Negotiation of Severance Agreement with Employee Who Ended Affair With Company President Constitutes a Claim That Was Not Timely Reported Under EPL Policy

The United States District Court for the Southern District of California, applying California law, granted an insurer’s motion for summary judgment, finding that a Claim for sexual harassment by an employee was made during an earlier policy period and not timely reported. AV Builder Corp. v. Houston Cas. Co., 2022 WL 2168075 (S.D. Cal. Mar. 22, 2022). The Court reasoned that emails negotiating a release of the employee’s claims against the company, which included sexual harassment, in exchange for a monetary payment was sufficient to constitute a Claim within the meaning of the company’s employment practices liability insurance policy. 

A mold remediation company purchased claims-made-and-reported employment practices liability insurance policies for the Policy Periods August 19, 2017 to August 19, 2018 (the “2017 Policy”) and August 19, 2018 to August 19, 2019 (the “2018 Policy”). The company’s president was having an affair with an employee that she broke off in April 2018. The president responded by immediately sending her an email regarding her purported “resignation.” Over the next few months, the president and the employee exchanged emails about her departure from the company. On August 1, 2018, the employee sent a list of proposed changes to a draft severance agreement, which provided for a net payment of $400,000 in exchange for a release of claims against the company, including those arising under Title VII of the Civil Rights Act of 1964. On August 14, 2018, the employee’s lawyer emailed the company, stating that he was representing her with respect to her claims against the president and was “in the process of preparing a suit.” While the president was negotiating the severance agreement with the employee, he renewed the company’s employment practices liability coverage, and doubled the limit of liability for the 2018 Policy. The company did not notify the insurer of the situation with the employee until October 15, 2018, when it tendered the matter under the 2018 Policy. 

The policies defined a Claim as “a written demand received by the insured alleging damages or the filing of a “suit”, or any administrative proceeding including but not limited to the Equal Employment Opportunity Commission, or any other state or federal agency or authority with jurisdiction over you.” The policies required that written notice of a Claim be given no later than 60 days after the insured had actual notice or 30 days after the expiration of the Policy Period. The policies provided that notice must include certain specific information including the identity of the person alleging discrimination, harassment or “inappropriate employment conduct, as well as the identity of the insured who allegedly committed same.” The insurer denied coverage on the basis that the employee’s Claim was first made during the 2017 Policy Period and was not timely reported. Coverage litigation ensued, and the parties cross-moved for summary judgment as to coverage. The insurer also sought summary judgment that it was entitled to rescind the 2018 Policy due to the company’s material omission of information regarding the employee’s contentious separation, about which it had knowledge.

The Court granted the insurer’s motion with respect to the timing of the Claim and coverage. The Court found the policy’s definition of Claim to be ambiguous as to whether a demand must allege damages related to an insured event (i.e., discrimination, harassment or inappropriate workplace conduct). The Court observed that the notice provision seemed to contemplate that it did, based on the specific information required to be reported. Nonetheless, the Court concluded that the Claim was made on August 1, 2018 when the employee sent revisions to the separation agreement, and, at the latest on August 14, 2018, when the employee’s attorney contacted the company about a contemplated lawsuit. The Court reasoned that the draft separation agreement required a monetary payment by the company in exchange for a release of claims, including sexual harassment claims. However, the Court denied the insurer’s motion with respect to rescission. The Court ruled that the insurer had failed to identify a specific question on the application in response to which the company could reasonably have been expected to disclose information about the employee.

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