New Jersey Voids Sexual Harassment Exclusion in Employer's Liability Policy Compared with Public Policy
Stempel, Jeffrey W., Journal of Risk and Insurance
Schmidt v. Smith, 155 NJ 44, 713 A.2d 1014, 1998 NJ LEXIS 601 (New Jersey Supreme Court, June 15, 1998).
Linda Schmidt filed a complaint against her employer Personalized Audio Visual, Inc. (PAV) and its president, Dennis Smith, alleging hostile work environment sexual harassment's, as well as violation of the New Jersey Law Against Discrimination (LAD), assault, battery, an invasion of privacy, and intentional infliction of emotional distress. In an amended complaint, she also alleged liability for negligent infliction of emotional distress against Smith and negligent failure to train supervisors against PAV as her employer.
PAV and Smith sought defense and indemnity coverage from United States Fidelity & Guaranty (USF&G) under a comprehensive general liability (CGL) policy and also under an Employer's Liability (EL) Policy. USF&G denied coverage under both policies. Trial of the discrimination action preceded trial of the coverage dispute; USF&G had the opportunity to participate in the defense but refused. At trial, Smith was found liable by the jury for hostile work environment sexual harassment, assault, assault and battery, and intentional infliction of emotional distress. PAV was found liable for only hostile work environment sexual harassment. The verdict form did not ask whether the employer's liability was direct or vicarious or whether the employer might be vicariously liable for the intentional torts found by the jury to have been committed by Smith.
After the jury verdict, the trial court found that USF&G was responsible for coverage. The intermediate appellate court (the "Appellate Division" in New Jersey) affirmed the trial court verdict and found that the EL policy provided coverage even though the CGL did not. The New Jersey Supreme Court affirmed this result in its June 15, 1998 decision.
The EL policy in question stated that it covered damages accruing to the employer for occurrences of "bodily injury by accident or bodily injury by disease" that arises "out of and in the course of the injured employee's employment" by the insured, The EL policy also contained an exclusion for damages arising out of coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination against or termination of any employee, or any personnel practices, policies, acts or omissions.
The Court found the broad language of this exclusion was textually applicable in the Schmidt claim because liability was premised on several legal theories but the different legal violations arose from sexual harassment behavior. However, the Court also found that the exclusion could not be enforced against the PAV or Smith because the exclusion was inconsistent with New Jersey law that requires employers to "make sufficient provision for the complete payment of any obligation [the employer] may incur to an injured employee. …