Missouri Public Entity Risk Management Fund v. Investors Insurance Company of America

Citations: 451 F.3d 925; 2006 U.S. App. LEXIS 16179; 98 Fair Empl. Prac. Cas. (BNA) 548; 2006 WL 1750965Docket: 05-2754

Court: Court of Appeals for the Eighth Circuit; June 28, 2006; Federal Appellate Court

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A declaratory judgment case concerns the interpretation of an excess insurance policy issued by Investors Insurance Company of America to the Missouri Public Entity Risk Management Fund (MOPERM), governed by Missouri law. The district court granted summary judgment in favor of MOPERM, affirming that excess insurance coverage exists under the policy, prompting an appeal from Investors. MOPERM, which provides liability insurance for Missouri public entities, purchased a policy to cover claims exceeding $900,000 per incident or $6,000,000 annually. The policy defines an "Insured" as MOPERM member agencies and their officials acting within their official duties. It covers "wrongful acts," including civil rights violations by officials. 

The policy was modified to include Endorsement No. 19, which explicitly covers legal discrimination claims. MOPERM sought a declaratory judgment regarding liability for four unrelated employment discrimination claims, for which Investors denied coverage. MOPERM argued for indemnification under Endorsement 19 since all claims involved legally prohibited discrimination. The appeal focuses on one specific claim from Darlene Hellerich against Jerome Biggs and Andrew County, Missouri. Hellerich worked for Biggs and alleged that he engaged in severe discriminatory behavior, alongside inappropriate physical conduct from a county custodian, which ultimately forced her to resign.

Hellerich initiated a lawsuit against Biggs in state court, claiming intentional and negligent infliction of emotional distress related to Biggs's workplace behavior. Concurrently, she filed discrimination charges with the Missouri Human Rights Commission and the EEOC against Andrew County, her employer, and Biggs, alleging sexual harassment and a hostile work environment due to actions by Biggs and Reed. In her EEOC filing, Hellerich noted the absence of a formal procedure for reporting discrimination and the lack of an anti-sexual harassment policy for county employees during her tenure.

MOPERM settled Hellerich's claims fully, resulting in her dismissal of the state lawsuit against Biggs and withdrawal of the EEOC complaints against both Biggs and the county, alongside relinquishing her right to pursue further legal action on these charges. As part of the settlement, Andrew County committed to implementing an anti-harassment policy and providing relevant training to its employees.

Although the Hellerich settlement did not exceed MOPERM's policy's single claim floor with Investors, it pushed MOPERM's annual aggregate claims over $6,000,000, which activated coverage under the excess insurance policy. MOPERM sought indemnification from Investors, which contested the claim. The district court granted summary judgment in favor of MOPERM, determining that excess coverage was applicable per the policy language and Missouri law.

The review of the district court's summary judgment and interpretation of state law is conducted de novo. Under Missouri law, an insured must demonstrate that their claim falls within the policy's terms and bear the burden of proof for substantial evidence of coverage. Courts enforce insurance contracts as written, only interpreting ambiguous terms against the insurer, while maintaining the original intent of the parties unless it contradicts public policy. Furthermore, if both covered and excluded risks concurrently cause a loss, the insurer remains liable as long as one cause is covered by the policy.

Investors contends that the Hellerich claim lacks coverage under the policy because it does not involve 'wrongful acts' by an 'insured' as defined in the policy. They argue that 'insured' refers to public officials acting within their duties, and that Biggs's alleged sexual harassment was outside the scope of his role as county attorney. This reasoning is countered by the fact that the county, as a member agency of MOPERM, is also considered an insured. The county’s failure to act contributes to its vicarious liability under federal law for the hostile environment created by Biggs, which becomes a basis for coverage under the excess insurance policy that includes protection against legally prohibited discrimination.

The document references the legal principle that sexual harassment by a supervisor typically falls outside the scope of employment when determining employer liability. However, vicarious liability may still apply if the employee’s discriminatory conduct is facilitated by the agency relationship. For vicarious liability to be established, there must be evidence of something beyond the employment relationship aiding the tort. The court rules that an employer can be liable for a hostile work environment created by a supervisor, particularly when no tangible employment actions are taken.

In such cases, an employer may assert an affirmative defense if they can demonstrate reasonable care in preventing harassment and that the employee failed to utilize preventive measures. Hellerich's claims indicate that all harassment occurred during work hours while Biggs was acting as her supervisor. Additionally, it is alleged that Biggs not only harassed Hellerich but also participated in the harassment by another employee. Hellerich claims the county lacked an anti-harassment policy and complaint procedures to protect employees in such situations. The settlement was reached in exchange for Hellerich dismissing her lawsuit against Biggs and the EEOC charges against the county related to his conduct.

