In a May 1, 2014 opinion (here), District of Kansas Judge Sam A. Crow, applying Illinois law, held that neither the EPL insurance coverage part nor the D&O insurance coverage part of a restaurant company’s management liability insurance policy covered the defense fees incurred or the forfeiture amount ordered in an immigration enforcement proceeding that resulted in the company’s entry of a guilty plea to a criminal charge.
The court held that the immigration enforcement proceeding did not involve “Wrongful Employment Practices” as required for coverage under the EPL coverage part and did not involve a Claim within the meaning of the D&O coverage part because the criminal proceeding did not involve an adjudication of liability “for damages or other relief.” Judge Crow also held that in any event the forfeiture ordered as a result of the guilty plea was not covered under the policy.
A July 22, 2014 memorandum from the McGuire Woods law firm about Judge Crow’s opinion can be found here.
McCalla Corporation operates McDonald’s restaurants. In August 2012, McCalla learned it was a target of a U.S. Immigration and Customs Enforcement investigation. In September 2012, the company received a search warrant. The government subsequently entered a one-count criminal information against the company.
On December 3, 2012, the company entered a plea to the criminal charges, admitting among other things that McCalla’s director of operations was aware that one its McDonald’s restaurant store manager’s I-9 form identity documents were expired or invalid. Two days after the supervisor advised the manager of the problem, the manager presented the supervisor with a “resident alien” card “that the supervisor knew did not appear to be genuine” yet the supervisor took no further action. The supervisor was also aware that “it took weeks, not two days, for a foreign national to obtain a ‘resident alien’ card, giving him further reason to know that the resident alien card …was not genuine.” McCalla was ordered to pay a $300,000 fine and a $100,000 forfeiture.
McCalla sought to have its management liability insurer pay its costs of defending the criminal proceeding as well as the $100,000 forfeiture. The management liability insurer denied coverage for the claim. McCalla filed an action in the District of Kansas seeing a judicial declaration that the insurer owed McCalla a duty to defend the company in the immigration proceeding and also was obligated to pay the $100,000 forfeiture. The parties filed cross- motions for summary judgment.
The EPL coverage part of the management liability insurance policy defined “Wrongful Employment Practices” to include “wrongful failure or refusal to adopt or enforce adequate workplace or employment practices, policies or procedures.” However, the policy further provides that Wrongful Employment Practices are covered “only if employment-related and claimed by or on behalf of an Employee, Former Employee or applicant for employment.”
The D&O coverage part of the management liability insurance policy defined the term “Claim” to mean “a civil, criminal, administrative or regulatory proceeding commenced against any Insureds in which they may be subjected to binding adjudication or liability for damages or other relief.”
The May 1 Order
In his May 1, 2014 order, Judge Crow denied McCalla’s motion for summary judgment and granted the insurer’s motion for summary judgment.
Judge Crow held that the EPL coverage part did not cover the claim because the criminal proceeding was not “claimed by or on behalf of” an employee, former employee, or applicant, but rather was brought by prosecutors acting on behalf of U.S. regulators. Judge Crow said that the plaintiff had not provided an interpretation of the policy that “would justify reading this plain language out of the contract, as is necessary to trigger Defendant’s duty to defend.” Judge Crow added that doing so “would defeat the purpose of EPL coverage, which is necessarily limited to enumerated acts claimed by employees, former employees and prospective employees.” Judge Crow also held that the forfeiture does not constitute covered “Loss” under the EPL coverage section.
Judge Crow held that the claim was not covered under the D&O coverage part because the criminal proceeding did not meet the D&O coverage section’s definition of “Claim.” While the term claim encompassed a “criminal” proceeding, the definition specifies that the proceeding must represent an adjudication of liability “for damages or other relief.” The Court said that the plaintiff provided “no reasonable construction” of the definition that would “permit the Court to find that the search warrant process or the filing of the information .. could subject the Plaintiff to an adjudication of liability for damages or to an adjudication of liability for other relief.” Judge Crow also concluded that the forfeiture did not meet the definition of Loss in the D&O coverage section.
