January 1995

Workplace Labor Update - Insurance Coverage in Employment Cases – January 1995

8 min

Much has been said about the litigation explosion in this country. Suits by workers against their employers have contributed to this explosion, and million dollar verdicts in this area are not unusual. Particularly as the plaintiff?s bar has become more sophisticated in its use of tort theories to redress the gamut of workplace claims ? from negligent hiring to abusive discharges ? the specter of huge jury awards for mental anguish and punitive damages has intensified.

The good news is that some employment claims may be covered by insurance. Employees who can plead a claim that is covered by insurance may add a deep pocket to the equation. Employers whose counsel is astute to insurance issues can find coverage to pay for an adverse verdict and legal fees.

On the other hand, management is accustomed to controlling its own destiny in making employment decisions. In employment litigation, employers prefer to use their own lawyers and to control their own strategy, in part, because of the impact of such litigation upon other workers who may be planning their own suits in the not-too-distant future. If insurance is in the picture, another player ? the insurance company ? will come to the card table insisting upon some say in (or even total control over) the defense.

What Types of Employment Claims Are Covered?

The scope of insurance coverage is defined by the policy. A standard liability policy generally covers costs associated with the legal defense of the insured party as well as indemnification for any damages awarded (either by settlement or judgment). Even punitive damage awards may be covered if there is no provision to the contrary. First National Bank v. Fid. & Dep. Co., 283 Md. 228 (1978) (insurance protection against punitive damages is not barred by public policy).

In most states, an insurer owes a duty to defend the policy owner if the allegations in the suit come within the policy?s coverage or even if the claims potentially fall within the ambit of coverage. Moreover, any doubts as to whether the allegations against the insured fall within the policy?s coverage are to be resolved in favor of the insured.

Although these principles generally slant in favor of protecting insured parties, most courts adhere to the ?exclusive pleading rule? and refuse to consider evidence beyond the specific allegations of the complaint in determining whether coverage exists. In situations where complaint allegations arguably include both covered and non-covered actions, a defense must be provided until such point as covered claims no longer exist. Insured parties and their counsel, therefore, will carefully compare complaint allegations with policy language ? especially exclusionary provisions ? seeking refuge in the arms of the insurance carrier. Insured parties should be cognizant, however, of the strict time limitations on reporting claims included in all policies. Insurance should not come to mind only after a large verdict is rendered ? it must be an immediate consideration when litigation commences, otherwise it may be too late.

As alluded to above, standard liability policies often exclude coverage for intentional acts. A thorough plaintiff?s lawyer, however, will alternatively claim negligence (e.g. negligent hiring, supervision, retention or misrepresentation), reckless disregard defamation (e.g. in giving ?bad? or unfavorable references), invasion of privacy, false imprisonment or other unintentional torts in order to increase the potentiality of a deep pocket co-defendant. Plaintiffs? lawyers may prefer dealing with a faceless insurance adjuster rather than the defendant employer or its counsel who might have a more adversarial posture and be less amenable to quick settlement.

Generally an employer?s insurance policy will cover the wrongful or negligent acts of its employees acting within the scope of their employment, when others are harmed. Policies, however, normally exclude coverage for employees themselves when they are injured within the scope of their employment (which may nevertheless be covered by worker?s compensation). An interesting situation arose in Terra Nova Ins. v. Chillum Corp., 71 Md. App. 552 (1987), cert. denied, 311 Md. 22 (1987), where an employee arrested for theft of the employer?s goods sued for false arrest and defamation. The insurer denied coverage, but the court disagreed holding that theft was not within the employee?s intended job duties, thus his alleged injuries occurred outside the scope of employment and the insurer was required to defend the employer in the tort case.

While certain insurance policies expressly include or exclude discrimination claims, most policies are silent and the issue turns on the language of the policy, e.g. the definitions of ?occurrence,? ?bodily injury? or ?damages? contained therein. In Maryland Cup Corp. v. Employers Mutual Liability Ins. Co., 81 Md. App. 518 (1990), the Maryland Court of Special Appeals held that administrative charges filed with the Equal Employment Opportunity Commission (?EEOC?) were not claims for ?damages? covered by an insurance company. The court reasoned that because the EEOC could only award and enforce equitable remedies, rather than legal or monetary damages, the insurance company had no duty to defend or indemnify the employer. With the passage of the Civil Rights Act of 1991, which permits the EEOC to assess compensatory and punitive damages up to certain statutory limits, the continuing viability of Maryland Cup?s analysis is doubtful.

