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© 2018 Zuckerman Spaeder LLP

Can You “Negligently” Fire Someone?

Insurance Claim Form - REJECTEDThe answer to that question, at least according to the Ninth Circuit Court of Appeals, is “no.” 

It seems straightforward, but getting to that “no” requires a little bit of an understanding of insurance – in this case, directors’ and officers’ (“D&O”) insurance.  A D&O policy was at issue in this case, Forest Meadows Owners Assoc. v. State Farm Ins. Co., in which the policyholder – a condominium association – was sued by an employee it had fired, and sought coverage from its insurer.  

A brief bit of insurance background is in order here.  As a general core principle, liability insurance (including D&O insurance) covers the policyholder’s fortuitous accidents – “oops” moments, mistakes, better known as negligence – that damage other people, their property, or their money.  From there, individual types of insurance narrow this principle down – auto liability insurance, for example, covers drivers who injure other people or their cars, while D&O insurance covers directors and officers (and sometimes their companies) for mistakes that cause others to lose money directly or suffer some other sort of “loss” (maybe the value of their stock, for instance).  What these policies generally don’t cover are intentional acts: if I’m a careless driver and run over Old Lady McGillicuddy in the crosswalk by mistake, my auto insurer will hire a lawyer to defend me against her suit and indemnify me; if, on the other hand, I never liked her and I sped up when I saw her crossing the street – an intentional act – and she alleges that I intentionally ran her over in her suit, my auto insurer may decline to cover me. 

We’ve written a lot about insurance and corporate indemnity – topics executives should, we think, at least be somewhat familiar with – and how they work in the employment dispute context.

With that overview, back to our story.  The Forest Meadows Condominium Association was sued by Michelle Carpenter after it fired her from her job as a security guard.  Carpenter alleged that she was fired due to scheduling conflicts with her Air Force Reserve training, and that the firing violated state and federal laws providing employment protections for people serving in the military.  For its part, Forest Meadows, according to this Law360 story, says it fired Carpenter because she refused to work on weekends even when she didn’t have reserve training.  Forest Meadows ultimately won the suit. 

In the meantime, Forest Meadows’ D&O insurer refused to provide the association with a defense.  It pointed to the policy’s definition of the conduct it covers – the “wrongful act” – which included “any negligent acts, errors, or omissions or breach of duty related” to the association’s operations, and decided that firing Carpenter couldn’t have been done in error or through negligence: it had to have been an intentional act on the part of the association.  Forest Meadows sued the insurer, seeking a declaration that it had to defend it against Carpenter’s suit.  To make Carpenter’s firing qualify as a negligent act, it parsed the definition of “wrongful act,” reading it to include “negligent acts” – but also allowing, in its view, the alleged “errors, omissions, or breach of duty” to be intentional because those words weren’t directly modified by the word “negligent.” 

Do you buy that?  A federal trial court in California didn’t, granting the insurer summary judgment on Forest Meadows’ “A-for-creativity-but-not-much-else” argument. On the association’s appeal, the Ninth Circuit made it clear: “this policy reaches only negligent conduct – negligent acts, negligent errors, or negligent omissions.  Since the firing of an employee is an intentional act, it cannot qualify as negligence and does not fall within the policy.” 

The takeaways here: as you probably already knew, you can’t fire someone negligently, or by mistake.  And, your company’s D&O policy won’t cover its executives for absolutely everything: there’s no better time than now – before you’re facing a claim – to get a sense of what it covers and doesn’t cover.    

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