The Southern District of New York recently addressed a “Wrongful Employment Practices Act” exception to an Insured versus Insured (“IVI”) exclusion in In re Seabury FxOne LLC v. U.S. Specialty Ins., No. 21-cv-837, 2023 U.S. Dist. LEXIS 31255 (S.D.N.Y. Feb. 24, 2023). In 2015, the CEO of Seabury FxOne LLC (“Seabury”) issued a demand letter alleging corporate misconduct and interference with the CEO’s ability to perform. Soon after the initial demand letter, the CEO resigned, arguing constructive discharge and retaliation as he allegedly had been cut off from critical information. Additional demand letters were exchanged and an unsuccessful mediation occurred, with the CEO ultimately initiating arbitration in August 2018 against Seabury and several related entities. By that point, the CEO’s allegations had evolved so the arbitration demand focused on dilution of the CEO’s shares, while the earlier demands focused on alleged wrongful termination and retaliation.
Seabury was insured by U.S. Specialty Insurance Co. (“U.S. Specialty”) from 2014-2015 under a claims-made insurance policy. In 2015, U.S. Specialty acknowledged receipt of the initial demand letters. In 2018, the insurer acknowledged that the arbitration was “interrelated” to the demand letters, such that the demand letters and arbitration constituted one “Claim” under the policy. However, in late 2018, U.S. Specialty denied coverage for the arbitration, citing the policy’s IVI exclusion, which barred coverage when the at-issue Claim was brought by an insured individual or entity.
After the arbitration panel issued its decision in 2020, finding in part for the CEO, Seabrook filed suit against U.S. Specialty seeking reimbursement of its defense costs. Seabrook argued that the IVI exclusion did not apply, as the CEO’s suit fell within an exception to the IVI exclusion for an “Employment Practices Wrongful Act,” which was defined in the policy as “any actual or alleged: … retaliation, … [or] wrongful termination….”
On summary judgment, the Southern District of New York agreed with Seabury and found that the exception to the IVI exclusion applied. Critical to the court’s analysis was the fact that both the demand letters and the arbitration demand were one “Claim” under the policy. Thus, the court looked to all the demand letters and the arbitration demand when determining the applicability of the exclusion, rejecting U.S. Specialty’s argument that only the arbitration demand was relevant as it “replaced” the demand letters similar to an amended pleading. Because the initial demand letters contained allegations related to constructive discharge and retaliation and the arbitration “stemm[ed] from the same set of facts,” the court determined that the one “Claim” (i.e., the demand letters and the at-issue arbitration demand) fell within the exception to the IVI exclusion, even though the arbitration focused on allegations related to dilution of the CEO’s shares.
While the court found that the IVI exclusion did not bar coverage, the court nevertheless denied Seabury’s request for payment of its defense costs in full because the policy contained an allocation provision requiring the parties to allocate between insured Loss and uninsured loss. While the court noted that an allocation ultimately may not be possible, given the nature of the at-issue costs, it ruled that additional briefing was needed to determine what costs fell within the exception for an “Employment Practices Wrongful Act,” and what costs were barred by the IVI exclusion.