Personnel Policies Exclusion Bars Coverage for Negligence Action Arising from Alleged Sexual Harassment and Assault of Insured’s Employee

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The United States District Court for the Western District of Pennsylvania, applying Pennsylvania law, has held that a personnel policies exclusion bars coverage for an employee’s negligence action against the insured restaurant operator arising from the alleged sexual harassment and assault of the employee by a supervisor. Rice Enters., LLC v. RSUI Indem. Co., 2024 WL 8452631 (W.D. Pa. Dec. 6, 2023).

The employee filed an action against the restaurant operator and the fast-food company alleging that she was harmed by her supervisor’s misconduct. The employee further alleged that the operator was negligent in hiring the supervisor, failed to adequately train the employee on how to identify and report incidents of sexual harassment, and failed to act following observation and reports of the supervisor’s misconduct. The operator tendered the suit to its employer’s liability insurer. The insurer denied coverage based on a personnel policies exclusion and a worker’s compensation exclusion.

In the ensuing coverage litigation, the court held that the personnel policies exclusion barred coverage for the underlying suit. The exclusion applied to “[d]amages arising out of coercion, criticism, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination against or termination of any employee, or any personnel practices, policies, acts or omissions[.]” The court interpreted the phrase “arising out of” broadly to mean a causal, “but for” relationship, such that “[i]f the alleged injuries would not have happened but for the excluded conduct, the injuries ‘arise out of’ the conduct.” The court determined that the supervisor’s alleged conduct satisfied the “arising out of” causal link to exclude coverage. The court further noted that the underlying lawsuit alleged that the employee’s damages “arise out of” the insured’s personnel practices, policies, acts, or omissions, in the form of hiring the supervisor, failing to adequately train the employee, and failing to take action with respect to the supervisor’s misconduct.

The court also held that the worker’s compensation exclusion applied even if the employee did not file a worker’s compensation claim. The court held that the exclusion, which barred coverage for “any obligation imposed by a worker’s compensation, occupational disease, unemployment compensation, or disability benefits law, or any similar law,” applied to claims subject to workers compensation exclusivity, regardless of whether the employee actually sought such benefits.

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