WARN Act Exclusion Bars Coverage for Breach of Fiduciary Duty Lawsuit

Wiley Rein LLP

The United States District Court for the Northern District of California, applying California law, has held that an exclusion barring coverage “in connection with a Claim” for violation of the WARN Act barred coverage for a lawsuit alleging breach of fiduciary duty against a company’s officers and directors for causing a mass layoff in violation of the WARN Act. Adelman v. U.S. Specialty Ins. Co., 2021 WL 6427920 (N.D. Cal. Nov. 17, 2021)

The insured, a now-defunct company, laid off over 300 employees before filing for bankruptcy. The former employees filed a class action lawsuit against the insured company for violation of the Worker Adjustment and Retraining Notification Act (WARN Act). As part of the settlement of that action, the class received an assignment of the company’s claims against certain officers and directors. Subsequently, the class, as assignee of the company, filed a lawsuit against the directors and officers for breach of fiduciary duty for allegedly causing or allowing the layoff in violation of the WARN Act. Upon settlement of that action, the directors and officers assigned their claims for insurance coverage for the lawsuit to the named class plaintiff. The named class plaintiff sued the insurers as assignee of the directors and officers, seeking a declaration that coverage was available for the lawsuit. The insurers filed a motion to dismiss, asserting that coverage for the lawsuit was barred under a policy exclusion providing, in relevant part, that “the Insurer will not be liable to make any payment of Loss in connection with a Claim: . . . for any actual or alleged violation of any provision of [the WARN Act][.]”

The court held that the exclusion barred coverage for the breach of fiduciary duty lawsuit. The court rejected the plaintiff’s argument that the exclusion did not apply because the “employment claims” and the “fiduciary duty claims” were not the same “claim.” The court explained that under California law, the exclusion’s “in connection with” language “does not import any particular . . . theory of liability into an insurance policy,” but rather the language “broadly links a factual situation with the event creating liability and connotes only a minimal causal connection or incidental relationship.” The court found that “[e]ach of [the plaintiff’s] claims rested on the assumption that the D&Os either knowingly or negligently violated the WARN Act when they conducted a mass layoff.” Accordingly, “[b]ecause [plaintiff’s] fiduciary duty claims only exist due to alleged violations of the WARN Act,” “the fiduciary duty claims were made ‘in connection with’ alleged violations of the WARN Act,” triggering the exclusion.

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