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Title VII plaintiff not ‘employee’ under liability policy, so $4M settlement not covered

By Lorene D. Park, J.D.

Affirming summary judgment against breach of contract and other claims against an insurance company arising from its refusal to defend or indemnify the defendants in a Title VII race discrimination suit, the Fifth Circuit concluded that the plaintiff in the underlying suit was not an “employee” as defined by the terms of an employment practices liability insurance policy. The court also rejected his argument under Mississippi’s “borrowed servant” doctrine because he failed to raise it below and, on the merits, the defendants did not control his work performance (Isom v. Valley Forge Insurance Co., December 29, 2017, per curiam).

Insurers refuse to defend race discrimination suit. In the underlying case, a “contract employee” physician who worked as an anesthesiologist claimed a surgeon and the medical practice of which he was CEO refused to work with the physician because he is black. The EEOC’s investigation of his charge ended after the agency concluded he was an independent contractor. He filed a Title VII race discrimination suit and the defendants filed claims with their insurers under policies providing employment practices liability (EPL) coverage and Businessowners liability coverage. The insurers refused to defend or indemnify, arguing the claims were not covered by the policies. The parties settled the discrimination suit for $4 million, but instead of paying damages, the surgeon and his practice assigned the physician their right to sue the liability insurers for indemnity.

Physician sues insurers. The physician filed suit alleging a breach of contract claim against the insurers for breaching their duty to defend and indemnify under the policies and a claim for breach of implied covenant of good faith and fair dealing. The insurers moved for summary judgment, arguing that the claims in the underlying suit were not covered by any policy which they issued and, because there was no breach, there could not have been a breach of implied covenant of good faith and fair dealing.

No coverage because not “employee.” Granting summary judgment, the district court found that the contract physician was not an “employee” so there was no EPL coverage, which applied to claims “by or on behalf of a natural person who is an ‘employee’ or applicant for employment.” The policies defined an “employee” to be “all of your past, present or future full-time or part-time employees, including seasonal and temporary employees and employees leased or loaned to you.” Independent contractors were excluded from the definition. Nor was there Businessowners liability coverage. The physician appealed as to the EPL coverage. (The appeals court noted that by raising no argument concerning the other policy, he forfeited that claim.).

Affirming, the Fifth Circuit applied Mississippi law and explained that the duty to defend is a matter of contract and there can be no such duty where a claim falls outside the policy’s coverage. Here, it was clear from the complaint alone that the physician was not an employee of the CEO or his practice. Thus, the insurers were entitled to summary judgment on the breach of contract claim. Also, because there was no duty defend, they could not be liable for breaching a duty of good faith and fair dealing for refusing to do so.

Borrowed servant doctrine not satisfied. Though the physician argued on appeal that under a “fair reading” of the complaint, he “may have been” a leased or loaned employee under Mississippi’s borrowed servant doctrine, he had not raised that issue below and therefore could not raise it now. Even assuming he had preserved this argument, the appeals court found that it lacked merit because he could not establish the three factors required under the borrowed servant doctrine, including showing that the surgeon or his practice paid him or controlled his performance. Rather, on the fact of the complaint it appeared he and the CEO were independent specialists performing different functions during a surgery.

Out-of-state counsel disqualified. The appeals court also found no abuse of discretion in the lower court’s decision to disqualify two of the physician’s out-of-state attorneys for unauthorized practice of law. Both attorneys had allowed their names to be listed on the complaint and attempted to negotiate a settlement before the district court had acted on their applications for admission to practice pro hac vice.