Untimely Notice Causes Employer to Lose Insurance Coverage for Employment Claim

October 30, 2007

An employer cannot recover from its insurance company the costs of defense and settlement related to an employment discrimination claim where the employer failed to timely notify the insurance company of the claim, a federal court in Washington, D.C., has ruled. American Ctr. for Int'l Labor Solidarity v. Federal Ins. Co., No. 04-01523 (CKK) (D.D.C. Oct. 15, 2007). Granting the insurance company's motion for summary judgment and denying the employer's similar motion, the court ruled that a charge before the U.S. Equal Employment Opportunity Commission constituted a "formal" administrative proceeding requiring notice under the insurance policy.

The insurance company issued a liability policy to a not-for-profit labor-related organization which required the organization (as an employer), as a "condition precedent" to coverage, to give the insurer notice of any claim "as soon as practicable". The policy required the insurance company to defend any covered claim and to cover all losses, and permitted it to investigate and to settle any claim that it deemed expedient. The policy defined "claim" to include a "formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order, or similar document."

In August 2002, the employer received a Notice of Charge from the EEOC indicating that a former employee filed a Charge of Discrimination asserting a race discrimination claim. The Notice of Charge stated that no action was required by the employer at that time. In November 2002, the employer received a Second Notice of Charge. Unlike the first notice, the EEOC enclosed a two-page "perfected" Charge of Discrimination outlining the allegations in greater detail. This time, the EEOC requested that the employer either participate in mediation or submit a position statement. The employer declined mediation and submitted a position statement prepared by its outside counsel. The EEOC subsequently dismissed the charge and issued a right-to-sue notice to the complainant. In December 2003, the complainant filed a race discrimination lawsuit against the employer and one of its employees.

In January 2004, the employer notified the insurance company of the lawsuit and asked whether its outside counsel could handle the lawsuit. The employer had not informed the insurance company of the two EEOC charges, its decision to decline mediation, or its submission of the position statement. The employer also did not inform the insurance company that its counsel had knowledge of the matter due to its handling of the EEOC proceeding. In March 2004, the insurance company declined to cover the claim because it was not notified of the claim in a timely manner. The employer subsequently sued the insurance company for coverage under the policy, and the parties filed cross-motions for summary judgment.

The employer argued that the EEOC proceedings were not "formal" administrative proceedings because the EEOC used informal methods of resolving charges and could not adjudicate liability. Reviewing the nature of EEOC administrative proceedings, the court noted that the EEOC issues charges, investigates charges, considers position statements and evidence regarding allegations, conducts mediations and fact-finding conferences, has subpoena power, negotiates settlements of charges, and issues determinations on charges.

The court also observed that EEOC proceedings have consequences in subsequent actions. For example, charges and position statements may be admissible at trial as admissions or for impeachment. Thus, the court found that EEOC proceedings appear to possess all of the "trappings of formality." The fact that the EEOC cannot impose liability or damages did not strip its proceedings of their formality. The court found that the most "natural reading" of the liability policy was that an EEOC proceeding constituted a "formal administrative proceeding."

The court further noted that a reading of the policy as a whole compelled its conclusion that a notice of charge commenced a formal administrative proceeding. For example, the policy prohibited the employer from settling any claim or incurring any defense costs without the insurance company's permission. By unilaterally submitting a position statement and refusing to engage in mediation, the court reasoned, the employer potentially prejudiced the insurance company's rights by delaying the insurer its ability to investigate and resolve the claim.

The employer then argued that the insurance company should defend and indemnify the claims against the individual employee because he was not named as a party to the EEOC charge. The court also rejected this argument since the claims against the individual employee arose out of the same facts and circumstances as the EEOC charge and thus constituted one loss under the policy.

This case reminds employers with policies insuring against employment practices liability that their insurance companies need to be notified immediately whenever a charge or notice is received from a governmental agency, even if they are unsure whether the notice constitutes a claim under their liability policy. Employers also should make sure that they have a clear company procedure addressing how to handle administrative charges and complaints where insurance may be involved. The procedure should be communicated to all management employees who may learn of potential claims.

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