Attorney's Letter or DFEH Charge Triggers Employer's Duty to Tender Claim to Insurance Carrier Even if No Lawsuit Filed

Westrec Marina Management, Inc. v. Arrowood Indem. Co., contains some important lessons for employers who believe they have insurance coverage for employment claims.

In Westrec, an employee’s attorney sent a letter on June 24, 2003 to the Company asserting that his client had been sexually harassed by supervisory employees, and inviting the Company to engage in a settlement discussion. The Company apparently did not take up the offer and the employee filed a lawsuit six months later, in December.

At this point the employer probably took comfort from the fact that it had a “directors and officers” insurance policy, which would at least defray the cost of defending the case. The carrier, however, refused to defend the case on the ground that the “claim” should have been tendered before the lawsuit was even filed. The Court agreed. 

The reason is that the policy covered only claims which were first made during the policy period and were “reported within 30 days after the expiration of the policy.” The original policy had a coverage period of July 1, 2003 to July 1, 2004. Although the employer had renewed its coverage at the expiration of this original period, the first policy had nevertheless technically “expired” on July 1, 2004. 

As a result, the court held that: (a) the first policy period expired on July 1, 2004 – and the attorney letter should therefore have been tendered within 30 days of that date; (b) the lawsuit and the letter were the same “claim” for purposes of determining insurance coverage; and (c) the time to report the claim under the policy had therefore expired before the lawsuit had even been filed. 

The lessons for employers are clear. First, you must carefully read the language of your policy. Businesspeople who are not versed in the intricacies of insurance law generally concentrate on the seemingly broad grants of coverage in the first portion of the policy, without examining all of the ways in which this coverage is whittled down by the exclusions, definitions, and reporting requirements. (It is no coincidence that insurance carriers do not draft their policies in “plain English.”) Second, when in doubt -- immediately tender everything that even resembles a potentially covered claim.