Conflict Must Be Evident On Face Of Complaint
July 28, 2009
The 7th U.S. Circuit Court of Appeals recently held that claims against an employer that it intentionally discriminated against employees based on race and gender did not give rise to a conflict of interest requiring that the employer's insurer defend it through the appointment of independent counsel, even though the liability policy covering the employer contained an exclusion from coverage for willful failures to comply with the law. National Casualty Co. v. Forge Industrial Staffing Incorporated, 567 F.3d 871 (7th Cir. June 3, 2009).
The insurer, National, was represented byn Shaun McParland Baldwin of Tressler, Soderstrom, Maloney & Priess LLP, Chicago, and Thomas Crouch of Meagher & Greer, Scottsdale, Arizona. Robert B. Baker of Surdyk & Baker, Chicago, represented the employer, Forge.
Forge is a staffing company that places temporary and some permanent employees throughout the country. In 2006 four of Forge's former employees filed anti-discrimination charges with the Equal Employment Opportunity Commission alleging they were fired because of their race and/or in retaliation for complaining about Forge's practice of honoring clients' requests not to staff minorities. The charges were characterized by the 7th Circuit as alleging "intentional discrimination" by Forge based on race and gender.
National provided employment practices liability coverage for Forge, including coverage for intentional discrimination. It therefore agreed to provide a defense for Forge to the claims before the EEOC, and it assigned counsel to do so.
At the same time, National reserved the right to deny coverage based on exclusions in its policy, including a punitive damage exclusion and an exclusion for the "willful failure … to comply with any law … or regulations relating to employment practices." The policy defined "willful" as "acting with intentional or reckless disregard for such employment-related laws, orders or regulations."
Forge thereafter requested the appointment of independent counsel based on National's alleged conflict of interest, and National declined. Forge hired its own counsel, and National brought this action seeking a declaration that no conflict of interest existed and that it had no obligation to pay the defense costs incurred by Forge's own counsel. The district court found there was no conflict and that Forge had to bear the costs of its own counsel. Forge then filed this appeal.
In an opinion by Judge Anne Claire Williams, the 7th Circuit affirmed. Williams first reviewed Illinois law generally with respect to conflicts of interest and noted that a conflict exists, thereby requiring the appointment of independent counsel, where the resolution of fact issues in the underlying lawsuit would allow insurer-retained counsel to lay the groundwork for a later denial of coverage.
She then took up Forge's argument based in part on Nandorf Inc. v. CNA Insurance Cos., 134 Ill.App.3d 134, 479 N.E.2d 988 (1st Dist. 1985), that the EEOC charges could result in lawsuits where punitive damages are requested and that they would dwarf any compensatory award. In Nandorf the court essentially held that where the punitives sought greatly outweigh the compensatory award, an insurer might be induced to put on a less than vigorous defense and pay the compensatory award, thereby leaving the insured exposed for the non-covered punitive award.
While Nandorf required the appointment of independent counsel under these circumstances, Williams found the case not applicable because punitive damages cannot be sought in an EEOC proceeding. Moreover, said Williams, there was no evidence here that the underlying plaintiffs would seek punitive damages if and when they actually filed a lawsuit in court against Forge. Not until punitives are actually requested, and a court then determines that a conflict appears, should a court order the appointment of independent counsel.
Forge further argued that independent counsel was necessary because National-appointed counsel would have the incentive to shift the facts on the intentional discrimination claim to make it appear that Forge willfully violated the law, thereby removing the action from the policy's coverage.
Williams rejected the point. She acknowledged that it would be possible for National-appointed counsel to subtly elicit facts tending to show that Forge had knowledge of the applicable anti-discrimination laws, which would negate National's obligation to indemnify Forge. The danger of that, however, according to Williams, was minimal given that this information would likely be discovered anyway.
As an employment placement company, said Williams, one would assume that Forge has knowledge of employment laws, and the underlying claimants or the EEOC itself will likely inquire about that knowledge. The same kind of evidence could be adduced if National brought a separate suit against Forge claiming that its policy did not apply. Therefore, counsel's ability to solicit this information during the defense of the EEOC charges is of little import.
Moreover, Williams observed that there are no allegations present in the EEOC charges that Forge willfully violated the law or that Forge had knowledge of anti-discrimination laws. The case therefore presents no fact allegations which, when resolved, would preclude coverage. In the absence of these kinds of allegations, the appointment of independent counsel is not warranted, for Illinois law requires facts to be alleged on the face of the complaint which, if proven true, take the matter out of the scope of coverage.
Accordingly, under the charges as alleged, any theory that may shift the facts in such a manner as to foreclose coverage is entirely speculative and presents, at most, a potential and not an actual conflict. In any event, according to Williams, the mere fact that National can use information garnered in the EEOC proceeding in a parallel proceeding alleging non-coverage is not relevant because the same information could be obtained through the normal discovery process in the parallel suit.
Based on this analysis, the 7th Circuit affirmed the judgment in favor of National.
