Why it matters 

In a recent pro-policyholder decision, the Second Circuit, applying New York law, reminded insurance companies that the duty to defend is “exceedingly broad.” An insurance company has the duty to defend even if there is only a possibility of coverage in light of how the underlying complaint against the policyholder has been pleaded. The court explained that under New York law, if there is potential for coverage based on factual allegations in a complaint, the insurer is obligated to defend, even if facts outside the complaint belie coverage, and even if the complaint also sets forth claims that clearly are not covered.

Detailed Discussion

Jada Scali sued her former employer, Euchner-USA, Inc., alleging that she had been sexually harassed and that after she lodged a complaint with the company she was then coerced into accepting a position as an independent contractor, resulting in the loss of various “employee” benefits. Scali later amended her complaint and added causes of action under the Employee Retirement Income Security Act (ERISA). Specifically, Scali alleged that the employer improperly and unlawfully classified her as an independent contractor. As a result, she was deprived of 401k benefits.

Hartford Insurance issued a primary commercial general liability policy and an excess policy to Euchner-USA that excluded coverage for claims involving employment-related practices. Employee benefits liability, however, was covered by an endorsement that provided Hartford would be legally obligated to pay “damages” because of applicable “employee benefits injury.” The policy also excluded coverage for liability arising out of “any dishonest, fraudulent, criminal or malicious act.”

Euchner-USA demanded coverage, which Hartford denied, contending, among other things, that coverage afforded under the policy’s employee benefits endorsement did not apply to Scali as an independent contractor. Hartford also later declined to participate in the settlement of Scali’s claim.

Euchner-USA filed suit against Hartford in the U.S. District Court for the Northern District of New York, seeking reimbursement for its defense fees and indemnification of part of the Scali settlement. The parties cross-moved for summary judgment. The court granted Hartford’s motion finding it had no duty to defend Euchner-USA because its policy excluded the intentional conduct alleged in Scali’s complaint, and granted summary judgment to Hartford.

The Second Circuit vacated and remanded. The court explained that under New York law, an insurer’s defense obligations are “exceedingly broad.” If there is potential for coverage based on factual allegations in a complaint, the insurer is obligated to defend, even if facts outside the complaint belie coverage, and even if the complaint states clearly noncovered claims in addition to potentially covered claims.

The ERISA claims raised a reasonable possibility of negligence on Euchner-USA’s part. It was alleged only that Euchner misclassified her position; it was not alleged whether this misclassification was done intentionally or negligently. The complaint contained allegations that sound of malice, but did not assert that Euchner improperly classified her with the purpose of interfering with her retirement benefits. Because the possibility of coverage was not precluded by the words of the complaint, the district court was reversed and Hartford was held responsible for defense costs.

To read the decision in Euchner-USA v. Hartford Casualty Ins. Co., click here.