In Farmers Auto Ins. Ass'n v. St. Paul Mercury Ins. Co., 2007 WL 1052822 (C.A.7 Ill.), Farmers insurance company bought employment practices liability coverage from St. Paul insurance company. The coverage is for employment wrongful acts, broadly defined to include any error, misstatement, neglect, breach of duty, etc., in connection with an alleged wrongful dismissal, sexual harassment, retaliation, or other unlawful treatment of an employee.
Coverage was triggered when a class action was filed in an Illinois state court against Farmers on behalf of its claims adjusters, seeking overtime pay pursuant to the Illinois Minimum Wage Law. St. Paul refused coverage, pointing to an exclusion in the insurance policy for “any actual or alleged violation of the Fair Labor Standards Act (except the Equal Pay Act), the National Labor Relations Act, the Worker Adjustment and Retraining Notification Act, the Consolidated Omnibus Reconciliation Act of 1983, the Occupational Safety and Health Act, any workers' compensation, unemployment insurance, social security, or disability benefits law, other similar provisions of any federal state or local statutory or common law or any rules or regulations promulgated under any of the foregoing.”
The question, then, is Illinois' statutory overtime pay provision “similar”? The district judge answered yes and granted summary judgment for St. Paul. Farmers appealed.
The appeals court noted that the question of similarity is one of contract interpretation to be answered under Illinois law. Under this guidance, the appeals court said that the purpose of the exclusion in question is to avoid “moral hazard,” which, in its most extreme form, is the temptation of an insured to precipitate the event insured against if the insurance goes beyond merely replacing a loss. Insurance against a violation of an overtime law, whether federal or state, would enable the employer to refuse to pay overtime and then invoke coverage so that the cost of the overtime would come to rest on to the insurance company. The employer would have violated the overtime law with impunity, unjustly enriching itself by the difference between the overtime wage for the hours in question and the straight wage. No insurance company would knowingly write a policy that would enable the insured to trigger coverage any time it wanted a windfall.
Farmers cited Illinois cases which say that words left undefined in an insurance policy should be interpreted with reference to the average person's understanding. However, the court reasoned that is a blind guide in the present case because the average person has no understanding of the exclusion of claims based on the Fair Labor Standards Act and similar statutes. The language is not addressed to the average person, but to employers, who know what the Fair Labor Standards Act is, and know that there are state counterparts. The court questioned whether Farmers could think they had bought insurance that would enable them to disregard the state overtime provisions.
Farmers also argued that the “similar” clause must be struck from the policy because it makes the policy illusory. Given the word's vagueness, there is a reading of “similar” that would have that effect. The Fair Labor Standards Act, the National Labor Relations Act, and the other statutes mentioned by name in the exclusion are all about the rights of employees, and so there is a sense in which laws that forbid wrongful dismissal, discrimination, retaliation, and other “employment wrongful acts” are similar because those laws also confer rights on employees. But an interpretation of “similar” that nullified the policy would be as silly as an interpretation that nullified the “similar” exclusion. Any exclusion narrows coverage; that is its purpose. To narrow coverage is not to make coverage illusory.
The judgment in favor of the insurer was affirmed.