Finally Judge Crow held that even if the insurer had breached its duty to defend under either the EPL coverage section or the D&O coverage section the plaintiff “has shown no damages from any breach of that duty.” McCalla’s criminal plea and sentencing represented “a final adjudication of a criminal act,” and therefore fell within the conduct exclusions found in both coverage sections. Even if the insurer had paid the company’s defense expenses prior to the guilty plea, the company “would need to repay those amounts now.” Judge Crow added that the company “cites no cases in which a breach of the duty to defend or to pay defense costs was found where the insured was found guilty of the criminal offense and the policy contained a criminal adjudication exclusion, as here.”
It is a statement of the obvious that immigration enforcement is a matter of serious concern for every employer in the United States. Employers undoubtedly would want reassurance that if they are hit with an immigration enforcement action that their costs of defense, at least, would be paid by their management liability insurer. Unfortunately, as was the case for McCalla here, there likely will be no management liability coverage even for defense costs incurred in defending against immigration proceedings that result in a criminal guilty plea or a criminal conviction, as no management liability insurance policies will provide coverage for an adjudicated criminal conviction. As Judge Crow noted, even if the insurer had advanced defense fees prior to the guilty plea or conviction, the insurer would be entitled to have the amount of those advanced fees reimbursed following the conviction.
However, the absence of coverage in the event of a guilty plea or conviction is hardly the end of the analysis. At a minimum, companies hit with immigration enforcement actions would want to have their defense fees advanced during the pendency of the proceeding and in any event would want to know that their defense fees would be paid if they are successful in defending the immigration enforcement action. And on that score, this case shows nothing so much as how much depends on the precise wording of the policy. Here, the specific wording of the relevant coverage parts at issue resulted in Judge Crow’s determination that there is no coverage under either coverage part. However, the relevant wordings in this policy differed significantly from other coverage terms and conditions available in the marketplace.
The policy at issue here offered coverage only for claims by employees, former employees and applicants. However, many EPL policies available in the market place include Third Party Liability Coverage, or the carriers offer Third Party Liability coverage as an option. This coverage extends the EPL coverage to claims brought by third parties. However, depending on the wording of the Third Party Coverage part, the policy might or might not extend to the type of claim here. Many EPL policies offering this coverage limit the definition of Third Parties to “natural persons.” Other polices’ definition of Third Party Claims omit criminal proceedings from the definition. Thus it would not be sufficient to bring the type of immigration enforcement action here within the scope of the EPL coverage for the policy to include Third Party liability coverage; the policy’s definition would have to be broad enough to encompass claims by the government and broad enough to encompass criminal proceedings. In addition, one or more exclusions found in the EPL coverage part might also operate to preclude coverage for an immigration enforcement action.
The possibility for coverage under the D&O coverage part is perhaps more promising. Here the insured ran afoul of an infelicitous wording in the definition of claim, where the phrase “adjudication of liability for damages or other relief” was found to modify not only “civil … administrative or regulatory” proceeding but also to modify a “criminal” proceeding. Because all of these various named types of proceedings are telescoped together into a single phrase, the impression is created that the phrase “damages or other relief” was meant to apply to “criminal proceedings.” However, for policies in which the definition of “claim” is subdivided with each of these types of proceedings having its own separate subpart, the intent of the policy is clearer and in particular there is no mistake that the phrase “damages or other relief” or its equivalent applies to “criminal proceedings.” Policyholders whose policies have this clarifying definition of “claim,” could hope to have their costs of defending a criminal immigration enforcement proceeding advanced, and in the absence of a guilty plea, covered.
As the McGuire Woods memo linked above puts it, when it comes to coverage for immigration enforcement actions, “the particulars of the policy language dictate the extent of coverage.” According to the memo, which is quite critical of the opinion, Judge Crow’s ruling is on appeal to the Tenth Circuit.
Director and Officer Liability for Environmental Enforcement Actions: As I have noted on this blog, environmental enforcement actions can result in findings of liability against the individual directors and officers of companies that caused environmental damage or harm. In an interesting July 22, 2014 article in the Arizona State Law Journal entitled “Liability of Parent Corporations, Officers, Directors and Successors: When Can CERCLA Liability Extend Beyond the Company?” (here), Michelle De Blasi of the Gammage and Burnham law firm takes a look at the broad reach of the joint and several liability regime under the Comprehensive Environmental Response Compensation and Liability Act. (CERCLA).
The article covers a lot of ground but among other things it examines the circumstances under which directors and officers can be personally liable under CERCLA. The author also briefly reviews a number of specific cases where individuals have been held liable under CERCLA or for environmental reporting.