On July 21, 2009, the Minnesota Court of Appeals ruled that severance paid to settle an employment claim fell within an employment practices liability (EPL) policy’s definition of loss. Royal Indemnity Company v. C.H. Robinson Worldwide, Inc., 2009 WL 2149637 (Minn. App. July 21, 2009).

C.H. Robinson faced a nationwide class action lawsuit alleging gender discrimination, hostile work environment and other claims. Robinson had both primary EPL coverage and two excess EPL policies. After Robinson exhausted the $10 million primary policy through payment of defense costs, it demanded the two excess carriers fund a $15 million settlement. Both excess carriers, including Royal, agreed to fund the settlement.

However, Royal settled under a reservation of rights to recoup amounts it paid in settlement. It filed a declaratory judgment action seeking to recover its share of the settlement. Its policy followed the form of the primary policy, which defined loss, in relevant part as: “any amount which an Insured becomes legally obligated to pay as the result of a covered Claim or Claims…for Wrongful Employment Acts, including but not limited to damages…and settlements.”

In seeking to escape its duty to indemnify, Royal relied on two main points. It argued that severance payments made to the three named plaintiffs in the class action did not qualify as loss. The definition of loss also excluded taxes, and Royal therefore claimed it should receive a credit for the portion of the settlement that went to pay employees’ taxes.

Robinson made the severance payments to the named plaintiffs in exchange for their voluntary agreement to sever their employment with Robinson. According to Royal, Robinson had not made the payments as the result of a claim for a wrongful employment act. Id. at 4.

The court of appeals rejected Royal’s argument. The three named plaintiffs had received settlement monies beyond what the other class members had received. In approving this arrangement, the court in the underlying case required the named plaintiffs to provide additional consideration for the severance payments, namely, their voluntary termination of employment.

The court agreed that severance payments, by themselves, would not normally fall within the insuring agreement of an EPL policy. Nevertheless, in the case before it, Robinson agreed to the severance as part of a settlement. As the court stated, “It is simply implausible to suggest that the severance agreements are not the result of the covered claims that were settled in the settlement agreement.” Id. at *5.

Royal also sought credit for the part of the settlement that went to pay the class members’ tax obligations. The definition of loss excluded taxes. The trial court ruled that the tax exclusion applied only to taxes imposed directly upon the insured. Before the court of appeals, Royal argued that nothing in the policy limited the tax exclusion. However, the appellate court affirmed the lower court’s ruling. Because the settlement fund went to pay tax obligations of the settling class members, and not Robinson’s taxes, the court found the exclusion inapplicable. Royal has appealed this decision to the Minnesota Supreme Court, which has not yet decided whether to hear the case.

EPL policies are a relatively new product, and EPL policy language varies substantially between different insurers. Correspondingly few judicial opinions exist construing these policy’s terms. Accordingly, each new decision, even if unpublished, helps build the body of case law on this line of insurance. The C.H. Robinson decision is important because it clarifies what payments fall within the definition of loss. Insurers will refuse to pay severance in connection with a termination or employment contract. However, if an employer settles an employee’s claim or lawsuit by paying severance, C.H. Robinson helps ensure that such payments are covered. Further, the decision may keep insurers from trying to pass an employee’s tax liability from a settlement onto the insured-employer.

If you face an employment practices liability claim and have any questions concerning EPL policies, please contact McGuireWoods LLP’s Insurance Coverage Counseling and Litigation Group.