New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on December 20, 2005, representing the position of the New York State Insurance Department.

RE: Commercial Umbrella Liability Insurance and Discrimination Claims

Question Presented:

May a commercial umbrella liability insurance policy provide coverage for discrimination claims?

Conclusion:

A commercial umbrella liability insurance policy may provide coverage for discrimination claims based on disparate impact (as opposed to disparate treatment) and for actions alleging vicarious liability arising from the discriminatory acts of employees of the insured, provided such acts are not conducted intentionally by the employer.

Facts:

An attorney with an upstate New York law firm questioned whether a commercial umbrella liability insurance policy may provide coverage for discrimination claims under the Fair Housing Act of 1968. The citation provided did not refer to the Fair Housing Act; thus, the Department responded more generally with regard to discrimination claims.

Analysis:

N.Y. Ins. Law § 1101(a) (McKinney Supp. 2005) states in relevant part:

(a) In this article: (1) "Insurance contract" means 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 upon 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.

(2) "Fortuitous event" means 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.

Liability insurance for intentional wrongs is prohibited, in part, because deliberate misconduct lacks the element of fortuity required of insurance contracts. Indemnification of a wrongful act is also proscribed because it is against public policy. For these reasons, the Department has consistently disallowed intentional discrimination (disparate treatment) claims to be covered under liability insurance policies. The Department does, however, permit coverage to be provided for claims arising from unintentional discrimination: disparate impact claims and employer’s vicarious liability.

The Department stated in its Circular Letter No. 6 (1994):

[A]ctions and recoveries under the various and evolving civil rights laws have increasingly been rooted in discrimination claims based upon disparate impact, rather than disparate treatment. In such cases, the discriminatory result does not directly proceed from specific discriminatory acts against individuals; in fact, such acts are not an element of the wrong and need play no part in the facts alleged. Rather, such suits are normally grounded upon statistical or other numerical profiles that reflect disparities between or among groups sufficient to support a finding of discrimination.

The basis for allowing employers coverage in actions alleging vicarious liability arising from the discriminatory acts of their employees is identical – ie., the lack of intentional conduct on the employer’s part. An employer may be held vicariously liable for the discriminatory act of an employee even though it: (1) played no active role in the commission of the act; (2) did nothing whatever to aid or encourage its commission; and (3) may have done all that it possibly could to prevent it. In all situations except those involving discrimination, the Department permits coverage for claims of vicarious liability regardless of whether the underlying wrong is intentional or not. Therefore, this determination merely conforms the Department’s treatment of discrimination with its treatment of all other kinds of vicarious liability claims.

Moreover, the Insurance Department concludes that the strong public policy against discrimination of any kind is, in fact, furthered by permitting coverage of the kinds described. By bringing to employers’ attention practices that can potentially result in unlawful discrimination, insurers’ loss prevention programs and underwriting standards should discourage such practices. Any employer who does not diligently attempt to modify employment procedures accordingly may well be denied insurance coverage. When unlawful acts of discrimination occur nonetheless, coverage will help ensure just compensation for victims.

Thus, a commercial umbrella liability insurance policy may provide coverage for discrimination claims based on disparate impact (as opposed to disparate treatment) and for actions alleging vicarious liability arising from the discriminatory acts of employees of the insured, provided such acts are not conducted intentionally by the employer.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.