robintek

Jacqueline Butler did not receive a promotion from the Texas law firm where she worked, and she suspected that her race had something to do with it. In July 2001, she filed complaints with the Texas human rights commission and the federal Equal Employment Opportunity Commission. The EEOC notified the employer, who responded a month later. The following spring, the EEOC informed Butler that she had the right to sue the employer, which she promptly did. In turn, the employer made a claim with the company that provided its Employment Practices Liability insurance. Four weeks later, the insurance company denied the claim; the employer had no choice but to pay for its own legal defense and any potential settlement. In 2006, the employer sued the insurance company for the costs of its defense, but a federal court in 2007 upheld the claim denial.

Why did the employer’s insurance not pay for a discrimination claim? Because the employer took too long to submit it.

A typical policy requires the insured to give the insurer notice of any claims made against it as soon as practicable. In the Texas case, the policy went further — it required written notice to the insurer as soon as practicable and in no event later than sixty (60) days after such Claim was first made. The insurer maintained that Butler made her claim in July 2001, when she filed complaints with authorities. As evidence, it cited the policy’s definition of a claim as any judicial, administrative or other proceeding against any Insured for any Employment Practices Wrongful Act. Since the complaints filed with the authorities initiated administrative proceedings, the insurer held that they also constituted a claim. In the insurer’s opinion, the policy did not provide coverage if the employer did not give notice within 60 days of when Butler filed the complaints.

The employer argued that, since it notified the insurer within 60 days of receiving notice of the lawsuit, it had complied with the policy’s conditions. However, the court agreed with the insurer.

Insurance companies do not include this language in their policies simply to get out of having to pay claims. The sooner they know about events that might involve coverage, the better they can investigate and prepare legal defense. As time elapses, witnesses’ memories become less reliable, or witnesses might move away, and memos, e-mails, and other types of evidence might become hard to find. Also, a claimant who has been kept waiting for a length of time might become angry and unwilling to negotiate a settlement. Therefore, even without a firm 60-day deadline, an insurance company might deny coverage when the insured fails to give prompt notice of a claim.

Courts have not developed a standard for what is “prompt” notice, but they normally consider three questions: How long was the delay? What are the reasons for the delay? How does the delay affect the insurer’s ability to handle the claim? Sometimes, a court will excuse a late notice if it decides the insured had a reasonable basis for believing it was not liable for any harm. However, in a situation where an employee has filed complaints with authorities, the court might not agree that such a belief was reasonable.

The safest course for employers is to notify their insurance companies or agents as soon as they become aware of any type of employee complaints to outside authorities. Even if the employer believes the charges to be groundless, it should put the company on notice. Our professional insurance agents can advise you on what the policy requires it to do when a charge is made. The best time to have that discussion is before something happens.

A general contractor builds a new home. The GC hires a subcontractor to install certain components. After the home’s completion, those components turn out to be defective. Not only that, but their defects begin to affect other parts of the building. The homeowner sues, and the GC, facing large legal defense costs and potential judgments, submits claims to its insurers. The insurers deny coverage, saying that this was no accident, as the insurance policies use the term. Was this incident indeed an accident for which the GC should have insurance coverage, or was it merely a business risk that comes with hiring subcontractors? In the opinion of a federal appellate court, it was an accident.

The case, Stanley Martin Companies, Inc. v. Ohio Casualty Group, involved the construction of 24 duplex townhouses in a suburb of Washington, D.C. Stanley Martin, a home builder, hired Shoffner Industries to supply the wood trusses for the new homes. In its contract, Shoffner gave Martin a warranty guaranteeing that the trusses were free of mold, and it agreed to reimburse Martin for any liability or other costs that might arise out of defects in the trusses or any negligence. After Martin completed the homes, some of the homeowners began to complain of mold infestations. Investigations of the problem showed that the mold growth started with defective trusses and surrounding materials. The affected homeowners sued Martin, who ended up spending a long time in litigation and paying more than $1.7 million to clean up the mold.

Martin sought coverage under its General Liability and Umbrella insurance policies. The court’s decision does not say what the General Liability insurance company did, but Ohio Casualty, who provided the Umbrella policy, denied the claim. Ohio Casualty’s policy covered an “occurrence,”� which it defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”� The company argued that the mold damage caused by the subcontractor’s defective work did not fall within this definition of “occurrence,”� and therefore the insurance did not apply. Martin sued Ohio Casualty for breach of contract, but the trial court sided with the insurance company. Martin appealed the decision, and the higher court ruled in its favor.

