Gauntlett on Intellectual Property/Antritrust Insurance : Insurance Policyholder Advocate & Attorney David Gauntlett : Gauntlett Law Firm : Insurance Recovery, Policy Interpretation : Irvine, Orange County, California

The court found that a cause of action for slander was therefore stated.

The court did not find the Employment-Related Practices Exclusion, however, surpassed and determined that it barred potential coverage because the alleged conduct was employment-related in its view.

The court reasoned,

At the very least, in calling Wilson a “nigger,” Plaintiff's employees intended to create a hostile, uncomfortable workplace environment. At most, in calling Wilson a “nigger,” Plaintiff's employees indicated their belief that he was not capable of performing the job competently. The point being made here is that no matter how one slices it, the underlying incidents were “employment-related practices, policies, acts or omissions” excluded under this provision.

Id. at *8.

The court did not directly deal with the issue of whether the fact, and that the actors were not the employer’s supervisors, but other employees made the acts, acts of the employer, so as to be employment-related in that all of the offenses, the harassment, humiliation, discrimination, demotion, coercion, evaluation and reassignment, were necessarily acts of an employer. There is no reason that defamation should be given a singular and distinct interpretation in context so as to make it actionable, if done by co-employees, where those were not the acts of the employer. The court assumes respondeat superior without analyzing this issue.

The Employment-Related Acts Exclusion

While the use of racial epithets may have occurred at the work site, the perpetrators were mere employees who were not acting either at the behest or direction of management nor whether acts ratified by management. More critically, since it is not the true facts but those alleged that count for coverage purposes, it was not alleged that conduct of these employees was attributable to the employer other than as a consequence of its alleged and implicit negligent supervision.

Had the complaint against Diversified been clearer in its fact allegations about negligent supervision, perhaps the court would have reached a different conclusion. At minimum, the court would have faced a tougher challenge in ruling as it did.

Had California case law specifically narrowly construed the scope of the employment-related exclusion on analogous facts as was the case in the Peterborough Oil Co., Inc. v. Great American Ins. Co., 397 F. Supp. 2d 230, 238-39 (D.Mass. 2005), the district court would also have had a harder task in ruling against Diversified.

Notably, the district court did not look to Peterborough or any other out-of-state authority (even though it was the case which was most directly on point) or seek to distinguish it or otherwise comment upon its non-applicability.

Although the suit asserted labeled causes of action for “harassment” Govt. Code § 12940(j) and discrimination Govt. Code § 12940(a) and (n) as the court observed which arose from acts on the employer’s premises and in an employment setting, that fact does not answer the question as to whether the unauthorized and unratified acts of non-managerial employees against another co-employee were an “employment related practice . . . act or omission” as the policy requires.

In this circumstance the conduct alleged would only be chargeable against Diversified for negligent supervision which under one plausible construction of the exclusion would not be within its ambit.

Per Peterborough Oil Co., Inc. v. Great American Ins. Co., 397 F. Supp. 2d 230, 238-39 (D. Mass. 2005) the provisions, when taken together “strongly suggest the common-sense conclusion that the term ‘employment-related’ has a relatively narrow meaning: it is intended to refer to matters that directly concern the employment relationship itself, such as the demotion, promotion, or discipline of employees by employers, and tortious acts that may accompany such personnel decisions, such as discrimination, harassment, or defamation. Conversely, it is not intended to refer to all matters that concern or relate to employees.

Implicit within this discussion is the premise that while the topic was one within the scope of the exclusion the chargeable acts must be those of an employer which is itself the actor who engaged in defamatory behavior.

In Truck Ins. Exchange v. Prairie Framing, LLC, 162 S.W.3d 64, 79 (Mo. Ct. App. 2005) negligent supervision asserted as an alternative to a respondeat superior claim was covered. Artfully pleaded allegations suggested a basis for liability due to employer’s knowledge that employees drank excessive amounts of alcohol while at work.

There was no allegation in the Wilson complaint that the shop supervisor was representing the employer, or was serving as a member of Diversified’s management team at the time the alleged acts took place. There was no allegation in the Wilson complaint that the shop supervisor was acting on behalf of the employer, or was a member of management.

