Insurance coverage issues arising from workplace tort claims.

• Author: Brady, Michael J.

THE WORKPLACE and the employment environment generate four separate but interrelated sets of issues:

* Liability issues in wrongful termination and sexual harassment lawsuits.

* Coverage issues regarding wrongful termination and sexual harassment lawsuits under general liability insurance policies.

* Coverage issues regarding wrongful termination and sexual harassment lawsuits under workers' compensation and employers' liability policies.

* Coverage issues regarding wrongful termination and sexual harassment lawsuits under directors and officers liability policies.

Lawsuits against insured employers often involve former employees who have quit or have been fired. They file lawsuits against former employers, and sometimes against employees, partners, directors, officers, co-workers and supervisors, alleging wrongful or constructive termination in breach of an employment contract. Most of these lawsuits also include causes of action for some type of violation of public policy, such as sexual harassment or racial discrimination, retaliation based on the employee's whistle-blowing or union activities, or discrimination based on the employee's health or physical disability. In some cases, plaintiffs also include a cause of action for defamation based on a derogatory statement by a supervisor or co-worker.

In some situations, former employees also allege that they were forced to quit or were fired because of an unfair condition inherent in the employment, such as excessive stress, unreasonable working hours, cramped working conditions, or an unfair demotion or reprimand. The underlying complaints typically contain causes of action for breach of the employment contract, breach of the covenant of good faith and fair dealing, negligent and intentional infliction of emotional distress, discrimination, harassment and/or retaliation. There usually will be claims for damages for emotional distress, loss of salary and other employment benefits, plus punitive damages.

Insured employers will tender the defense and indemnity of these lawsuits to their general liability insurers, sometimes to their D&O insurers, and recently in California to their workers' compensation carriers.

During the last few years, appellate decisions, both in state and federal courts, have greatly narrowed the scope of liability coverage afforded for these types of lawsuits. Court decisions have focused on different issues tied to the language usually contained in general liability policies. The law now is favorable to general liability insurers. At least in California, a liability insurer's decision to deny both a defense and indemnity to an insured employer sued for wrongful termination and discrimination is well founded. The decisions that have been issued on wrongful termination show a trend to force these types of cases out of civil court and into the workers' compensation arena.

TORT LIABILITY ISSUES

1. Wrongful Termination

   Tort damages, such as those for emotional distress, generally are not available to a plaintiff alleging wrongful discharge or breach of the covenant of good faith or fair dealing, unless the termination contravenes a fundamental public policy.(1) The violation of public policy must affect a duty that inures to the public at large, rather than merely affecting the righs of a particular employee,(2) and the public policy must be fundamental, substantial and well established at the time of the discharge.

   The status of the law in California is that, unless an employee alleges a breach of public policy, an employee who is fired can claim only breach of contract damages, not tort damages in the form of emotional distress. Thus, wrongful termination claims often appear in tandem with alleged violations of federal and state anti-discrimination statutes. Federal satautes include Title VII of the Civil Rights Action of 1964, 42 U.S.C. [sections][sections] 2000e et seq.; the Age Discrimination and Employment Act of 1967 (ADEA), 29 U.S.C. [sections][sections] 621-634; and the Americans with Disabilities Act (ADA), 42 U.S.C. [sections] 12. Violations of these statutes from the basis for the claim that the termination was in violation of the law and public policy.

2. Sexual Harassment

   Under federal law, sexual harassment claims generally arise from the prohibition against sexual discrimination under Title VII.(3) Sexual harassment is defined by the federal Equal Employment Opportunity Commission as unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature where submission to or rejection of such conduct is used as the basis for employment decisions or where such contact has a purpose or effect of unreasonably interfering with an individual's work performance or creating an intimidating, hostile or offensive working environment.(4)

   1. Theories of Liability

      There are two theories under which sexual harassment may be alleged: "quid pro quo harassment" and "hostile work environment."