The court relied on a Maryland ruling which held that damage spreading from a subcontractor’s defective work to the general contractor’s non-defective work qualified as an “occurrence.”� Rejecting Ohio Casualty’s argument that the spread of mold was a further deterioration of already defective work, the court cited a legal definition of “accident”� as an event that takes place without one’s foresight or expectation. Martin, the court said, did not expect or intend for the subcontractor to supply moldy trusses, nor did it expect or intend for mold to spread throughout the buildings. The court held that the mold’s spread to non-defective building components was an “occurrence,”� and therefore Ohio Casualty was obligated to provide coverage for the replacement of those components. However, the court said that the need to replace the trusses was not unexpected nor unforeseen, and therefore the policy did not cover that.

This decision might not bind courts in all states, but it provides a useful guideline to them and to insurance companies and contractors. Because of this decision, insurance companies might demand that the general contractors they insure be very selective about the subcontractors they hire, with special attention to their reputations for quality of work. They might also insist that policies include deductibles for property damage claims, to encourage contractors to use loss control practices. Both the insurance companies and the contractors will need to make every effort to prevent these types of claims from occurring.

Imagine two accident scenarios. In the first, a construction worker falls off a ladder from 12 feet up and breaks his ankle. His employer has a policy requiring drug and alcohol testing for all workers who suffer work-related injuries that are likely to result in Workers Compensation claims. Can the employer legally do that? If it can, is it a good idea?

In the second, the construction worker is on the ground near the ladder. Someone asks him a question and he turns around to answer. At that exact moment, a worker 12 feet up on the ladder is stung by a bee and drops a component of the air conditioning unit he was installing. The component strikes the worker on the ground, fracturing his shoulder. His employer has the same policy about automatic testing after a workplace injury. Again, is this legal? Is it a good idea?

Employers have good reason to be concerned about the effects of drug and alcohol use in the workplace. A 2002-2003 workplace study showed that, in the prior 12 months, 7% of U.S. workers had consumed alcohol during the workday, 1.7% had worked while under the influence of alcohol, 9% had suffered from hangovers while at work, and 3% used illicit drugs on the job. To combat this, many employers have drug- and alcohol-free workplace policies that they enforce through testing workers for these substances. However, automatically testing all workers following work-related accidents might not be wise. In fact, it could end up hurting the employer.

First, automatic testing might be illegal in the employer’s state. A West Virginia court in 2002 found that Walmart violated the privacy rights of an employee when it required him to take drug and alcohol tests after he injured his back on the job. The jury relied on earlier court decisions holding that employers violated the state’s constitution by requiring testing without having a reasonable suspicion that the employee was using.

A 2001 decision from an Ohio court went even further. It struck down a state law that permitted employers to deny Workers Compensation benefits to employees who refused to submit to post-injury drug and alcohol tests. The court ruled that requiring testing of employees for whom the employers had no reason to suspect substance abuse amounted to a search of the employees. This search, the court said, violated the U.S. Constitution’s prohibition against unreasonable searches and a similar provision in the Ohio constitution.

Even where state law permits automatic testing, it might harm employee morale. Otherwise loyal and productive employees might feel offended if an employer demands that they submit to testing after they’ve been injured on the job. In the long run, this might hurt the employer’s ability to retain employees and recruit new ones.

It might also invite disability discrimination claims. When the employer does not routinely test all employees but tests only those who suffer workplace injuries, the injured employees might view this as discrimination against them due to their disabilities. They might seek redress under the Americans with Disabilities Act and pursue monetary damages from the employer.

As was the case with the West Virginia and Ohio decisions, automatic testing might invite invasion of privacy claims. At the least, this will subject the employer to long, expensive, and distracting litigation.

Employers should take sensible steps to ensure that their workplaces are safe. While post-injury drug and alcohol testing might make sense in many cases, it is not always appropriate or desirable. Employers should consult with human resources professionals to establish sensible testing policies, and seek the advice of our professional insurance agents to verify that you have the necessary insurance coverage in the event of a discrimination or privacy violation claim.