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On March 8, 2022, in
State Automobile Mutual Insurance Company v. Tony’s Finer
Foods Enterprises, Inc. et al., No.
1:2020cv06199, Document 43 (N.D. Ill. 2022), a federal court in the
Northern District of Illinois held an Employment-Related Practices
Exclusion in a general liability policy does not preclude a defense
obligation for a proposed class action brought by the
insureds’ employees under the Illinois Biometric Information
Privacy Act (BIPA). The court further found that a jury needs to
decide whether the insureds breached the “as soon as
practicable” notice condition in the policy by waiting 20
months to provide notice to the insurer.
Setting the Stage: The Thermoflex
and Caremel Decisions Issued in 2022
The Tony’s Finer Foods decision
follows on the heels of other recent decisions in the Northern
District of Illinois. Taken together, the courts were split on
whether an insurer has a duty to defend employees’ BIPA
claims. First, in January, one court held that an
Employment-Related Practices
Exclusion did preclude a defense of BIPA claims
brought by the insured’s employees. See, American
Family Mut. Ins. Co. v. Caremel, Inc., Case No. 20 C 637
(N.D. Ill. Jan. 7, 2022). Just two months later, a separate
decision by a different court found three exclusions –
including the Employment-Related Practices Exclusion
– did not unambiguously preclude coverage
for BIPA claims brought by the insured’s
employees. See, Citizens Ins. Co. of
American et al. v. Thermoflex Waukegan LLC, et
al., Case No. 20-cv-05980 (N.D. Ill. Mar. 1, 2022). Reference
our
previous
analysis of Thermoflex
and Caremel along with other BIPA decisions on
the duty to defend under CGL policies.
The Tony’s Finer Foods Ruling
In December 2018, the insureds/employers were sued by a proposed
class for violations of BIPA based on their collection and use of
employees’ fingerprints to clock in and out of work. The
insureds were served in January 2019, and by March 2019 had
notified their insurance agent of the lawsuit. The insureds’
agent provided notice to some of the insurers’ carriers,
including a general liability insurer, on the risk in
2017–2018 when the claimant was hired. However, the agent
did not notify State Automobile Mutual
Insurance Company (State Auto) under its commercial general
liability policy, which insured Tony’s Finer Foods between
2013 and 2016. The agent first notified State Auto on September 8,
2020 – nearly 20 months after the insureds were served.
Importantly for the court, during this time frame, the BIPA lawsuit
was stayed for the majority of the time while the underlying court
awaited BIPA-related Illinois appellate court decisions.
Upon receipt of notice, State Auto accepted the tender subject
to a reservation of rights and filed a lawsuit seeking a
declaration that it owed no duty to defend. State Auto moved for
summary judgment on the Employment-Related Practices Exclusion and
late notice. The exclusion at issue precludes coverage for
“personal and advertising injury” to a person arising
out of any “(a) refusal to employ that person; (b)
termination of that person’s employment; or (c)
employment-related practices, policies, acts or omissions, such as
coercion, demotion, evaluation, reassignment, discipline,
defamation, harassment, humiliation, or discrimination directed at
that person.”
On March 8, 2022, the Tony’s Finer
Foods court denied State Auto’s motion. In doing
so, the court explained that at “first glance” the
exclusion appears applicable because collection of fingerprints for
employee timekeeping may be an employment practice. However, after
a closer reading of the exclusion and while noting the split
decisions, the Tony’s Finer Foods court
concluded it did not preclude a defense obligation. In reaching
this conclusion, the court relied on two construction canons:
(1) noscitur a sociis (the meaning of a word is
determined by neighboring words) and (2) ejusdem
generis (construing general words following specific
words to apply only to things of the same kind as the specific
examples). With these in mind, the court turned to the
exclusion.
First, the court looked to the structure of the
exclusion, finding it applies to certain types of employment
claims, not just any claim by an employee. Relying
on noscitur a sociis, the court found the
“employment-related practices” conduct must be
construed in the context of the other provisions – those that
relate to hiring, termination and other adverse or negative
employment-related actions.
Next, the court looked to the listed
examples following “the employment-related
practices” phrase to interpret the scope of the catch-all
portion of the exclusion. Employing ejusdem generis,
the court acknowledged the list was not exhaustive, but found that
the listed examples were illustrative of the type of conduct
falling within the exclusion (the court suggested it would have
found the exclusion applies if the policy language did not include
the “such as” examples). Namely, the exclusion
applied to claims arising out of adverse or negative
employment-related actions taken against an employee. The
court found that, based on the listed examples, the collection of
fingerprints did not fit this mold because fingerprint scanning and
collection is not a type of employee mistreatment, disciplinary
action or act that would involve HR, nor would it affect an
employee’s standing with the company. Accordingly, the court
found the underlying allegations did not fall within the scope of
the exclusion to preclude a defense.