      A cause of action for quid pro quo harassment is stated where it is alleged that a term of employment was expressly or impliedly conditioned on the acceptance of unwelcome sexual advances.(5)

      A cause of action for hostile work environment sexual harassment occurs where the harasser creates a discriminatory work situation "sufficiently severe or pervasive as to alter the conditions of the victim's employment and to create an abusive working environment."(6)

   2. Strict Liability for Quid Pro Quo Harassment

      Most courts considering the issue hold the employer strictly liable for quid pro quo harassment regardless of whether the specific acts complained of were actually authorized or forbidden by the employer, and regardless of whether the employer knew or should have known of their occurrence.(7)

   3. Hostile Work Environment

      In hostile work environment cases, plaintiffs generally must prove respondeat superior. In Meritor Savings Bank v. Vinson,(8) the U.S. Supreme Court ruled that an employer is not strictly liable for hostile work environment situations, but the employer can be found liable if the plaintif demonstrates that the employer had actual or constructive knowledge of a sexually hostile working environment and took no prompt remedial action.(9)

3. State Statutes

   Violations of state anti-discrimination statutes such as, in California, the Fair Employment and Housing Act (FEHA), often are asserted as well.(10) For example, in Matthews v. Superior Court (Regents of the University of California)(11) a California Court of Appeal held that under the FEHA a heterosexual male worker who was sexually harassed by homosexual coworkers may sue not only the entity that employed him (the university) but also the various individual supervisors who either condoned the harassment or failed to stop it. In other words, the FEHA may be used to impose personal liability on those who violate its provisions.

   COVERAGE ISSUES UNDER GENERAL LIABILITY POLICIES

1. Emotional Distress Not "Bodily Injury"

   Most general liability policies limit coverage to claims or lawsuits that seek damages for bodily injury or property damage that occurs during the policy period caused by an occurrence defined as an accident, subject to a number of exclusions. Most define bodily injury as injury, sickness or disease. Most underlying complaints alleging wrongful termination, constructive termination or sexual harassment will include a claim for negligent or intentional infliction of emotional distress. Plaintiffs will claim that they sustained psychological injuries, mental aguish and emotional distress as a result of the termination or harassment.

   Allegations of emotional distress alone do not constitute bodily injury sufficient to trigger the insurer's duty to defend.(12) Under this authority, a carrier with a policy that contains the above definition of bodily injury can refuse to defend or indemnify the insured employer in an underlying lawsuit that claims pure emotional distress. If the underlying complaint contains claims that the plaintiff sustained any injuries of a physical nature, such as headaches, insomnia, ulcers, hives or high blood pressure, that complaint would include claims for "bodily injury," as the term is defined in general liability policies, and the carrier could not deny coverage.

   Other jurisdictions in addition to California have required some manifestation of physical injury before finding coverage under policies that limit coverage to bodily injury.(13) However, a New Jersey court concluded that emotional distress and mental anguish did constitute bodily injury where the mental injuries resulted from a fellow employee's repeated acts of sexual harassment through physical contact.(14)

2. Economic Damages Not "Property Damage"

   Most general liability policies define property damage as physical injury to or destruction of tangible property that occurs during the policy period. Most underlying complains for wrongful termination claim damages for lost wages and other economic employment benefits. Generally, liability for property damage is covered only if there is some destruction of or injury to tangible property. Economic damages do not constitute property damage.(15)

3. Wrongful Termination Not "Occurrence"

   Most general liability policies limit coverage to damages that result from an "occurrence," and they define an occurrence as an accident or as an accidental event. The termination of an employee is a purposeful act and does not constitute an occurrence. Courts have concluded that insurance carriers have no duty to defend or indemnify the insured against a claim of alleged wrongful termination on this basis.

   In Commercial Union Insurance Co. v. Superior Court(16) the California Court of Appeal held that the intentional termination of an employee could not be construed as an "occurrence" under a general business policy, because the resulting harm was not accidental.

   In American Guaranty & Liability Insurance Co. v. Vista...