Between the Lines

A Discussion of Case Law and Statutory Law Affecting Commercial Lines of Insurance

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Prior Arbitration Establishes Exclusion: No Coverage Under EPL Policy for Reckless or Willful Sexual Harassment

In a case won by Anderson & Kreiger, and argued by this blogger, the First Circuit rejected a policyholder’s argument that he was entitled to re-litigate an arbitration panel’s determination that he had sexually harassed an employee.

After the sale of his company, the policyholder stayed on as its president. A portion of the purchase price was held back to be paid later, unless the policyholder violated the purchaser’s code of conduct.  The code of conduct prohibited illegal sexual harassment, and the arbitration panel concluded that the policyholder had willfully violated that provision by harassing several employees.

One of the employees filed a sexual harassment charge with the Massachusetts Commission Against Discrimination.  The insurer denied coverage, and the policyholder brought a coverage action in the District Court, which entered summary judgment in favor of the insurer, ruling that under the doctrine of issue preclusion the arbitration decision established the facts required to trigger the policy’s exclusion for conduct in reckless or willful disregard of law.  The policyholder appealed.  The First Circuit affirmed, rejecting the policyholder’s argument that the issues were not identical because the employer’s code of conduct was broader than Massachusetts law prohibiting sexual harassment.  The policyholder’s argument that the arbitration panel’s findings were not specific to the MCAD claimant also failed.  The First Circuit concluded that the policyholder was not entitled to defense or indemnification, and also rejected his claim of bad faith.

Most workplace sexual harassment cases will not be preceded by arbitration over the sale of the company.  However, many may overlap with an investigation, termination of the harasser, and a suit over the termination.  This can result in delicate situations for both corporate policyholders and insurers, who may potentially have an interest both in defending against liability and in establishing bad acts by an individual insured.

The case is Manganella v. Evanston Insurance Company, _ F.3d _ (2012).

Harvey Nosowitz
(617) 621-6555

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Harvey Nosowitz


Posted In: Employment Claims, Sexual Abuse

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