It is axiomatic that an insurer’s duty to defend an insured depends on whether the facts alleged in an underlying complaint fall within the coverage of the insurance policy. In Hansard v. Federal Ins. Co., No. 00633, slip op. (N.Y. App. Div. Feb. 1, 2017), a New York appellate court re-affirmed this principle, holding that an exclusion for “employment-related Wrongful Acts” in a directors and officers insurance policy was unambiguous, and that the insurance carrier had no duty to defend the insured against underlying wage and retaliation claims.

In Hansard, employees of Vanguard Urban Improvement Association, Inc. (Vanguard) brought a lawsuit against Vanguard and its Chairman of the Board of Directors, Thomas C. Hansard, Jr. (Hansard), alleging that Vanguard and other employees violated the Fair Labor Standards Act and the New York Labor Law with respect to payment of wages and vacation benefits. The plaintiff employees further alleged that Vanguard had also retaliated against them for bringing the lawsuit.  Vanguard and Hansard were insureds under a Federal Insurance Company (FIC) Directors & Officers Liability and Entity Liability policy, which provided coverage for “Wrongful Acts,” a term that was expressly defined by the policy. However, the policy also contained an express exclusion for any “employment-related Wrongful Acts.” The term “employment-related” was not defined under the policy. Vanguard and Hansard sought a defense from FIC, but FIC, relying on the “employment-related Wrongful Acts” exclusion, declined to defend the insureds in the underlying wage and retaliation lawsuit. The trial court disagreed with FIC, finding that FIC had a duty to defend. 

On appeal, the Appellate Division, Second Department, reversed, finding that the term “employment-related,” while not defined by the policy, is not an ambiguous term. While the court noted the well-established principle that ambiguous language is generally construed in favor of the insured and against the insurer, it found no such ambiguity in the policy exclusion at issue in this case. The court reasoned that “the plain and ordinary meaning of the ‘employment-related Wrongful Act’ exclusion unambiguously encompasses claims regarding violations of wage laws and retaliation for complaints about violations of wage laws. The payment of wages has such an established connection to ‘the act of employing’ or ‘the state of being employed’ that a contrary conclusion would be unreasonable.” Hansard, Slip op. at 5. The court concluded that the allegations in the underlying wage and retaliation lawsuit fell within the exclusion and outside of the policy’s coverage, and therefore FIC had no duty to defend the insureds in that underlying action. 

Although the insurance carrier obtained a favorable outcome here, this case should serve as a reminder of the potential perils of ambiguous language in an insurance policy, particularly with regard to exclusionary clauses. Whenever insurers wish to exclude certain acts from coverage under a policy, it behooves them to do so in clear and unmistakable language.

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