Not All Statements Arising Out Of A Business Are An Employment-Related Act Excluded By The Employment-Related Practices Exclusion
September, 2003
Coverage was found under a commercial liability policy for defamatory statements made against an employee despite the existence of an employment-related practices (“ERP”) exclusion where the statements were not made in the context of employment and were not sufficiently related to the employment relationship. American Alliance Ins. Co. v. 1212 Restaurant Group, LLC, 794 N.E.2d 892 (Ill. App. 1st Dist. 2003).
Facts
Defendant 1212 Restaurant Group, LLC (“1212”) operated a restaurant located in Chicago called The State Room. The restaurant and its managers were insureds under a commercial general liability (“CGL”) policy issued by American Alliance. Demetri Alexander was hired under a three-year contract by the restaurant owners to be the Creative Director and Front House Manager of The State Room. During his employment, Alexander was injured when one of the owners dropped a piece of equipment onto Alexander’s foot, crushing his toe and foot. Following the accident, Alexander wore a brace and used crutches when he returned to work. After only one year of employment under the contract, Alexander was terminated.
Alexander filed suit against the restaurant and its owners alleging breach of contract, defamation per se and intentional infliction of emotional distress. Alexander alleged that following his return to work after the accident, the owner told him to “lose the shoe” meaning not to wear his brace because they did not want a “gimp” at the front of the restaurant. Alexander also alleged that during his employment the owner repeatedly called him names including “gimp,” “cokehead,” “faggot,” “homo,” etc. in front of other employees. On the day of his termination, Alexander was handed a separation agreement and threatened by the owner who stated that if Alexander did not sign the agreement, the owner would tell people that Alexander was “robbing the joint.” In his complaint, Alexander claimed that the owner told people “Alexander had his hand in the till and was robbing ‘the joint.’”
Both 1212 and the owners tendered their defense to American Alliance. The American Alliance policy contained the following ERP exclusion;
B. The following exclusion is added to Paragraph 2., Exclusions of Section I--CoverageB--Personal and Advertising Liability:
This insurance does not apply to:
‘Personal and Advertising Injury’:
1. A person arising out any;
(a) refusal to employ that person;
(b) termination of that person’s employment; or
(c) employment - related practices, policies, acts or omissions such as coercion, demotion, evaluation, reassignment, decipline [sic], defamation, harassment, humiliation, discrimination directed at that person.
Based upon this exclusion, American Alliance denied coverage, refused to provide a defense and filed a declaratory judgment action against 1212 and the owners.
Analysis
While reviewing the trial court’s finding of a duty to defend, the appellate court noted that no Illinois court had yet addressed the ERP exclusion within a CGL policy. Other jurisdictions, including California and Louisiana, have interpreted this exclusion. The court reviewed California’s interpretation that, if the occurrence was “directly related” to the insured’s employment, the exclusion would be applicable. The fact that the events occurred before or after termination does not alone render the ERP exclusion inapplicable. Loyola Marymount University v. Hartford Accid. & Indem. Co., 271 Cal. Rptr. 528 (Cal. App. 1989). The appellate court noted that California courts have also found that the ERP exclusion is not ambiguous when it is used in its ordinary sense. When the alleged statements are made in the context of employment and are directed at the individual’s performance during that employment, they are “related to employment” and therefore excluded pursuant to the ERP exclusion. Frank & Freedus v. Allstate Ins. Co., 52 Cal. Rptr.2d 678 (Cal. App. 1996). Decisions from the Ninth Circuit have also supported the analysis that the timing of the statement is not the determining factor. The key factor is whether the statement is related to employment. Defamatory remarks must have been made during the termination or “directly and proximately” resulted from the termination. HS Service, Inc. v. Nationwide Mut. Ins. Co., 109 F.3d 642 (9th Cir. 1987).
The Illinois appellate court agreed with the holdings of the cases cited above and found that whether or not the defamation occurred post-termination was not sufficient to remove it from the reach of the ERP exclusion. The issue was whether “the alleged defamatory statements were made in the context of Alexander’s employment and related to his employment performance.” The complaint in the underlying litigation alleged that both during and subsequent to his termination, his employers referred to Alexander’s sexual activities and stated that he was a “drunk” and a “cokehead.” The court found that these statements constituted personal insults and lewd comments separate from his employment. The nexus between the defamatory statements and Alexander’s employment was missing. The content of the statements was not about Alexander’s work performance and therefore the defamatory statements did not fall within the purview of the ERP exclusion. Consequently, the ERP exclusion did not exclude coverage and American Alliance was under a duty to defend 1212 and its owners against the Alexander complaint.
Other New Case Law Interpreting ERP Exclusion
In a similar recent decision, the court in Waffle House, Inc. v. Travelers Indemnity Co. of Illinois, 2003 WL 21666438 (Tex. App.-Fort Worth), held that an ERP exclusion for “’personal injury’ arising out of any... termination of employment... [c]oercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination, or other employment-related practices, policies, acts or omissions” was not ambiguous and did not exclude coverage for defamatory allegations intended to dissuade employees from working for a competitor. The court reviewed the timeframe of the statements and, although two years passed between the termination and the statements, it was the lack of causal connection to the employment that prevented application of the ERP exclusion. The Texas court briefly reviewed and agreed with the California court’s decision in Frank & Freedus requiring a relationship between the statements and the employment in order for the ERP exclusion to apply.
Learning Point:
Under a CGL policy containing an employment-related practices exclusion, defamatory statements made regarding an employee’s performance and within the context of that employment will likely be excluded from coverage. Those comments made outside of the context of employment or comments that do not relate to the claimant’s employment may not be excluded from coverage under a CGL policy. Insurers should carefully review all allegations within a complaint in order to determine whether the statements are sufficiently connected to employment to be excluded under the policy. Those statements which concern the individual personally, and are likely to be the most derogatory (promiscuity, sexual orientation, appearance or other personal attacks), may not have a sufficient nexus to the employment to fall within the ERP exclusion.
Consequently, particular attention should be paid to the nature of the alleged defamatory statements and whether those statements do indeed relate to the employment of the claimant, thereby falling within the employment-related practices exclusion. A denial of coverage based upon the ERP exclusion should be issued only in those cases where all of the alleged defamatory statements have a nexus or connection to the employment relationship.
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