Judge Jacobs
Judge Jacobs (NYLJ/Rick Kopstein)

An insurer had a duty to defend a company’s chief executive and its 401(k) plan for reclassifying an employee as an independent contractor after she complained a second executive was sexually harassing her, a federal appeals court has ruled.

Jada Scali sued in the Northern District in 2011, claiming Michael Ladd, chief executive officer at safety products company Euchner-USA, and the company’s 401(k) plan violated the Employee Retirement Income Security Act (ERISA) because she lost her benefits after Ladd allegedly forced her out as a regular employee.

The Hartford Casualty Insurance Company had issued a commercial general liability policy and an excess policy to Euchner-USA that excluded coverage for employment-related practices.

Employee benefits liability was covered by Hartford’s promise to pay “those sums that the insured becomes legally obligated to pay as ‘damages’ because of ‘employee benefits injury,’” which was defined as an “injury that arises out of any negligent act, error or omission in the ‘administration’ of your ‘employee benefits program.’”

The Hartford policy said there was no coverage arising out of any “dishonest, fraudulent, criminal or malicious act.”

Hartford denied coverage in May 2011 and, in October 2011, Scali amended her complaint to add the Euchner-USA 401(k) as a defendant and make a claim under the ERISA.

Euchner-USA settled with Scali in 2012, then filed an action seeking a declaratory judgment on the policy and a determination of whether Hartford was required to reimburse it for attorney’s fees and a portion of the settlement.

But Northern District Judge Thomas McAvoy (See Profile) ruled that Hartford had no duty to defend because its policy excluded intentional conduct.

Euchner-USA appealed to the Second Circuit, where Judges Amalya Kearse (See Profile), Dennis Jacobs (See Profile) and Gerard Lynch (See Profile) heard oral argument on April 9 in Euchner-USA, Inc. v. Hartford Casualty Insurance Company, 13-2021-cv.

Jacobs, writing for the panel, said “The decisive issue is whether there was a reasonable possibility that Scali’s ERISA claims arose (A) from negligence in (B) administering the 401(k) plan.”

The answer was yes.

“It was alleged only that Euchner misclassified her position; it was not alleged whether this misclassification was done intentionally or negligently,” Jacobs said. “The complaint contains allegations that bespeak malice; but none of Scali’s ERISA claims alleged that Euchner improperly classified her with the purpose of interfering with her retirement benefits.”

And Scali’s ERISA claims did not “require a showing of intent, he said, as “they stood or fell on whether, notwithstanding the classification as an independent contractor, Euchner so controlled Scali’s activities that she came within the common-law definition of an employee.”

Jacobs noted that the amended complaint alleged Euchner “unlawfully and with discriminatory intent” fired Scali and then coerced her into being an independent contractor.

“But as to the ERISA classification, it was alleged only that it was done ‘improperly and unlawfully,’” Jacobs said, “which is a legal conclusion, not an allegation of fact.”

The court went on to find “there is a reasonable possibility that the ERISA claims arose from the ‘administration’ of Euchner’s benefit plan,” and rejected Hartford’s position that “administration” involves only ministerial acts as “unavailing.”

On remand, Jacobs said, the lower court should consider “whether Hartford breached a duty to indemnify (a distinct question); and whether Euchner is entitled to attorney’s fees in this action due to Hartford’s breach of the duty to defend.”

Alan Pierce, partner at Hancock Estabrook in Syracuse, argued for Euchner.

“There wasn’t a lot of case law on this, so the Second Circuit’s decision will be very helpful to practitioners and district court judges in New York,” Pierce said Wednesday. “I thought it was fairly straightforward, without a lot of authority, that those claims fell within the coverage terms of the policy, but the district court didn’t see it that way.”

Kenneth Lange, special counsel at Goldberg Segalla, in Garden City, represented Hartford Casualty.