Claims-made issues are often complicated in employment practices liability insurance (EPLI) cases because of the nature of discrimination claims. As a prerequisite to filing suit, a claimant must first submit a charge to the EEOC or other administrative body for investigation.  Because of this, a claimant may file an EEOC charge in one policy period but file the subsequent lawsuit in a later policy period.  In most EPLI policies, the event triggering coverage is a claim for an employment wrongful act which is first made during the policy period.  Since both the administrative charge and the lawsuit usually fall within the policy’s definition of a claim, a dispute may arise over when the claim was first made.

This exact scenario played out in John Marshall Law Sch. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 16 C 5753, 2016 WL 7429221 (N.D. Ill. Dec. 26, 2016).  In that matter, the Northern District of Illinois correctly determined coverage was triggered in National Union (“AIG”)’s policy period due to an ambiguity in the AIG policy.  The court determined a lawsuit constituted a claim first made in AIG’s policy period, even though the claimant brought an EEOC charge against the insured based on the same factual allegations before the AIG policy became effective.

In John Marshall, an employee of the law school filed a discrimination charge with the EEOC on October 30, 2013.  About a week later, the EEOC issued a right to sue letter.  On November 15, 2013, the law school’s EPLI policy with AIG became effective.  The claimant filed suit on December 21, 2013.  The law school tendered the lawsuit to AIG; however, AIG denied coverage, arguing that the EEOC charge constituted a claim first made before its policy period.  The law school sued, and AIG moved to dismiss.

The law school’s EPLI policy insured against Loss arising from a Claim first made against the insured during the Policy Period and reported to the Insurer pursuant to the terms of the policy, for any Wrongful Act. The EPLI policy defined “Claim,” in relevant part, as:

(i) a written demand for monetary relief or non-monetary relief (including any request to toll or waive any state of limitations); or

(ii) a civil, administrative, regulatory or arbitration proceeding for monetary relief or non-monetary relief which is commenced by:

(1) service of a complaint or similar pleading;

(2) return of an indictment, information or similar document (in the case of a criminal proceeding); or

(3) receipt or filing of a notice of charges; or

(iii) an administrative or regulatory investigation when conducted by the Equal Employment Opportunity Commission . . . which is commenced by the filling of a notice of charges . . . .

Id. at *2.  The court recognized that both the EEOC charge and the subsequent lawsuit fell within this definition of “Claim.”  The dispositive issue, according to the court, was whether the lawsuit was a Claim first made within the policy period.  Posed differently, the court asked whether the EEOC Charge and the later lawsuit constituted a single claim.  If they did, then there would be no coverage as the claimant filed his EEOC charge before AIG’s policy period.

The law school argued the EEOC charge and the lawsuit constituted separate claims. The law school pointed to the structure of the policy’s definition of “Claim.”  The policy separated each alternative definition of “Claim” with the word “or.”  The use of the disjunctive “or” between each alternative definition, according to the law school, meant that each alternate definition stood on its own, so that an EEOC charge constituted a separate claim from a lawsuit.  AIG countered that an EEOC charge was a prerequisite to filing a discrimination lawsuit, so that the charge and lawsuit must be part of the same claim.

The court agreed AIG correctly stated the procedural requirements for a discrimination lawsuit, but criticized the insurer’s position because it failed to address the EPLI policy’s language. Id. at *3.  The AIG policy lacked any language stating that any claims arising out of the same facts or transactions would be considered a single claim [often referred to as a “deemer” clause].  In addition, the court pointed to several clauses in the AIG policy that suggested that separate “claims” could arise from the same facts.  Accordingly, the court concluded that it could reasonably read AIG’s policy “as contemplating that an administrative investigation/charge and a lawsuit arising from the same facts are two different claims.” Id. at *4.  Because the lawsuit against the law school could be interpreted as a separate claim from the earlier EEOC charge, the court ruled a “claim” was first made during AIG’s policy period.

AIG also asked the court to rule that the EPLI policy was not a duty to defend policy, seeking to avoid the conclusion that it breached its duty to defend. In its argument, AIG referred to language in the policy stating that the insurer “does not assume any duty to defend.  The Insureds shall defend and contest any Claim made against them.” Id. at *5.  The court pointed to additional language, however, requiring AIG to defend if the insured tendered the claim for a defense within thirty days of the Claim being made.  Under Illinois law, the court concluded, such language created a duty to defend and therefore overruled AIG’s motion.

This second ruling is another critical win for the law school. Under Illinois law, a liability insurer must either defend an insured under a reservation of rights or seek declaratory relief as to its obligations. Santa’s Best Craft, LLC v. St. Paul Fire and Marine Ins. Co., 611 F.3d 339, 349 (2010).  If the insurer fails to take either action, and is found to have breached its duty to defend, the insurer is estopped from asserting coverage defenses to indemnity. Id. Based on the court’s finding that the lawsuit triggered coverage in its policy, and the court’s finding that the policy required AIG to defend, the law school may now argue AIG is estopped from raising defenses to its obligation to indemnify.

It is unclear why AIG failed to seek declaratory relief. Perhaps it felt its coverage defense under the insuring agreement was unassailable.  It may come to regret that decision.  It is also unclear from the court’s opinion whether the law school had an EPLI policy in place before the AIG policy, and if it did, why it did not provide notice under that policy.  If it did have an earlier policy in place, it likely could have avoided the litigation with AIG by providing notice of the EEOC charge to the earlier carrier.

Notwithstanding this policyholder-friendly decision, employers would we well-advised to make a practice of notifying their EPLI carriers of EEOC charges when they are first made, avoiding potential litigation and loss of coverage in the event no notice is given until a subsequent lawsuit is filed.