The Office of General Counsel issued the following informal opinion on March 17, 2000, representing the position of the New York State Insurance Department.
Endorsement in General Liability Umbrella Policy Circular Letter No. 6 (1994).
Has the Department directed insurers on comprehensive general liability umbrella policies to include an endorsement excluding insurance coverage for injury arising out of discrimination because of race, creed, color, or national origin?
Certain acts of discrimination are not insurable. As indicated in the Department's Circular Letter No. 6, dated May 31, 1994, addressed to all licensed property/casualty insurers and insurance producer organizations: "Discrimination based upon disparate treatment is an intentional wrong whose resultant harm flows directly from the acts committed, and liability coverage for it is impermissible. The Department's longstanding prohibition against coverage for discrimination claims generally originated at a time, some thirty years ago, when virtually all discrimination claims were of this type."
The Department's position is that it is against public policy to provide insurance coverage for acts of discrimination based on disparate treatment or for punitive damages. An endorsement to this effect conforms the policy to that position.
A policyholder was issued a comprehensive general liability umbrella policy containing an endorsement amending the policy to exclude coverage for injury arising out of discrimination because of race, creed, color or national origin. The policyholder wanted to know about the basis for such an exclusion.
N.Y. Ins. Law §1101(a)(1) (McKinney 1985) defines an insurance contract as "any agreement or other transaction whereby one party, the 'insurer,' is obligated to confer benefit of pecuniary value upon another party, the 'insured' or 'beneficiary,' dependent on the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event." Subsection (2) of said Section 1101(a) defines a fortuitous event as "any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party."
As stated in the Department's Circular Letter No. 6 (May 31, 1994), "Liability insurance coverage for intentional wrongs is, and has always been, prohibited on two related grounds: first, purposeful misconduct lacks the element of 'fortuity generally required of insurance contracts; and, second, indemnification of wrongful conduct that is intentional (and hence in theory may be deterred) is against public policy."
There are two exceptions to this prohibition of coverage: there may be coverage on claims based on disparate impact (as opposed to disparate treatment) and for actions alleging vicarious liability arising from the discriminatory acts of the employees of the insured. As noted in said Circular Letter, the question of whether coverage for acts of discrimination is permissible largely depends upon the relationship between the wrongdoer's act and the resultant harm. Where such relationship is sufficiently fortuitous, and not intended, coverage is permitted. Discrimination claims having coverable disparate impact occur in cases where the discriminatory result does not directly proceed from specific discriminatory acts against individuals but are based upon statistical or other profiles reflecting disparities between or among groups which establish a finding of discrimination.
Likewise, coverage to employers is permissible in actions alleging vicarious liability even where there are intentionally discriminatory acts by their employees when there is a lack of intentional conduct by the employer. However, any employer who does not make a diligent attempt to modify employment procedures to discourage unlawful discrimination might be denied insurance coverage. If the employer acts properly but the employees nevertheless engage in unlawful discrimination, the coverage will help to provide just compensation for victims. This underwriting approach strengthens the public policy against discrimination. As a reminder to insurers of this long-standing public policy, and to point out these exceptions, the Department issued Circular Letter No. 6 (May 31, 1994).
For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.