Court: Court of Appeals for the Second Circuit; June 10, 2014; Federal Appellate Court
Hartford Casualty Insurance Company issued a comprehensive general liability insurance policy to Euchner-USA, including an endorsement for employee benefits. Hartford denied coverage and refused to defend Euchner against a lawsuit by former employee Jada Scali, who alleged sexual harassment, wrongful termination, coercion into accepting an independent contractor status, and loss of benefits from the 401(k) plan. The Northern District of New York granted summary judgment to Hartford, ruling it owed no defense since the claims involved intentional wrongdoing. However, the appellate court found a reasonable possibility that some claims in Scali's amended complaint could invoke coverage under the insurance endorsement, indicating Hartford had a duty to defend. The court vacated and remanded the decision regarding the defense obligation but affirmed the dismissal of Scali's claim under New York General Business Law § 349. Scali's amended complaint retained similar allegations as the original but added the Euchner 401(k) Plan as a defendant and included claims under the Employee Retirement Income Security Act (ERISA), asserting that she was misclassified as an independent contractor.
Misclassification of Scali as an independent contractor resulted in her being denied benefits under Euchner’s 401(k) plan. Euchner submitted an amended complaint to Hartford, which included ERISA claims that a litigation consultant initially deemed covered under the employee benefits liability endorsement. However, Hartford ultimately denied coverage on two grounds: (1) the policy only covered employee claims, and Scali’s agreement indicated her status as an independent contractor; (2) an exclusion existed for liabilities arising from failure to comply with regulatory reporting requirements related to employee benefits. After Hartford refused to defend against the Scali action, Euchner hired counsel and continued discussions with Hartford. When a settlement was anticipated, Hartford issued another disclaimer citing exclusion for wrongful conduct. Euchner settled the case in April 2012 and initiated this action to clarify the rights and obligations under the insurance policy, seeking reimbursement for attorney fees and part of the settlement. Euchner also claimed Hartford violated New York General Business Law § 349. After discovery, both parties moved for summary judgment, which the district court granted in favor of Hartford, ruling it had no duty to defend due to the policy exclusion for intentional conduct. The court denied a motion for reconsideration. The appeal reviews the summary judgment under New York law, which states that an insurer's duty to defend is broad and based on the allegations in the pleadings, while the duty to indemnify relies on the actual liability. An insurer must provide a defense if the allegations suggest a reasonable possibility of coverage, even if the claims may eventually be found meritless.
The duty to defend an insured arises when allegations in a complaint suggest a reasonable possibility of recovery under the insurance policy, regardless of the claims' validity. This principle distinguishes the duty to defend from the duty to indemnify, which depends on established coverage. If claims, even if groundless, could be construed as falling within policy coverage, the insurer must defend the insured. Any ambiguity regarding coverage must be resolved in favor of the insured.
In this case, Hartford’s policy included coverage for "employee benefits injury," specifically related to negligent acts in administering employee benefits programs. Scali’s amended complaint alleged that Euchner misclassified her as an independent contractor, thereby denying her 401(k) pension benefits. The key issue was whether Scali's ERISA claims demonstrated a reasonable possibility of negligence in the administration of the 401(k) plan. Although the amended complaint suggested malice, it did not claim intentional misconduct aimed at interfering with Scali’s benefits.
Hartford’s policy excluded coverage for wrongful or intentional conduct, placing the burden on Hartford to prove that all allegations fell solely within these exclusions. An insurer must provide a defense unless it can conclusively demonstrate that the allegations unequivocally negate coverage and can only be interpreted as falling within the exclusions.
Exclusions in insurance policies must be narrowly construed. The amended complaint against Euchner alleges wrongful termination and coercion into an Independent Sales Manager Representative Agreement, but ERISA-related allegations are stated only as improper and unlawful, which constitutes a legal conclusion rather than a factual assertion. The focus of analysis should be on factual allegations, not conclusory statements. Hartford's argument that ERISA claims fall entirely within a policy exclusion is unconvincing, as there is a reasonable possibility that the claims arose from the administration of Euchner’s benefit plan, which encompasses providing counsel regarding eligibility and handling records. Hartford misinterprets 'administration' as limited to ministerial acts; classifying a worker as an independent contractor versus an employee involves eligibility determinations that are not discretionary. Consequently, Hartford has a duty to defend Euchner regarding Scali’s ERISA claims, and the district court should also examine other issues, including Hartford's potential breach of indemnification duties and entitlement to attorney’s fees. Additionally, Euchner contests the dismissal of a claim under N.Y. Gen. Bus. Law § 349, which requires proof of consumer-oriented conduct, misleading practices, and resulting injury.
Private contract disputes generally do not support a claim under General Business Law § 349, as plaintiffs must show that the alleged practices have a broader consumer impact. In this case, the dispute is strictly between the parties regarding coverage under specific policies, rather than involving deceptive conduct aimed at the public. Euchner failed to establish that Hartford's actions constituted deceptive practices with wider consumer implications. Consequently, the district court's dismissal of Euchner's § 349 claim is upheld. Additionally, while Hartford's disclaimer letter referenced policy language, including an exclusion for dishonest acts, this exclusion was not the basis for Hartford's denial of coverage. The court affirms in part and vacates and remands in part the prior decision.
