No Coverage Available for Employment-Related Claims Under Policy D&O and EPL Coverage Sections

The United States District Court for the District of Massachusetts has held that coverage is unavailable for a complaint alleging violations of the California Labor Code and the California Business and Professions Code because the complaint did not constitute an employment claim as defined by the Policy’s EPL Coverage Section and triggered an exclusion in the Policy’s D&O Coverage Section regarding claims “alleging, arising out of, based upon, or attributable to” the employment practices of the insured.  The Talbots, Inc. v. AIG Specialty Ins. Co., 2017 WL 4364178 (D. Mass. Sept. 29, 2017).

Former employees of the insured, a clothing retailer, filed a class action lawsuit against the insured for violations of the California Labor Code and the California Business and Professions Code.  The insured sought coverage for defense costs and indemnity under the D&O and EPL Coverage Sections of its management liability policy.  The insurer denied coverage under both sections, and the insured filed a breach of contract suit.

The court granted the insurer’s subsequent motion to dismiss.  First, the court concluded that coverage was unavailable under the D&O Coverage Section because the exclusion for claims “alleging, arising out of, based upon, or attributable to the employment of any individual or any employment practice” applied to bar coverage because the various claims all arose out of or were attributable to the insured’s employment of individuals or its employment practices.  The court also concluded that the exclusion barred coverage for the California Business and Professions Code count because the count alleged that the insured “gained an unfair advantage over other businesses solely because of the employment-related violations,” and was “merely an alternative statutory theory of recovery for the same alleged injuries to [the insured’s] employees[.]”  Second, the court concluded that the complaint did not trigger coverage under the EPL Coverage Section because none of the counts were included in the definition of Employment Practice Violations.

Finally, the court rejected the insured’s contention that the insurer had “taken inconsistent positions” by “suggesting that the [underlying action] does not meet the definition of Employment Practices Violation under the EPL Coverage Section, but does qualify as an employment practice for purposes of [the D&O Coverage Section exclusion].”  According to the court, “[t]his argument is completely beside the point. . . .  The D&O Coverage Section contains a broad exclusion for any claims arising out of employment practices, presumably because there is a separate section of the policy (the EPL Section) which deals with employment practices violations and defines with specificity what forms of violations are covered under the policy.”