by Brian J. OConnor (Fall 2016)

The United States Court of Appeals for the Seventh Circuit recently clarified in American Alternative Insurance Corporation v. Metro Paramedic Services, Inc., 829 F.3d 509 (7th Cir. 2016), that the terms of an insurance contract held by Antioch Rescue Squad (Antioch) required American Alternative Insurance Corporation (AAIC) to defend and indemnify Metro Paramedic Services, Inc. (Metro).

The Background

The underlying insurance claim arose from a federal lawsuit by three female members (Plaintiffs) against Antioch and Metro, alleging workplace sexual harassment of the Plaintiffs, coupled with lack of corrective action by their supervisors despite knowledge of the workplace harassment. Antioch and Metro had a contractual support relationship. Antioch operations were jointly staffed by Antioch and Metro personnel, while both Antioch and Metro staff used Antioch uniforms and gear, as well as Antioch ambulances. The federal court claims were settled with the Plaintiffs.

Antioch’s policy with AAIC contained two critical provisions. First, the policy covered Antioch and added coverage extended to a partnership or joint venture with Antioch within the course and scope of Antioch’s operations. Second, the policy provided that AAIC would pay sums Antioch was legally obligated to pay as damages arising from Antioch’s employment practices (defined in the policy), which expressly excluded sexual abuse (defined in the policy) but including sexual harassment (also defined in the policy).

AAIC covered Antioch’s defense cost in the underlying federal court case and indemnified Antioch for its settlement costs with the Plaintiffs. AAIC declined to cover Metro, and sought a court determination that AAIC was not required to defend or indemnify Metro. Metro filed a counter-claim seeking the opposite court determination: that AAIC was required to defend or indemnify Metro as it had Antioch. The federal district court ruled that AAIC had a duty to defend and indemnify Metro. AAIC appealed. On appeal, the Seventh Circuit affirmed the district court’s decision.

Citing to earlier Illinois court rulings, the Seventh Circuit noted an insurance company’s duty to defend an insured was determined based upon allegations in the complaint of the underlying court action. As the court noted, the assessment evolves into comparing the language of the insurance policy with the language of the complaint, and if the facts alleged in the complaint fall within coverage of the policy, then the insurance company has a duty to defend.

The Seventh Circuit reviewed the complaints allegations of the relationship between Antioch and Metro, and the policy’s terms that coverage applied to a partnership or joint venture when within the course and scope of policy holder’s operations. The court rejected AAIC’s arguments that Metro should not be considered a partnership or joint venture with Antioch, so as to be covered by the AAIC policy with Antioch.

The Take-Aways

There are several points worthy of note. First, definitions and details in insurance policies are important, if not critical. Close, careful review is essential before approving a policy. Here, the court deemed Metro to be covered under Antioch’s policy because of the language of the policy. Fire district administrative personnel charged with reviewing policies of this type can expect, as the Seventh Circuit noted, revision of the language defining who is covered by insurance companies.

Second, while the policy expressly excluded sexual abuse (defined in the policy), that same policy expressly included coverage for sexual harassment (defined in the policy). Administrative personnel charged with reviewing policies need to be mindful of defined terms for inclusion and exclusion of policy coverage. Potential revision of covered, versus excluded activity or behavior, should also be anticipated.

Action to Avoid Future Problems

Perhaps more importantly, the Seventh Circuit’s brief recitation of Plaintiffs’ allegations in the underlying federal complaint reinforces the essential and absolute need of fire district trustees, chief officers, officers and members to aggressively ensure prompt and immediate investigation and remedial action as appropriate when complaints of discrimination or harassment are raised. Policies need to be adopted and diligently complied with. Discrimination and harassment cannot be tolerated. Because fire district staffing is constantly subject to change, training to ensure an environment free of discrimination and harassment is and needs to be an on-going effort and the charge of every official, officer and member.

The dignity of all members deserves nothing less than that commitment. If that is not sufficient motivation, then consider that the legal penalties and loss of reputation for failure to ensure a work environment free of discrimination and harassment. Do a thorough review to ensure your house is in order and avoid problems like those described in this court ruling.