timely reported under the second policy.

Unfortunately for Westrec, the California Appellate Court did not buy either argument. First, the court found that the plain reading of the term “claim,” would include any written demand for civil damages or other relief. According to the court, the policy did not state that such a demand must be made in connection with a judicial or administrative proceeding to constitute a claim under the policy. Here, the attorney's letter clearly expressed Clark's intent to sue Westrec for employment discrimination if an appropriate settlement could not be reached. Although the letter did not expressly demand payment or refer to any specific amount, its meaning was clear that, absent some form of negotiated compensation, Clark would commence a lawsuit against Westrec.

The court added in a footnote stating that, in light of its conclusion that the attorney's letter was a “claim” under the insurance agreement, it was not necessary to decide whether the DFEH complaint also constituted a claim. It is very likely, however, that if presented with that specific question, the court would probably find that an administrative complaint would also constitute a claim under the insurance policy.

With regard to Westrec's second argument that the Clark lawsuit was a separate claim arising under the second policy that was timely reported to the carrier, the court was unimpressed. In reading the two insurance policies together, the court found that all claims arising from or involving the same events or related facts or series of facts are deemed a single claim.

As the court reasoned, the Clark lawsuit was the litigation that was authorized by the right-to-sue notice issued by DFEH and threatened in the attorney letter. The lawsuit was based on and arose from the same events or related series of facts referenced in the DFEH charge and the attorney letter. The court, therefore, found that the lawsuit and the letter constituted a single claim that was first made at the time the attorney letter was sent to Westrec on June 24, 2003. To be timely, Westrec should have alerted its carrier to the claim within 30 days following the expiration of the first policy or by July 30, 2003. Instead, Westrec notified the carrier when the lawsuit was filed under the second policy on Jan. 30, 2004, which the court found was too late, resulting in a denial of coverage.

Bottom Line

This case highlights the care that all employers who have EPLI or D&O policies should take whenever an employee claim is made that might possibly be covered under the insurance policies. In the general hustle and bustle of the workplace, an employer may not immediately be thinking of the need to report an employment dispute to the carrier when it arises ' especially if there is a glimmer hope that the matter can be resolved amicably.

Indeed, some employers are reluctant to notify the carrier of any potential employment claims for fear that the carrier will use that information and increase their premiums when the insurance policy is renewed. Notwithstanding those understandable concerns, as this case makes very clear, if the employer receives an employment claim in writing demanding the employer take any action, including making payments for the alleged harms, that letter should be considered a claim and forwarded to the carrier. This would be true if the letter is written by the employee, or, here, by her attorney.

Likewise, in the event that an administrative claim is filed with the Equal Employment Opportunity Commission (EEOC) or any of the various local agencies, a copy of that claim should also be sent forthwith to the carrier. As Westrec learned the hard way, failing to report such claims promptly to the carrier can result in the denial of coverage for that claim.

Here, although Westrec paid the premiums for two years to cover any such employment claims, when one was actually received, it never received the coverage it paid for because it failed to timely report that claim to the carrier. Do not let that happen to you.

Kevin C. McCormick, a member of this newletter's Board of Editors, is a partner in the Baltimore firm of Whiteford, Taylor & Preston. He provides advice and counsel to public and private employers including health care providers on all phases of the employment relationship.

For Twitter and LinkedIn followers, subscribe to the Employment Law Strategist newsletter at a special introductory rate. Click here. This offer is valid for new subscribers only.

An increasing number of employers have begun purchasing insurance, sometimes referred to as “employment practices liability insurance” (EPLI), or as a rider to a directors and officers liability policy, to cover any employment claims that arise in the workplace.

However, as with any insurance agreement, it is essential that you scrupulously follow any of the provisions contained in the insurance agreement to preserve its coverage. One such requirement, contained in virtually all EPLI policies, is that the employer promptly notify the carrier in the event that any employment claims, potentially covered under the policy, are made.

While the receipt of a summons and a complaint in a lawsuit is clearly a “claim” ' and should be reported to the carrier as soon as possible ' often as a prelude to the litigation, there is an exchange of correspondence, sometimes from plaintiff's counsel, suggesting informal resolution of a specific workplace dispute. Depending upon the phrasing of the dispute and the suggested resolution, an employer may be lulled into thinking that it has no obligation to report such an event to the carrier. Think again! As one California employer learned, its failure to promptly alert its carrier until after the formal lawsuit was filed was too late and coverage was lost. Westrec Marina Mgmt., Inc. v. Arrowood Indemnity Company, 163 Cal.App. 4th 1387 (2008).

Background Facts

Westrec Marina Management, Inc. (Westrec), purchased a directors and officers (D&O) liability insurance policy from Arrowood Indemnity Company (Arrowood), formerly known as Royal Indemnity Company. In fact, Westrec had two D&O policies with Arrowood. The first was effective from July 1, 2002, until July 1, 2003, and then a second policy effective July 1, 2003, continuing until July 1, 2004.

Each policy provided coverage for losses incurred in connection with claims first made during the policy period and reported within 30 days after the expiration of the policy.

A claim was defined under the insurance policy as:

• A written demand for civil damages or other relief commenced by the insured's receipt of such demand;
• A civil proceeding commenced by the service of a complaint or similar pleading;
• A formal administrative or regulatory proceeding commenced by the filing of a notice of charges, a formal investigated order or similar document; or
• A criminal proceeding commenced by the insured's receipt of notice of a grand jury investigation.

Betty Clark, a former employee of Westrec, filed a complaint with the California Department of Fair Employment and Housing (DFEH) on April 14, 2003, alleging employment discrimination. In that complaint, Clark also requested a right-to-sue notice.