In a telling part of his Order, Judge Gutierrez notes, “The statements made by Plaintiff’s employees [were] allegedly on Plaintiff’s behalf . . ., p. 12.

The court’s order assumes that the factual basis for the allegations directed against Diversified that were made allegedly on Plaintiff’s behalf “was respondeat superior. That the employer’s defamation statements were chargeable against Diversified because they were the acts of Diversified’s manager or agents. Yet this is but one, albeit not the most logical construction of the fact allegations against Diversified.

It is equally logical to presume that liability would still attach if the acts were chargeable to Diversified if the actors, who allegedly suffered defamation statements were negligently supervised by Diversified.

The complaint alleged that:

¶14. WILSON’s supervisor, individually, and for DCS and 105 defendant’s other agents engaged in the above-referenced actions [and] . . . should have known of these harassing actions because WILSON complained to his supervisor of the demeaning comments by his managers, supervisors, and other employees . . . DCS failed to take immediate and appropriate corrective action to stop the harassment.”

Liability could have been achieved against Diversified under this theory of recovery consistent with the above allegations where Diversified was negligent, i.e., “should have known” of the conduct of Wilson’s co-employers but either was unaware of their conduct and failed to have managers act to restrain the allegedly defamatory behavior.

A Kansas district court observed in Park Univ. Enters. v. American Cas. Co. of Reading, PA, 314 F. Supp. 2d 1094 (D. Kan. 2004) in a decision affirmed by the Tenth Circuit analyzing the analogous “personal injury” offense of invasion of privacy:

J.C. Hauling alleges that Park knew or should have known that the facsimile was unsolicited. “Should have known” is a term connoting negligence not intention. Restated, the J.C. Hauling complaint alleges alternatively that Park either (1) intentionally sent the facsimile, knowing that the recipient did not invite it, or (2) intentionally sent the facsimile, negligently believing that the recipient invited it. Because the J.C. Hauling complaint alleges that Park may have acted negligently, American should have considered that allegation when evaluating whether to defend Park in the underlying state court action.

Also germane to this analysis is a case cited in Park. Stegman v. Hunter Health Clinic, Inc. and Cincinnati Ins. Co., No. 97-1048-WEB, 1998 WL 748953 (Holding that facts available to insurer showed a possibility of coverage for defamation, even though retaliatory employment discrimination was not covered).

As Landmark’s exclusion may not bar employment related conduct that was not pertinent by the employer but rather a co-employee which the employer was liable for under theories of negligent supervision but which were not the acts of the employer, Landmark has not established that its exclusion would bar coverage in all possible worlds. Thus its exclusion should not bar a defense.

Even though it may ultimately be determined that Atlantic Mutual has a viable defense to coverage by virtue of the . . . exclusion, this can only affect its liability for indemnification. Its duty to defend depended on the existence of only a potential for coverage. That potential was never conclusively negated and obviously cannot be negated short of an actual trial to resolve what is clearly a genuine factual dispute. Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1040 (2002).

In other words, the court emphasized that the conduct was employment-related because it allegedly occurred on the work site. The court, however, did not explain why that was sufficient in and of itself to trigger the exclusion where another possible construction of employment-related exclusion, i.e., that the activity be for the benefit of the employer or in effectuating its purposes was not met by the allegations.

The court thus presumed that the employees who allegedly made the defamatory statements were acting on behalf of or with the knowledge of or agreement of Diversified, under the doctrine of respondeat superior. This is not what the complaint against Diversified alleged.

The court suggests that the racial epithets were uttered for the purpose of “undermining employee morale.” However, this understanding of the allegations is only one possible construction. Another possibility is the rogue acts of co-employees who are not engaging in conduct of which Diversified managers approved or knew of. The district court also fails to consider much less distinguish the point raised in our Reply:

“Diversified explained Mr. Williams’ negligent supervision theory and allegations in its moving papers. Landmark did not oppose that argument.”

Supervision of these employees, however, was not alleged to be as careful as it could have been and thus there was potential exposure for negligent supervision.