The Southern District of New York in Knox, et al. v. Ironshore Ind. Inc. (S.D.N.Y. Dec. 10, 2021) dismissed a N.Y. Ins. Law § 3420(b) direct action coverage suit by an employee class that had obtained a judgment against John Varvatos Enterprises, Inc. based on discriminatory compensation practices. The opinion provides guidance in handling interrelated claims in the claims-made policy context.
John Varvatos Enterprises, Inc., a clothing retailer, before 2005 provided its female and male employees an allowance so they could buy Varvatos clothes and wear them while working in stores. Varvatos discontinued its women’s clothing line in 2005. It then removed the clothing allowance for female employees but kept it for male workers, who received $12,000 a year for this purpose. Then, after 2012, Varvatos arranged a discount -- but not an allowance -- for female employees at a related retailer.
Female Varvatos employees filed a class action suit against Varvatos based on this “discriminatory compensation policy.” The jury found Varvatos liable for violating federal and New York civil rights law and awarded a final judgment of $2,114,086.20 on June 23, 2021. The prevailing plaintiffs then brought a direct action under New York Insurance Law § 3420(b) against Ironshore Indemnity Inc., Varvatos’ insurer. Plaintiffs immediately filed a motion for partial summary judgment, and Ironshore responded with a motion to dismiss.
The Varvatos employees sought coverage under a claims-made management liability policy issued for April 30, 2016 to April 30, 2017. The policy covered “Loss” caused by a “Wrongful Act,” which was defined to include any “Employment Practices Wrongful Act,” a term that referred to “discrimination,” “violation of the Equal Pay Act,” and “violation of an Employee’s civil rights relating to any of the above.”
The Parties’ Arguments
Ironshore contended that even if the underlying claim qualified as an “Employment Practices Wrongful Act,” the policy’s Prior Acts Exclusion defeated coverage. That exclusion applied to claims involving “any Wrongful Act which occurred prior to April 30, 2012.” It also applied to Loss arising out of a “Related Wrongful Act,” defined to mean “Wrongful Acts which are the same, related, or continuous, or Wrongful Acts which arise from a common nucleus of facts.”
The plaintiffs argued that the Prior Acts Exclusion is ambiguous and therefore cannot support a motion to dismiss. They further contended that the Exclusion is inapplicable because the nature of Varvatos’ wrongful acts changed when Varvatos “at some point after 2012” began to offer discounts to female employees in lieu of a clothing allowance. Plaintiffs also pursued an estoppel claim on the grounds that Ironshore allegedly agreed to provide defense and indemnity coverage in a March 14, 2017 letter to Varvatos.
The District Court’s Decision
The Court granted Ironshore’s motion to dismiss on the basis of the Prior Acts Exclusion. It observed that Varvatos installed the discriminatory compensation policy as early as 2005 and maintained it after the April 30, 2012 date set forth in the Prior Acts Exclusion. The Court reasoned that the underlying facts that gave rise to plaintiffs’ causes of action stemmed from a compensation policy that “existed both before” April 30, 2012 “and after that date.”
The Court specifically rejected plaintiffs’ contention regarding ambiguity in the Prior Acts Exclusion. In doing so, it reasoned that the Exclusion’s terms draw from language that is well understood in other legal contexts. The Court then cited cases involving interpretation of terms like “common nucleus of operative fact” in scenarios involving res judicata and supplemental jurisdiction issues.
The opinion also rejected plaintiffs’ additional argument regarding the changing nature of the compensation policy, as each iteration of the program and the judgment against Varvatos arose from a common nucleus of facts. The Court also reasoned that the plaintiffs were, in any event, judicially estopped from making such arguments based on the post-2012 change in the Varvatos program. After all, they had argued in the underlying action that this change was “worthless.”
Finally, the Court rejected the plaintiffs’ estoppel argument. It observed that Ironshore, in agreeing to defend Varvatos via the March 14, 2017 letter, had explicitly reserved its rights in relation to indemnity coverage. The Court found the “broadly worded reservation of rights … preclude[d] any claim for insurance by estoppel.” In doing so, it cited to Am. W. Home Ins. Co. v. Gjonaj Realty & Mgmt. Co., 138 N.Y.S.3d 626, 630 (1st Dep’t. 2020) and Globecon Group, LLC v. Hartford Fire Ins. Co., 434 F.3d 165, 176 (2d Cir. 2006).
The Court’s decision confirms that unambiguous policy exclusions can support a successful motion to dismiss in New York. It also provides a good example of how claims-made policies group related claims together for purposes of identifying the applicable policy period for coverage. However, plaintiffs in this case recently appealed the Court’s dismissal of their claim, so the parties will take these issues up to the Second Circuit.