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COMP POLICY COVERS HARASSMENT DEFENSE

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TRENTON, N.J. -- Workers compensation insurers will have to defend and indemnify policyholders in sexual harassment lawsuits in New Jersey, the state's highest court has ruled.

In a unanimous June 15 decision by the state's Supreme Court, United States Fidelity & Guarantee Co. was ordered to indemnify a workers comp policyholder that lost a jury verdict in a sexual harassment suit.

The ruling in Lisa M. Schmidt vs. Dennis Smith et al. involved a suit brought by Ms. Schmidt in 1991 claiming that her employer, Personalized Audio Visual Inc., and its president, Mr. Smith, sexually harassed her.

After the suit was filed, the company turned to USF&G for defense under both a commercial general liability policy and the employer's liability portion of a workers comp policy. The company denied coverage under both.

While a declaratory action was pending over the coverage, a jury awarded Ms. Schmidt $181,730 in damages and interest. After the verdict, the trial court ruled that the workers comp insurer had a duty to defend and indemnify its policyholder.

On appeal to the New Jersey Supreme Court, USF&G argued that the policy contained exclusions to coverage. The court in its June 15 ruling rejected this argument and held that, because earlier New Jersey court rulings state that injuries from sexual harassment are bodily injuries, the exclusion cited by USF&G that excludes coverage for workplace harassment "violates the public policy underlying the workers compensation scheme and is therefore void."

The court also noted that because workers comp policies might cover the same acts as an employment practices liability policy, the Commissioner of Banking and Insurance and Commissioner of Labor "may wish to work with the insurance industry to resolve or address this overlap."

The court also held that workers comp "policies must cover not only claims for compensation prosecuted in the Workers Compensation Court but also claims for work-related injuries asserted in a common law court."

Ruling favors fund in subrogation case

LOS ANGELES -- In a dispute between the California guaranty fund and state insurance regulators, a California appellate court says the key issue in determining who is entitled to funds subrogated after an insolvent insurer's claims are paid is whose assets were used to pay those claims.

The May 27 decision by the state appellate court in Los Angeles in California Insurance Guarantee Assn. vs. Superior Court of Los Angeles County focuses on a dispute between CIGA and the California Insurance Department related to Los Angeles-based Signal Insurance Co., which was placed in liquidation in January 1978.

Signal had been found to be insolvent in 1975, after regulators concluded that its primary asset, medical malpractice insurer Imperial Insurance Co., had a $6.7 million reserve shortfall.

A total of about $850,000 in funds that has been recovered by CIGA through subrogation is at issue in the dispute.

Insurance Commissioner Charles Quackenbush had contended that, as liquidator of the insolvent insurer, he is entitled to sums the guarantee association recovered because they are the estate's assets.

However, CIGA contended that, as the state's statutory guarantee association, it is entitled to the sums it recovers through subrogation because it paid the claims. CIGA then brought this lawsuit.

In its decision, in which it ordered a lower court to issue a new, revised order in the dispute, the appellate court said, "In our view, the proper resolution of this dispute over subrogation recoveries is to render onto CIGA what is CIGA's and render onto the estate what is the estate's."

"In other words," the appellate court continued, "to the extent CIGA pays covered claims with its own assets, such as proceeds from the premiums it charges its members, it is entitled to retain the amounts it recovers through subrogation actions. Conversely, to the extent CIGA pays covered claims with 'early access distributions' or other assets from the insolvent insurer's estate, the estate is entitled to the proceeds of any subrogation action."

Lawrence E. Mulryan, executive director of CIGA, said the decision, which he believes is the first by an appellate court, clarifies an issue that has arisen in other states throughout the country. "I think it will be helpful to all parties," he said.

Mr. Mulryan said the decision means CIGA will receive virtually all of the funds in dispute.

However, Harry LeVine, senior staff counsel to the California Insurance Department, contends this is not clear. He added that the department will appeal the decision to the California Supreme Court.

"We think the problem with the court's decision is tracing the money" in determining the source of the funds used to pay the claims, Mr. Levine said. "How we'll ever trace which dollars were used is a good question," he said.

Death of tobacco bill may spark state suits

WASHINGTON -- The death of comprehensive tobacco control legislation in the Senate last month could mean a flood of litigation against tobacco companies in state courts.

At least 15 states already have set court dates for their suits against cigarette makers in an attempt to recover smoking-related Medicaid costs. The suits had been on hold in anticipation of congressional approval of a proposed $368.5 billion "global" settlement of such claims worked out by 40 state attorneys general and five tobacco companies last June (BI, June 23, 1997). Four other states have settled with tobacco makers.

A bill drafted by Sen. John McCain, R-Ariz., to implement the settlement initially would have granted tobacco companies limits on punitive damages and a degree of immunity from class-action lawsuits in return for their acceptance of numerous restrictions on their business activities. The measure also increased the projected cost to cigarette makers to more than $500 billion over a 25-year period.

But the McCain bill, despite support from the White House and several major public health organizations, came under fire from lawmakers who said it did not punish tobacco companies enough, and from those who claimed it would unfairly burden low-income smokers with new taxes. After several weeks of amendments -- including one that removed the immunity provisions and another that limited attorneys fees for lawyers who worked on the deal to a maximum of $4,000 an hour -- proponents of the bill could not muster the 60 votes required to end debate. Almost a year to the day that the preliminary agreement between the states and the tobacco companies had been announced, Senate Majority Leader Trent Lott, R-Miss., announced that the McCain bill was dead.

The death of the McCain bill sets the stage for states that have not settled with the tobacco companies to pursue their suits. In addition, hundreds of private suits, including a multibillion-dollar class-action suit in Florida, have been filed against cigarette makers. Although cigarette makers have generally prevailed in state courts, a Florida jury recently returned a verdict against Brown & Williamson Tobacco Corp. that for the first time levied punitive damages as well as compensatory damages in a smoking-related death case (BI, June 15).

Some form of tobacco control legislation may yet win congressional approval this year. Late last month, Sen. Lott and House Speaker Newt Gingrich, R-Ga., said Republicans would introduce limited tobacco legislation later this summer aimed at reducing youth smoking.