No Insurance Coverage for Employee’s Suit Because of Prior Letter

Why it matters

When does insurance coverage attach to a claim made by an employee? One employer learned a hard lesson when a federal court denied coverage for an employee’s Equal Employment Opportunity Commission (EEOC) charge and related lawsuit because the plaintiff had previously sent a letter to the company about his impending termination. Facing a layoff, an employee sent a letter to the board of Convercent, Inc., stating that his termination would violate the Age Discrimination in Employment Act (ADEA) and asking that the parties “get together and determine” if continued employment was a possibility “to avoid litigation.” Seven months later (and after he was let go), the employee filed a charge of discrimination with the EEOC as well as a subsequent lawsuit based on the same allegations made in the letter. Convercent tendered defense of the charge and the suit to Scottsdale Indemnity Co., but the insurer refused to provide coverage. The letter constituted a claim that occurred outside of the current policy period, and because the charge and lawsuit related to the letter, they were not timely reported, the insurer said. The court agreed, finding the letter was a “demand for damages or other relief” even though it wasn’t authored by an attorney.

Detailed discussion

In October 2015, an employee was told that his position at Convercent, Inc., would be terminated in early 2016. Believing that the grounds for his termination were improper, the employee sent a letter via email to the company’s board of directors, CEO and president.

The letter asserted his belief that his forthcoming termination violated the Age Discrimination in Employment Act (ADEA), among other allegations. He requested that Convercent “reconsider the decision to terminate my employment because of my age or any unjustified or unlawful reason,” suggesting that the parties “quickly get together and determine if my continued employment may be mutually addressed in a manner reflective of all issues to avoid litigation.” He added that if the recipients did not “pursue the steps outlined above,” he would “pursue all appropriate remedies against everyone involved.”

Receiving no response, the employee followed up with a second missive in December. This letter reiterated his position and requests. Again, he received no response from Convercent and was terminated on Jan. 4, 2016.

The employee filed a charge of discrimination on the basis of age with the Equal Employment Opportunity Commission (EEOC) in August 2016, followed by a lawsuit in Colorado federal court.

Convercent tendered both the charge and the lawsuit to Scottsdale Insurance Co., seeking a defense. The insurer had provided two policies to the employer: one covering the period from May 30, 2015, to May 30, 2016, and a virtually identical policy that began May 30, 2016, and ended May 30, 2017. Both were claims-made policies that covered claims of wrongful acts that occurred during the policy period and were reported to the insurer within a specified time period.

The policies defined a “claim” to include various types of criminal and civil proceedings as well as “a written demand against an Insured for damages or other relief.” Claims were deemed to have been made whenever the earliest claim involving the same wrongful act or interrelated wrongful acts was first made.

Scottsdale denied Convercent’s request for coverage. The EEOC charge and lawsuit were related to the letters the employee sent to Convercent during the prior policy period, the insurer explained, and therefore, the employer was too late to obtain coverage under the 2015 policy and could not seek coverage under the 2016 policy.

The insurer then filed a declaration judgment action, asking the court to determine its obligations to provide a defense to Convercent with regard to the EEOC charge and the lawsuit. The employer argued that only the charge and lawsuit constituted claims pursuant to the two policies and that the letters were not a demand for damages, meaning coverage was required.

But U.S. District Judge R. Brooke Jackson sided with Scottsdale. The term “claim” was not ambiguous because it was defined by the policy, said the court, having little problem finding that the employee’s letters met the definition.

“[The employee’s] letter was a thinly veiled ultimatum,” the court wrote. “[He] listed the specific legal violations that he believed had occurred in relation to his termination and suggested that the parties ‘get together and determine if my continued employment may be mutually addressed in a manner reflective of all issues to avoid litigation.’ In so doing, [the employee] was impliedly requesting a settlement of the issues he raised. Additionally, he warned that he would ‘pursue all appropriate remedies’ if his recommended steps were not taken. Such a statement should reasonably have been read as an ultimatum and a threat to engage in litigation if his requests were not met.”

It was irrelevant that the employee did not hire an attorney to write his letter, the court added, and it would be unreasonable to require that a written demand for damages or other relief come from an attorney rather than from the individual seeking relief, “especially when, as in this case, that individual expressly cites alleged violations of law and conveys a desire to avoid litigation.”

The letter “contained enough information to put defendants on notice of his willingness to litigate the matters he raised if a settlement was not possible,” Judge Jackson wrote. “Defendants were thus given fair warning of [the employee’s] complaints and of the fact that he would likely sue if his requests were not addressed. The absence of an attorney was not a legitimate reason for defendants’ ignoring [his] requests or failing to see his letter for what it was: a demand for relief.”

Convercent’s attempts to characterize the language of the letters as “part of the negotiation of his continued employment” did not impress the court, which found the letters to contain requests for both equitable relief (reconsideration of the decision to terminate his employment) and monetary compensation (continuation of his salary and benefits).

The employee’s letters “requested that defendants reconsider their decision to terminate his employment, ensure that his salary and benefits not be terminated, and ‘get together’ to resolve the issues without litigation,” the court said. “If these requests were not met, [the employee] asserted that he would seek all remedies against all involved parties. Thus … the letter contained a demand for specific relief.”

Judge Jackson granted Scottsdale’s motion for summary judgment, declaring that the employer was not entitled to coverage for the EEOC charge or the lawsuit.

To read the order in Scottsdale Indemnity Company v. Convercent, Inc., click here.



pursuant to New York DR 2-101(f)

© 2020 Manatt, Phelps & Phillips, LLP.

All rights reserved