Locker Room Talk: A Preventive Law Case Study

Lawyers, for lack of a better analogy, have been lobotomized to a certain extent. Not the Nurse Ratched kind of lobotomy, mind you, but rather a bloodless one that begins in law school.

During their initial re-education, law students are trained to no longer see things through binary lenses. This ultimately leads to the super-human, if not sometimes eye-rolling, ability to view positions from multiple angles. This skill is further honed over the course of years in practice, where clients pay them to advocate positions on their behalf in various settings. This includes developing creative interpretations of otherwise innocuous words and phrases (cue eye-roll).

Insurance coverage disputes are fertile grounds for battles over what particular words or phrases should mean. For purposes of transparency, in my past life, I served as in-house coverage counsel for a large insurer and have also been retained by both businesses and insurers in coverage settings. I’ve seen both sides of the fence and how unexpected interpretations can have consequences.

Here is a real-life example, which credit unions could face if they are not paying attention.

Yes, This Unfortunately Still Happens

A credit union had at times exhibited a locker-room mentality, and there was a growing perception that inappropriate and discriminatory comments were being tolerated at certain levels of leadership. In fact, the director of human resources had received several messages from employees about the behavior of the vice president of business development over the prior couple years.

Company-wide training on appropriate workplace conduct had little apparent impact on this particular officer. One subordinate ultimately had enough of the mistreatment and sued the credit union for harassment and discrimination, requesting a substantial damages award. Unfortunately for the credit union, it was located in an area renowned for pro-claimant and anti-company juries, and damage awards in this amount sought by this employee were not out of reach.

The credit union dusted off its Employment Practices Liability policy and noted there was coverage for harassment and discriminatory claims, so it notified the insurer of the lawsuit. The insurer sent the credit union a response letter with the good news that it would be covering the claim, albeit subject to its standard reservation of rights (i.e., a list of provisions in the policy that could potentially trigger a reconsideration of coverage during the course of the claim).

The insurer then provided the credit union with one of its “panel” lawyers to defend the lawsuit. This lawyer also reported back to the insurer on status and strategy items, which helped the insurer determine the appropriate amount of money to reserve for defense costs such as attorney’s fees, as well as losses in the event of settlement or verdict.

A few months into the lawsuit, which had been largely forgotten by some of the senior executives, the insurer sent a letter advising that it would no longer be covering the lawsuit. The insurer pointed out that the credit union had not provided notice of the claim within the same policy year that the claim was made, a necessary pre-condition to coverage.

In the policy, explained the insurer, a “claim” was defined as “a suit or demand made by a current, former or prospective employee.” Of course, the terms “suit” and “demand” were further defined. A “suit” was defined to include traditional lawsuits and administrative claims such as EEOC charges. On the other hand, a “demand” was broadly defined to include “a request for monetary or non-monetary relief.”

The insurer went on to explain that, during the discovery stage of the lawsuit, the plaintiff had requested and was provided emails from the credit union demonstrating several instances of the VP’s problematic conduct that had preceded the policy year. In at least two of these emails, employees had specifically threatened to sue the credit union if the conduct did not improve …  which the insurer was interpreting to be “a request for non-monetary relief.”

The credit union was blindsided by the fact that the insurer was now denying coverage based on late notice. As a result, it was now left in the unenviable position of considering whether to spend significant sums suing the insurer, while simultaneously defending the employment lawsuit out-of-pocket.

And Knowing Is Half the Battle

Insurers can and will interpret policy language in their own favor to avoid coverage. Because of this, businesses must be proactive before any sort of claim or loss occurs. More specifically, identify and clarify vague, ambiguous and confusing language in the policies up front with your insurer.

Where possible, test the insurer on potentially problematic language with situations and hypotheticals like the ones above, and then see if those scenarios would be covered. If the answer is yes, get that confirmation in writing, as you may need that golden ticket later. If not, find out what you need to do to get coverage, even if that means going back to the market. Alternatively, consider developing internal procedures to minimize the exposure and impact to risks which you ultimately accept.

This process doesn’t just apply to insurance contracts. Any contract involving a business dealing your credit union enters into should be reviewed to ensure it is balanced and that your interests are being adequately represented and protected.

Chris Keefer is the Principal of preventive law practice Keefer Strategy in Portland, Ore.