Trial Court Erred In Not Determining Whether Insured Had Sufficient Information to Reasonably Expect that a Claim Would Be Made Against it Prior to Applying for Policy

A New Jersey appellate court has held that more fact finding is required to determine whether an insured college had sufficient information, prior to the policy period, for it reasonably to expect that a claim would be made against it where it had received a grievance letter and Equal Employment Opportunity Commission (EEOC) charge from a faculty member.  Bergen Community College v. Diamond State Ins. Co., 2014 WL 5026266 (N.J. Super. A.D. Oct. 9, 2014). The court also held that the trial court improperly failed to determine the reasonableness and good faith of the insured’s settlement.

Prior to obtaining educators’ liability insurance, the insured, a community college, received a grievance letter from one of its faculty members, complaining that the college had discriminated against him based on national origin and age.  The faculty member then filed a charge of discrimination with the EEOC.  Two months later, in its policy application, the insured disclosed that there were “pending complaints or investigations regarding employee hiring, compensation, promotion, demotion, or termination of employment.”  After the policy incepted, the faculty member filed an employment discrimination suit against the college seeking compensatory and punitive damages.  The college tendered the suit for coverage under the policy.

The insurer denied coverage, contending that the claim was made prior to the policy period by way of the faculty member’s grievance letter and EEOC charge, and that, even if the grievance letter and EEOC charge did not constitute a claim, coverage was excluded under the policy’s prior knowledge provision because the letter and EEOC charge provided sufficient information for the college reasonably to expect that a claim would be made.

After the college obtained partial summary judgment against the faculty member and settling the remaining claims, the college filed suit against the insurer for reimbursement of the settlement amount, plus fees it had incurred defending the underlying suit.  On cross-motions for summary judgment, the insurer reiterated the arguments raised in its denial, while the insured argued that the underlying lawsuit constituted the first notice of a claim under the policy, and noted that it had disclosed the grievance letter and EEOC charge to the insurer before the policy was issued. The trial court concluded that the letter and EEOC charge were insufficient to constitute a claim and ordered the insurer to indemnify the insured for the full settlement amount, minus the deductible, as well as fees the college incurred in the underlying litigation and in the coverage dispute.  Although the trial court concluded that the college had attached the grievance letter and EEOC charge to its application for insurance, the court made no findings regarding whether the policy’s prior knowledge provision precluded coverage.  The insurer then appealed.

On appeal, the court affirmed the trial court’s conclusion that the grievance letter and EEOC charge did not constitute a claim under the policy because neither included a monetary demand, which was required under the policy’s definition of claim.  The court concluded, however, that the record lacked enough factual development for it to determine whether the prior knowledge provision excluded coverage. The court explained that on remand, the trial court must focus on the circumstances or facts known at the time the college applied for insurance, and determine whether those facts or circumstances could lead to the conclusion that “any insured could reasonably expect would result in a claim” under the policy. The court also held that the trial court improperly failed to determine the reasonableness and good faith of the settlement.  The court noted that, on remand, if the trial court holds that the insurer wrongfully denied coverage, it may find the insurer liable for the settlement, but only if it finds that the settlement was reasonable and that payment was made in good faith.  In light of the ordered remand, the court declined to address the issue of attorneys' fees.