Despite overwhelming case law to the opposite, policyholders consistently argue that undefined terms create ambiguities within insurance contracts because such terms are open to multiple reasonable interpretations. Courts that apply this line of reasoning often do so because they mistakenly believe that if the parties can demonstrate two reasonable interpretations for the same term, then there <em>must</em> be an ambiguity in the policy. This appears to have been the case in <em><a href="http://blog.wcmlaw.com/wp-content/uploads/2017/02/Hansard-v-Federal-Ins.-Co.pdf">Hansard v Federal Ins. Co</a></em>, where the lower court (Supreme, Kings County) concluded that an insurer could not refuse to defend or indemnify because the undefined term “employment-related” was open to multiple reasonable interpretations of the parties.
The insureds' coverage spat with Federal Insurance Company arose out of an underlying complaint against Vannguard Urban Improvement Association, Inc. and Hansard—as chairman of Vannguard’s board of directors—by former employees alleging the non-profit corporation violated the Fair Labor Standards Act. These violations include misclassifying employees to avoid overtime pay, and by failing to pay employees according to their hours or on time. Hansard sought coverage from Federal under a Directors and Officers Liability Policy. The D&O policy issued to Vannguard covered Hansard as an insured against allegations of “wrongful acts” committed by Hansard as a director and/or officer of Vannguard. However, Federal disclaimed a duty to defend Hansard because the D&O policy excluded coverage for any “employment-related Wrongful Act,” and the underlying allegations fell within this exclusion.
After commencing a DJ action, Hansard moved for declaratory relief, arguing that Federal was required to defend him, and that the policy exclusion for employment-related wrongful acts was ambiguous. Specifically, Hansard argued that “employment-related” was not defined in the policy, and the exclusion produces two reasonable interpretations as to whether it applies to the allegations of violations of the Fair Labor Standards Act. The trial court agreed with Hansard, and declared that Federal was required to defend its insured under the D&O policy against the FLSA suit. Federal then appealed to the Appellate Division, Second Department.
In reversing the lower court, the Second Department reiterated that “an ambiguity does not arise from an undefined term in a policy merely because the parties dispute the meaning of that term.” The Appellate Division applied the plain and ordinary meaning of the policy language to first determine if there is any ambiguity. For the Court, the first logical place to look when analyzing the plain meaning of words is Merriam-Webster’s dictionary.
After looking up the definitions for “employment” and “related,” the Court asked whether any facts or allegations in the complaint are “connected by reason of an established or discoverable relation to the act of employing or the state of being employed.” After reading the allegations, the Court concluded that “no reasonable average insured” would conclude the underlying FLSA allegations regarding payment of wages were not “employment-related.”
Based on the facts, it seemed clear the policy’s exclusion applied to the underlying action. The fact the allegations were based on the Fair Labor Standards Act should have been a red-flag that Federal did not intend to insure against such risks under the D&O policy. Unfortunately, it took three years for the insurer to obtain this outcome.
Thanks to Dan Beatty for his contribution to this post. If you have any questions about this post, please call or email Brian Gibbons at <a href="mailto:firstname.lastname@example.org">Brian Gibbons</a> for additional information.