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    First Circuit: Arbitration Decision Bars Insured From Litigating Coverage Issues

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    In a recent decision, the U.S. Court of Appeals for the First Circuit held that the doctrine of issue preclusion barred an insured from litigating the applicability of an insurance policy exclusion where an arbitration panel had previously addressed a related, but not identical, question of law.  The case is Manganella v. Evanston Insurance Company, No. 12-1137. A copy of the decision is available here.

    The dispute arose in the context of the sale of clothing retailer Jasmine Company, Inc. (“Jasmine”) to Lerner New York, Inc. (“Lerner”).  As part of the sale, Jasmine’s president, who was to retain his position for three years, agreed to adhere to Lerner’s corporate Code of Conduct.  The Code of Conduct prohibited sexual harassment, among other things.  A subsequent investigation conducted by Lerner unearthed charges of sexual harassment against Jasmine’s president by several former employees.  As a result of the allegations, Lerner invoked an arbitration clause in the parties’ stock purchase agreement.  Finding in favor of Lerner, the arbitration panel determined that the president had sexually propositioned several female employees in willful violation of Lerner’s corporate Code of Conduct.

    Shortly before the arbitration concluded, one of Jasmine’s former employees filed a charge of discrimination against Jasmine’s president with the Massachusetts Commission Against Discrimination (MCAD).  The president thereafter notified Jasmine’s insurer, Evanston Insurance Company, which had issued an Employment Practices Liability Insurance Policy to Jasmine on a claims-made basis.  Evanston denied coverage for the claim on the ground that the alleged harassment occurred before the policy’s retroactive date, precluding coverage.  The insurer also advised its insured that coverage was precluded by an exclusion in the policy that barred coverage for claims based on conduct committed with “wanton, willful, reckless or intentional disregard of any law” that is the foundation for the claim.

    Jasmine’s president thereafter brought a declaratory judgment action against Evanston seeking a declaration that the insurer was required to defend and indemnify him against the former employee’s MCAD charge.  The district court concluded that the conduct described in the MCAD charge fell within the policy’s exclusion, and that the arbitration panel’s determination that president had harassed Lerner’s employees in willful violation of Lerner’s Code of Conduct also established that, for purposes of the exclusion in the Evanston policy, he acted with “wanton . . . disregard” of Massachusetts law prohibiting sexual harassment.  Affirming the district court, the First Circuit determined that Lerner’s corporate policy and Massachusetts state law concerning sexual harassment were substantially similar, and therefore, sexually harassing conduct committed in violation of Lerner’s Code of Conduct would necessarily show a reckless disregard for whether that conduct was lawful.  The First Circuit accordingly held that the doctrine of issue preclusion barred the insured from relitigating the issue of whether the policy’s exclusion precluded coverage for the allegations in the MCAD charge, and affirmed the lower court’s grant of summary judgment in favor of the insurer.

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