The DFEH notified Westrec of the complaint and stated that it was closed on April 14, 2003, because the complainant had requested an immediate right-to-sue notice. That notice was issued on April 15, 2003. Westrec did not notify Arrowood of these events within 30 days after the expiration of the first policy, which, by its terms, expired on July 1, 2003.

Thereafter, Clark's attorney sent a letter to Westrec on June 24, 2003. That letter began by stating that he represented Clark and that Clark was subjected to constant discriminatory and demeaning treatment by male supervisors based upon her sex. The letter then described alleged incidents of discrimination and wrongful termination and reminded Westrec that Clark had received a right-to-sue letter from DFEH.

The attorney asked if Westrec would prefer to attempt to resolve to mediate this matter or if it would be necessary to file a lawsuit and have a jury decide the outcome. The letter went on to describe what could occur in the event the matter were litigated and suggested that it was in Westrec's best interest to settle the matter amicably.

Westrec did not notify Arrowood of the attorney's letter within 30 days after the expiration of the first policy.

On Dec. 19, 2003, Clark filed a complaint against Westrec, alleging several counts arising from employment discrimination and wrongful termination. Westrec notified Arrowood of the litigation on Jan. 30, 2004, tendered its defense and requested indemnity. Arrowood declined to defend or indemnify Westrec, asserting that either the complaint to DFEH or the attorney letter, or both, constituted a claim as defined under the policy and that Westrec had waived its coverage by failing to provide timely notice of the claim to Arrowood.

Trial Court Proceedings

Attempting to force Arrowood to provide coverage and/or indemnity for Clark's claims, Westrec filed a complaint in California State Court alleging breach of contract and breach of the implied covenant of good faith and fair dealing. Arrowood moved to have the case summarily dismissed on the grounds that Westrec failed to provide timely notice of Westrec's claims, within 30 days of the end of the first insurance polity.

The trial court agreed and found that while the administrative complaint with DFEH was not a “claim” under the policy, the attorney letter was such a claim because it was a demand for monetary settlement.

On appeal, Westrec contended that its notice of claim was timely because neither DFEH nor the attorney letter were claims within the meaning of the policy, and that even if either of those items were to be considered a claim, the lawsuit was a separate claim that was timely reported under the second policy.

Unfortunately for Westrec, the California Appellate Court did not buy either argument. First, the court found that the plain reading of the term “claim,” would include any written demand for civil damages or other relief. According to the court, the policy did not state that such a demand must be made in connection with a judicial or administrative proceeding to constitute a claim under the policy. Here, the attorney's letter clearly expressed Clark's intent to sue Westrec for employment discrimination if an appropriate settlement could not be reached. Although the letter did not expressly demand payment or refer to any specific amount, its meaning was clear that, absent some form of negotiated compensation, Clark would commence a lawsuit against Westrec.

The court added in a footnote stating that, in light of its conclusion that the attorney's letter was a “claim” under the insurance agreement, it was not necessary to decide whether the DFEH complaint also constituted a claim. It is very likely, however, that if presented with that specific question, the court would probably find that an administrative complaint would also constitute a claim under the insurance policy.

With regard to Westrec's second argument that the Clark lawsuit was a separate claim arising under the second policy that was timely reported to the carrier, the court was unimpressed. In reading the two insurance policies together, the court found that all claims arising from or involving the same events or related facts or series of facts are deemed a single claim.

As the court reasoned, the Clark lawsuit was the litigation that was authorized by the right-to-sue notice issued by DFEH and threatened in the attorney letter. The lawsuit was based on and arose from the same events or related series of facts referenced in the DFEH charge and the attorney letter. The court, therefore, found that the lawsuit and the letter constituted a single claim that was first made at the time the attorney letter was sent to Westrec on June 24, 2003. To be timely, Westrec should have alerted its carrier to the claim within 30 days following the expiration of the first policy or by July 30, 2003. Instead, Westrec notified the carrier when the lawsuit was filed under the second policy on Jan. 30, 2004, which the court found was too late, resulting in a denial of coverage.

Bottom Line

This case highlights the care that all employers who have EPLI or D&O policies should take whenever an employee claim is made that might possibly be covered under the insurance policies. In the general hustle and bustle of the workplace, an employer may not immediately be thinking of the need to report an employment dispute to the carrier when it arises ' especially if there is a glimmer hope that the matter can be resolved amicably.

Indeed, some employers are reluctant to notify the carrier of any potential employment claims for fear that the carrier will use that information and increase their premiums when the insurance policy is renewed. Notwithstanding those understandable concerns, as this case makes very clear, if the employer receives an employment claim in writing demanding the employer take any action, including making payments for the alleged harms, that letter should be considered a claim and forwarded to the carrier. This would be true if the letter is written by the employee, or, here, by her attorney.

Likewise, in the event that an administrative claim is filed with the Equal Employment Opportunity Commission (EEOC) or any of the various local agencies, a copy of that claim should also be sent forthwith to the carrier. As Westrec learned the hard way, failing to report such claims promptly to the carrier can result in the denial of coverage for that claim.

Here, although Westrec paid the premiums for two years to cover any such employment claims, when one was actually received, it never received the coverage it paid for because it failed to timely report that claim to the carrier. Do not let that happen to you.

Kevin C. McCormick, a member of this newletter's Board of Editors, is a partner in the Baltimore firm of Whiteford, Taylor & Preston. He provides advice and counsel to public and private employers including health care providers on all phases of the employment relationship.

For Twitter and LinkedIn followers, subscribe to the Employment Law Strategist newsletter at a special introductory rate. Click here. This offer is valid for new subscribers only.