The insurance policy in question provides coverage for wrongful acts committed by officials, including instances of unlawful discrimination. Biggs's alleged misconduct, though outside the scope of his duties, does not negate the county's coverage. The county's lack of preventive measures, such as an anti-harassment policy, adequate training, or a complaint procedure, undermines its defense against vicarious liability for Biggs's discriminatory actions. Investors acknowledges that the policy language could imply coverage for vicarious liability situations. The district court's finding that excess coverage applies due to administrative charges against the county is supported by relevant case law. Investors' argument against allowing insurance for intentional unlawful conduct lacks a basis in Missouri public policy, as there is no prohibition against public entities insuring against intentional employment discrimination. Missouri courts have previously upheld insurance coverage for intentional acts in similar contexts. As such, the court concludes that the excess insurance policy complies with Missouri public policy, affirming the district court's judgment regarding the coverage. The underlying claim involves Darlene Hellerich, who experienced severe discrimination and harassment from Biggs and a county custodian, which led her to resign and subsequently file suit and discrimination charges against both Biggs and Andrew County. The county lacked a formal complaint process and anti-harassment policy during her employment. The claim was ultimately settled by MOPERM.

Hellerich settled her lawsuit against Biggs by dismissing the state court case, withdrawing EEOC charges, and waiving her right to sue on those charges. In return, Andrew County committed to upholding an antiharassment policy and training all employees on harassment issues. Although the settlement did not exceed MOPERM's policy claim floor, it pushed MOPERM's total claims over $6 million, activating excess insurance coverage. MOPERM then sought indemnification from Investors, which contested the claim. The district court ruled in favor of MOPERM, asserting that the policy and Missouri law supported excess coverage for the claim.

Under Missouri law, an insured must demonstrate that a claim falls within the policy's coverage terms, and courts are bound to enforce insurance contracts as written unless ambiguity arises. The court may interpret ambiguous terms against the insurer but will not distort clear language. Liability exists if an insured risk and an excluded risk are concurrent proximate causes of a loss.

On appeal, Investors argued that the Hellerich claim was not covered because it did not pertain to wrongful acts by an insured acting within official duties. Investors contended that Biggs's alleged sexual harassment was outside his official role as county attorney. However, the county is also an insured under MOPERM, and its failure to act on the harassment allegations resulted in vicarious liability, which qualifies for coverage under the excess insurance policy for unlawful discrimination. Generally, sexual harassment by a supervisor does not fall under the scope of employment for employer liability, but the county's inaction creates a basis for coverage.

Conduct within the scope of employment is not the sole basis for employer liability under agency principles. An insurance policy can cover wrongful acts beyond official duties, including legally prohibited discrimination. Employers may be vicariously liable for intentional discrimination if the agency relationship facilitated the tort, requiring more than just the employment relationship. An employer is vicariously liable for a hostile work environment created by a supervisor unless it can successfully raise an affirmative defense, which necessitates that the employer took reasonable care to prevent and correct harassment and that the employee did not unreasonably fail to utilize available remedies.

In this case, all of the alleged misconduct by Biggs occurred during work hours and in his official capacity as a supervisor, where he not only harassed Hellerich but also condoned and participated in the harassment by Reed. Hellerich's claims indicate that the county lacked an antiharassment policy and complaint procedure, leaving employees vulnerable to supervisor misconduct. The settlement involved Hellerich dismissing his claims against Biggs and the county, but the insurance policy's coverage extends to discrimination beyond the scope of an official's duties. The county's failure to implement protective measures against harassment contributes to its liability for Biggs's discriminatory actions. The district court correctly determined that the insurance policy's excess coverage applied due to the administrative charges against the county.

Coverage under a liability policy exists if at least one insured risk contributes to the loss. Investors asserts that allowing insurance for intentional unlawful conduct contradicts Missouri public policy, citing cases that prohibit insuring against theft or intentional damage. However, Investors fails to identify a clear public policy preventing public entities from insuring against intentional employment discrimination or vicarious liability. Missouri precedent supports the notion that law enforcement associations can insure against willful acts, and there is no indication that the Missouri Supreme Court would oppose insurance coverage for civil rights violations based on public policy. Thus, the court concludes that the excess insurance policy in question does not violate Missouri public policy, affirming the district court's judgment.