Policyholders might expect that their employment practices liability and/or directors’ and officers’ liability insurance policies would insure against U.S. Immigration and Customs Enforcement actions. As one insured recently discovered to its detriment, not all of these policies insure against such risks. As with all insurance policies, the particulars of the policy language dictate the extent of coverage.
McCalla Corporation operated a number of restaurants in Wichita, Kansas. In March 2011, it sought to update proof of employment eligibility documents for its workforce. During this process, a supervisor accepted a fake resident alien card from a longtime manager as proof of her employment eligibility. In August 2012, apparently after an audit, Immigration and Custom Enforcement opened an investigation and served a warrant on McCalla. In November of that year, the federal government filed a single-count criminal information alleging McCalla violated 18 U.S.C. § 1546(b)(2) for knowingly aiding and abetting the use of an identification document, having reason to know the document was false. The government alleged the resident alien card was an obvious fake and the supervisor should have been suspicious about the speed at which the manager was able to produce the card after it was requested. Several months later, and after burning through more than $104,000 in attorneys’ fees, McCalla entered a plea, accepted a $300,000 fine and paid a forfeiture of $100,000.
During the investigation, McCalla tendered the claim to its insurer, Certain Underwriters at Lloyd’s, London, which had issued McCalla a combination employment practices liability and directors’ and officers’ liability insurance policy. The day after McCalla entered its plea, Lloyd’s informed its insured that it was declining coverage. McCalla responded with a declaratory judgment action; however, the court entered summary judgment for Lloyd’s. McCalla Corp. v. Certain Underwriters at Lloyd's, London, 2014 WL 1745647 (D. Kan. May 1, 2014) (applying Illinois law).
The court appeared to acknowledge that the insuring agreement of the employment practices liability policy was broad enough to encompass the Immigration and Customs Enforcement action. The employment liability section insured against claims (defined to include criminal actions) for “wrongful employment practices,” which included “wrongful failure or refusal to adopt or enforce adequate workplace or employment practices, policies or procedures.” Id. at *4. The court determined, however, that the employment practices policy was limited by its terms to claims brought “by or on behalf of an Employee, Former Employee, or applicant for employment.” Id. Because the claim was brought by the government - and not on behalf of an employee, former employee or applicant - the employment practices liability coverage did not apply.
Coverage under directors’ and officers’ liability policies is typically broader than that found under employment practices liability policies. Nevertheless, the court also refused to find coverage under that policy section. The court identified three separate grounds for its decision. First, the court concluded that the government’s action was not a “claim.” The policy defined “claim” as “a civil, criminal, administrative or regulatory proceeding commenced against any Insureds in which they may be subjected to binding adjudication of liability for damages or other relief ...” The criminal information did not seek damages. The court reasoned that the criminal information did not seek “other relief.” Other relief, the court explained, was civil or equitable in nature. Because the government’s criminal proceeding did not seek damages or “other relief,” that action did not meet the definition of a “claim.”
Next, the court determined the criminal action did not seek “loss” as defined by the policy. The definition of “loss” included damages but excluded taxes, fines or penalties. McCalla conceded that the fines levied by the judgment fell outside of coverage, but argued the forfeiture was not a fine. The court disagreed on the grounds the forfeiture was punitive in nature. Id. at *7-8. It further ruled that the forfeiture was uninsurable at law, because it represented the insured giving up something it should not have had in the first instance. Id. at *8-9. As a third basis, the court found that the criminal plea fell within several “final adjudication” exclusions. Id. at *10. The court, however, did not reproduce those exclusions in its opinion.
The court got this decision wrong, at least with respect to the directors’ and officers’ liability coverage. The term “other relief” in the definition of “claim” is ambiguous and the court should have liberally construed the term in favor of coverage. Moreover, interpreting “other relief” so narrowly renders meaningless the term “criminal” in the definition of claim. Under the court’s definition, a criminal matter would never seek “other relief,” so a criminal action could never be a “claim.” This is clearly not the intention of the policy.
The court’s interpretation of the definition of “loss” is also flawed. According to the court, the purpose of forfeiture is to divest an individual of proceeds of a crime, property involved in a crime or property facilitating a crime. Here, however, the crime was the poor decision made by a restaurant supervisor to accept a bogus resident alien card. No property was involved in the crime; this was an administrative violation. Thus, the forfeiture did not represent the disgorgement of proceeds in the traditional sense. The judgment was closer akin to an award of damages, so denying coverage for this amount served no purpose.
The court also ignored the reality that sometimes parties plead in criminal matters for the same reason they settle in civil matters – to cap the uncertainty of litigation, as well as attorneys’ fees. This begs the question of what impact Lloyd’s failure to defend its insured had on McCalla’s decision to enter a plea.
The McCalla decision is under appeal and we hope the Tenth Circuit will correct the trial court’s mistakes. For other policyholders with Immigration and Custom Enforcement action exposures, we recommend counsel review their policies to determine whether these risks may be covered. If not, some insurers offer an immigration coverage extension/defense sublimit endorsement, which provides a $25,000 sublimit for defense costs incurred due to an immigration enforcement action. It also may be possible to add or expand such coverage through negotiation with the underwriter. A knowledgeable broker may assist in this instance.