The court turned to the next question: whether the
insureds’ 20-month delay in providing notice precluded a
defense obligation. The insureds argued the insurer suffered no
prejudice because the BIPA lawsuit had been stayed for
“most” of the time during this delay and claimed they
were diligent in ascertaining whether there was coverage. It
appears the insureds claimed they did not know State Auto’s
policy might apply to the BIPA lawsuit until March 2020, when the
Illinois Appellate Court decision in West Bend Mutual Ins.
Co. v. Krishna Schaumburg Tan Inc., 2021 IL 125978 (Ill.
2021) found that providing fingerprinting data to third parties is
a form of “publication” within the meaning of a general
liability policy and that the insurer had a duty to
defend.
The Tony’s Finer Foods court outlined
various factors to be considered when evaluating reasonable notice,
including the specific policy language, the insureds’
sophistication, their awareness of an event giving rise to a claim,
their diligence in ascertaining whether coverage is available and
prejudice to the insurer. The court found that even though the
delay was long, the insurer may not have been prejudiced because
the underlying BIPA lawsuit was stayed during most of the delay.
The court pointed to the insured’s proffered justification
based on the Krishna appellate decision, but
did not otherwise evaluate the same. Because of facts that
supposedly went in both directions, the court found the late notice
question would need to be decided by a jury.
The Implications
While the court in Tony’s Finer Foods
provided a more detailed discussion of its reasoning than
the Thermoflex case, the decision is not without
issue. With respect to the Employment-Related Practices Exclusion,
the court appeared to make certain assumptions and/or ignore
specific allegations in the underlying BIPA lawsuit. For instance,
when the court reasoned that the insureds’ collection and use
of employees’ fingerprints was not related to hiring, firing
and/or an employee’s standing with the company, it assumed
that fingerprints collection for employee-timekeeping purposes was
optional. Yet, the BIPA lawsuit alleged this was
“required” and a “condition of employment.”
To wit, requiring employees – as a condition of employment
– to provide biometric information when they are hired
certainly seems to be a practice that would lead to the refusal to
hire if the employee declines. At the very least, it appears to
implicate the “employment practices” envisioned by the
exclusion, including “coercion” – i.e., mandating
that employees provide their fingerprints may be
a coercive practice directed to employees. The
court did not address these aspects in the opinion.
Going forward, it is important to note that this decision does
not necessarily determine the outcome of future claims. Federal
district court decisions are not binding on
either other federal district courts or state courts. Thus,
insurers should continue to assert all potentially applicable
coverage defenses. Indeed, even if a trial court has rejected
certain exclusions or defenses, it is important to raise them to
preserve them for appeal. Likewise, insurers also should raise
other potentially applicable exclusions, particularly if they have
not been addressed by the courts. For example, the Statutory Right
of Privacy Exclusion has not yet been addressed. This exclusion may
be important, given the body of case law that discusses BIPA as a
privacy statute.
Based on the apparent split among district courts in the
Northern District of Illinois, it would not be surprising if the
decision in Tony’s Finer Foods results in
an appeal to the Seventh Circuit. That said, such an appeal may be
further down the road. The Tony’s Finer
Foods court did not appear to enter an order requiring
the insurer to defend. Instead, it held an issue of fact remained
(for the jury to decide) as to late notice. On the other hand, the
court in Thermoflex found the insurer did have
a duty to defend. This distinction – whether
the court finds an insurer has a duty to defend – is
important for appellate purposes because the Seventh Circuit very
recently held that trial court orders requiring an insurer to
prospectively defend an insured are deemed to be immediately
appealable injunctions under 28 U.S.C
§1292(a)(1). See
USA Gymnastics v. Liberty Ins. Underwriters,
Inc., No. 20-1245, (7th Cir. Feb. 25,
2022). Ultimately, until there is appellate guidance, the split
decisions on coverage disputes for BIPA claims under general
liability policies illustrate that the outcome may hinge on venue
and/or choice of law considerations.
As a final point, it is important to note
the Tony’s Finer Foods opinion has
implications related to late notice beyond coverage for BIPA
claims. Under Illinois law, an insured generally must provide a
justifiable or reasonable excuse for any delay. Unlike some
jurisdictions, an insurer is not required to
prove prejudice to prevail on this defense. While it is one factor
to consider, it is not a prerequisite. Moreover, prejudice should
become relevant only after the insured proffers
a reasonable excuse for the delay. In other words, a lack of
prejudice does not excuse an insured’s late notice where the
insured has not established a reasonable excuse for its
delay.
Summary
Despite the foregoing, the Tony’s Finer
Foods court declined to focus on whether the
insured’s justification for the lengthy 20-month delay was
reasonable. Instead, the court focused on the lack of prejudice
factor. Such an approach seems to put the cart before the horse.
This late notice issue was reserved for the jury despite the fact
there seemingly were no disputed facts. It is worth stating that if
the facts pertaining to notice are undisputed it seems appropriate
for a court to rule on the issue of reasonableness as a matter of
law. Here, the court declined to do so. In any event, the future
procedural history of this matter will be interesting to monitor
for a number of reasons.
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guide to the subject matter. Specialist advice should be sought
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