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When employees name the wrong employer in a management liability claim, insureds generally don’t receive coverage for defending against the claim. Are there any potential solutions?
Published on November 19, 2024
As claims professionals who help insureds address an array of claims, we have given some thought to a situation that all too frequently prevents these insureds from receiving the support they need. This arises when the wrong party is named as the “employer” by former or current employees, or applicants for employment, who are bringing employment-related claims.
This becomes a problem for insureds because management liability policies are generally not triggered when the wrong entity is named by the employees. In such cases, insureds generally do not receive coverage for defending against the claim. Rather, they must defend it at their own expense.
There are a number of circumstances where this situation may arise. Often claimants file state or federal administrative charges without counsel, and will name the entity where they appear for work or the entity named on their paycheck. However, that entity is not necessarily the employer. For example, sometimes a staffing agency or professional employer organization issues the paycheck. Other times a franchise is involved, and the employer is not the franchisor corporate entity, but rather a local franchise owner. Sometimes a management company is the employer, but the property owner or building name/location is named. Under any of these circumstances, the employee may not know the proper entity to name in an employment claim.
Management liability policies are generally not triggered when the wrong entity is named by the employees.
A Management Liability policy can be triggered when one or more of the following types of entities is listed on the policy:
- An “insured” that includes the Parent Company or Named Insured on the Declarations Page, with additional entities insured by endorsements.
- “Subsidiaries,” as long as they meet the definition of Subsidiary in the policy.
- Any policy endorsement that provides co-defendant coverage.
Courts consistently hold that an insurer is not required to defend a party when that party is not an insured under the policy. See, e.g., Brit UW Ltd. V. Briones, et al., 2013 WL 3242516 (W.D. Tex. 2013); and Henkel Corp. v. Hartford Acc. & Indem. Co., 399 F.Supp 607 (E.D. Pa. 2005). Thus, an entity that does not meet one of these policy provisions will not be covered under the policy.
One additional set of circumstances may offer help. If the company does not meet any of the policy provisions cited above to qualify as an “Insured” or additional “Insured,” but is responding to an administrative charge or lawsuit as the proper employer, then the insurance carrier may take the claim as a Notice of Circumstance (NOC) under a policy’s discovery clause. The carrier may assign counsel to investigate the NOC. It sometimes makes more sense for an insurer to do this at the outset of an NOC, so as to have more control over the defense and strategy. However, assigning counsel in this situation is purely discretionary and not a requirement under the policy.
Additional solution: a defense sublimit for NOCs
Looking forward, one potential solution for future issues of this nature may be to purchase or request an additional defense sublimit for NOCs to cover these situations and to provide, at a minimum, a defense until the proper entity is named. Before making this request, it is important for the insured to understand what constitutes an NOC and how discovery clauses work in the policy at issue. Only when it does not appear the carrier is likely to provide a defense in these situations should the insured request an NOC sublimit for defense costs.
Using these measures to ensure that an entity is covered even when named incorrectly, and that the proper entity is the party responding and incurring the defense costs, could help alleviate employers’ burden when they are named incorrectly through no fault of their own.