Moreover, with respect to Title VII, Equal Pay Act, Americans with Disabilities Act or Age Discrimination in Employment Act lawsuits, courts likewise grapple with a myriad of coverage issues. For example, in Continental Casualty v. Anne Arundel Community College, 867 F.2d 800 (4th Cir. 1989), the court held that a jury must decide whether the parties ?intended? that their insurance agreement?s exclusion of ?contract claims? covered implied or quasi contractual obligations such as the Fair Labor Standard Act?s provisions on minimum wages and equal pay thereby eliminating the insurer?s responsibility to pay a $550,000 settlement to female teachers in a sex discrimination lawsuit. When analyzing policies that exclude intentional acts from coverage, some courts have held that Title VII and Civil Rights Act of 1866 cases, as a matter of law, involve intentional acts of discrimination, which therefore are not covered. See, e.g., Industrial Indemnity Co. v. PMA, 50 FEP Cases 851 (Or. 1989) (intentional discrimination is not an ?accident? or ?occurrence? under policy); State Farm Fire & Casualty Co. v. Hiermer, 50 FEP Cases 1787 (S.D. Ohio 1988) (denying coverage on the ground that racial discrimination and retaliation are intentional).

Who is the Client?

According to the American Bar Association, the client of the attorney, although retained and paid by the insurance company, is the insured. ABA Formal Opinion 282 (1950). A lawyer may ethically undertake this dual representation based upon the ?community of interest? that exists out of the insurance contract.

In cases where the existence of policy coverage is questionable, or where lawsuits include both covered and non-covered allegations, insurance companies may undertake the defense of the insured with a reservation of rights, i.e., the right not to pay any judgment or otherwise indemnify the insured depending on the facts that subsequently develop and may eliminate coverage. In such situations, the best result for the insurance company may be, for example, that an act was intentional and thereby not covered. So while fulfilling its contractual obligation to provide a defense, the insurance company, in effect, is rooting against the insured on the outcome.

Maryland?s leading case on this issue, which is typical of decisions in other jurisdictions, is Brohawn v. Trans-america Ins. Co., 276 Md. 396 (1975). There, the insurer argued that because a conflict of interest existed between it and the insured, it no longer had a duty to defend. The company claimed that representing the insured put it in the ?untenable position? of ?cooperating in the defense of the action with its insured even though its interests are in fact adverse.? Id. at 409. The Court of Appeals disagreed, holding that the duty to defend was contractual and in the event of a conflict of interest, the insured is entitled to independent counsel paid for by the insurer.

This relationship, often referred to as the ?eternal triangle,? has been the subject of much commentary. Both the insured and the lawyer have certain ethical responsibilities to each other as well as those arising out of the insurance contract itself. A perplexing problem arises when in the course of representing the insured, the attorney discovers facts that would constitute a policy defense.

Under Maryland Rule of Professional Conduct 1.8, ?a lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client consents after consultation.? As long as the attorney realizes that her duty is to the insured and does not advance the interests of the insurer to the detriment of the insured, the attorney is operating within ethical guidelines.

On the other hand, every insured has a duty to cooperate which requires a full disclosure of facts to the insurer for the purpose of enabling it to determine whether or not there is a defense. The law in many jurisdictions again is on the side of the insured and provides that where an insurer seeks to avoid coverage because the insured has breached the policy by failing to cooperate with the insurer, the insurer must establish that such lack of cooperation resulted in actual prejudice.

Generally insurance agreements provide that the insurer has the complete and unilateral right to settle the case within policy limits. Concomitant with this freedom, is the insurer?s fiduciary duty of good faith to the insured. Nevertheless, this fact alone makes many employers uncomfortable. Although it might be cheaper for the insurance company to settle an employment case for ?nuisance value? rather than litigating for years, employers may be concerned about word getting out and around the workplace that filing a suit means easy cash.


Years of faithful insurance premiums may cushion the blow of employment-related litigation as long as claims fall within policy coverage, there is timely notification and full cooperation ? issues interpreted broadly in favor of coverage. Nevertheless, the flip side is loss of control over such important business concerns as litigation management, public disclosures and ultimate settlement. Although the employer may not have to pay a hefty verdict, other less obvious and ascertainable ?costs? may be the catch. While the issues have no easy solution, a thorough awareness of insurance agreements and an open and active relationship with the insurer?s agents and attorneys can only serve to better equip today?s employer to deal with employee litigation.