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Coverage Issues for Employment Practices Liability Insurance

02 Feb Coverage Issues for Employment Practices Liability Insurance

Originally Published in Canadian Defence Lawyers Hearsay (Winter 2015)

A growing number of insurers are offering employment practices liability policies as a stand-alone insurance product or as an added endorsement to their commercial general liability policies. Accordingly, there is a growing body of case law on coverage issues arising from these policies.

The below two cases illustrate the unique problems insurance lawyers and their clients face when determining coverage under these employment practices policies.

Coverage for Associated and Related Employers

In Precidio Design Inc v. Great American Insurance Company,2013 ONSC 7148 the Great American Insurance Company denied coverage under a directors’ and officers’ employment practices liability insurance policy. The applicant sought a declaration that it was insured under the policy, that Great American was required to pay all of its defence costs on a full indemnity basis resulting from a claim by the Ontario Ministry of Labour and an order that Great American Pay $239,000 being its loss from the claim.

The application was granted.

Great American had issued a policy of insurance to Precidio Inc and its holding company (collectively referred to in the reasons as Precidio). The policy was renewed. After the renewal, a new company was incorporated, Precidio Design Inc. with the same officers and directors.  A few months later Precidio terminated all operations and dismissed all of its employees. Precidio Design then commenced its operations and hired new employees. Unaware that Precidio was no longer in business, Great American offered to renew its insurance policy. Procedio Design applied for coverage. Procedio Design submitted the application and Great American agreed to be bound by the policy.

The next year the principals of Precidio design received notice from the Ministry of Labour regarding claims from 36 former employees of Precidio. The claim was initiated against Precidio and its officers and directors. Coverage was denied on the basis that the Ministry was not asserting claims against Precidio Design, the named insured. This was so even though Precidio Design and its directors were jointly and severally liable with Precidio due to the common employer doctrine found in section 4 of the Employment Standards Act. That section reads:

(1) Subsection (2) applies if,

(a) associated or related activities or businesses are or were carried on by or through an employer and one or more other persons; and

(b) the intent or effect of their doing so is or has been to directly or indirectly defeat the intent and purpose of this Act.

(2) The employer and the other person or persons described in subsection (1) shall all be treated as one employer for the purposes of this Act.

(3) Subsection (2) applies even if the activities or businesses are not carried on at the same time.

(4) Subsection (2) does not apply with respect to a corporation and an individual who is a shareholder of the corporation unless the individual is a member of a partnership and the shares are held for the purposes of the partnership.

(5) Persons who are treated as one employer under this section are jointly and severally liable for any contravention of this Act and the regulations under it and for any wages owing to an employee of any of them.

Justice Perrell ruled that a claim was made against Precidio Design within the meaning of the insurance policy due to the above section. Justice Perrell also ruled that the claim was made against an “Insured Person” under the policy. The definition of insured person included officers and directors. The officers of directors were pursued by the Ministry of Labour.

The insurer also argued that there was no “wrongful act” within the definition of the policy. The policy read:

“Employment Practices Wrongful Act” shall mean any of the following acts related to employment:

(1) wrongful dismissal, discharge or termination of employment, whether actual or constructive or breach of an implied employment contract..

Justice Perrell accepted the argument that because of the common employer doctrine in section 4 of the Employment Standards Act Precidio’s wrongfully dismissed employees are also Precidio Design’s employees and, therefore, Procidio Design committed a wrongful act under the terms of the policy.

Justice Perrell also went on to find that Great American not only had to pay the defence costs, but also the amounts paid by Procidio Design to the Ministry of Labour. The policy contained an exclusion that read:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured:

K: other than Costs of Defence, for the failure to afford an employee with reasonable notice of termination, except this exclusion shall not apply to that portion of Loss that is increased by reason of an Insured engaging in an Employment Practices  Wrongful Act..

The Court reasoned that the exclusion does exclude indemnification “for the failure to afford an employee with reasonable notice of termination” but does not exclude indemnification for “that portion of Loss that is increased by reason of an Insured engaging in an Employment Practices Wrongful Act.” In his opinion, the payment made to the Ministry was a loss increased by reason of the insured engaging in an employment practices wrongful act and was not a failure to afford an employee with reasonable notice.

I presume that Great American was surprised by Justice Perrell’s ruling as I doubt it intended its policy to apply to associated or related businesses or for damages to be paid pursuant to a Ministry of Labour proceeding.

ii) Coverage available despite allegations of intentional wrongdoing

In 1082652 Ontario v. Chartis, 2013 ONSC 7117 the applicant sought a declaration that Chartis Insurance Company was required to pay the legal costs of the applicant in a wrongful dismissal action. The policy provided coverage only for the payment of legal costs and not for damages for wrongful dismissal. The applicant was a tae kwon do school who terminated the employment of an instructor. A claim was commenced for wrongful dismissal damages as well as aggravated damages and punitive damages due to alleged high handed and malicious conduct. The claim also sought damages for defamation and various torts against the principal of the applicant.

Justice Gray reviewed the principles that apply in all duty to defend cases:

The insurer has a duty to defend if the pleadings filed against the insured allege facts which, if true, would require the insurer to indemnify the insured;

If there is any possibility that the claim falls within the liability coverage, the insurer must defend;

The court must look beyond the labels used by the plaintiff to ascertain the “substance” and “true nature” of the claims;

The court should determine if any claims plead are entirely “derivative” in nature, within the meaning of that term as set out inScalera;

If the pleadings are not sufficiently precise to determine whether the claims would be covered by the policy, “the insurer’s obligation to defend will be triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred”;

In determining whether the policy would cover the claim, the usual principles governing the construction of insurance contracts apply, namely: thecontra proferentum rule and the principle that coverage clauses should be construed broadly and exclusion clauses narrowly;

The desirability, where the policy is ambiguous, of giving effect to the reasonable expectations of the parties; and

Extrinsic evidence that has been explicitly referred to in the pleadings may be considered to determine the substance and true nature of the allegations.

The respondent relied on the allegations of intentional conduct in the Statement of Claim to deny coverage. Justice Gray did not accept that because the plaintiff claimed moral damages resulting from bad faith, high handed and malicious conduct that these allegations took the claim outside the coverage under the policy. Chartis was required to pay the defence costs of the claim.

This is an important ruling because many wrongful dismissal claims are accompanied by allegations of bad faith and intentional conduct for strategic reasons and to provide tax-related advantages and options for settlement purposes