A Hartford Financial Services Group Inc. unit had a duty to defend a firm in a case where a worker charged she was improperly switched from her status as an employee to an independent contractor and removed from her company's 401(k) plan, says an appellate court in reversing a lower court ruling.
According to Monday's ruling by the 2nd U.S. Circuit Court of Appeals in New York in Euchner-USA Inc., Michael Ladd, Euchner-USA Inc. 401-K Plan v. Hartford Casualty Insurance Co., former Euchner-USA employee Jada Scali sued the Syracuse, New York-based safety products manufacturer, in April 2011, charging she had been sexually harassed and coerced into accepting a position classifying her as an independent sales position salesperson rather than as an employee, which resulted in the loss of her benefits under the company's 401(k) plan.
She subsequently amended her complaint to add the company's 401(k) plan as a defendant and charged she was deprived of benefits under the plan because she was improperly classified as an independent contractor rather than as an employee.
Hartford Financial had issued a primary commercial general liability policy and an excess policy to Euchner-USA that excluded coverage for employment-related related practices. Employee benefits liability, however, was covered by an endorsement that provided Hartford would be legally obligated to pay “damages” because of applicable “employee benefits injury.”
A Hartford litigation consultant determined the Employee Retirement Income Security Act claims triggered Hartford coverage under the employee benefits liability endorsement but was overruled by a Hartford supervisor, according to the ruling.
The insurer refused to provide coverage as well as a defense on the grounds its policy only covered employee claims, while Ms. Scali was an independent contractor, and that there was an exclusion for any liability arising out of a failure by Euchner-USA to comply with regulatory reporting requirements associated with an employee benefits program.
Ms. Scali's case was settled for an undisclosed amount in April 2012, and Euchner-USA filed suit against Hartford to determine its rights under its insurance policy, and whether Hartford was obligated to reimburse it for attorney's fees and a portion of the settlement amount, according to the ruling.
The U.S. District Court in Binghamton, New York, held that Hartford had no duty to defend Euchner-USA because its policy excluded the intentional conduct alleged in Ms. Scalia's complaint, and granted summary judgment in Hartford's favor.
'Reasonable possibility of coverage' for ERISA claim
A three-judge panel of the 2nd Circuit disagreed in a unanimous ruling. Hartford's policy covers injury that arises “out of any negligent act, error or admission” in the administration of its employee benefits programs, says the ruling.
The “decisive issue” is whether there was a reasonable possibility that Ms. Scali's ERISA claims arose from negligence in administering the 401(k) plan.
Ms. Scali's ERISA claims “raised a reasonable possibility of negligence on Euchner's part,” concluded the ruling. None of her claims alleged the company had “improperly classified her with the purpose of interfering with her retirement benefits,” it said.
“We further conclude that there is a reasonable possibility that the ERISA claims arose from the 'administration' of Euchner's benefit plan,” said the ruling.
“In sum, there was a reasonable possibility of coverage under Hartford's policy as to Scali's ERISA claims,” said the ruling, in overturning the lower court decision. “Hartford therefore had a duty to defend Euchner.”
The ruling said that on remand, the District Court should consider whether Hartford breached a duty to indemnify the company, and if the firm is entitled to attorney's fees in this action because of Hartford's breach of the duty to defend.
The appellate court, however, upheld dismissal of Euchner-USA's charge that the Hartford had acted deceptively.