Knox v. Ironshore Indemnity Inc.

Background

The plaintiffs were former employees of John Varvatos Enterprises, Inc. (“Varvatos”). They sued Ironshore Indemnity Inc., Varvatos’s insurer, seeking to collect a judgment entered against Varvatos in earlier litigation. That judgment arose from Varvatos’s compensation policy for sales employees.

Before 2005, Varvatos required male and female sales employees to wear Varvatos clothing and gave both groups a clothing allowance. In 2005, Varvatos discontinued its women’s clothing line, stopped requiring female sales employees to wear Varvatos clothing, and stopped giving them a clothing allowance. Male sales employees received up to $12,000 in Varvatos clothing each year. After 2012, Varvatos offered female employees a discount on clothing at a related retailer but continued not to provide them with a clothing allowance.

In the underlying litigation, a jury found that Varvatos’s policy violated the federal Equal Pay Act and New York civil-rights law. After post-trial proceedings and an agreed reduction of the award, the court entered a final judgment totaling $2,114,086.20 against Varvatos on June 23, 2021.

Insurance policy and earlier litigation

Ironshore issued Varvatos a directors-and-officers and private-company liability policy that included employment-practices coverage. The policy covered losses resulting from certain employment-related wrongful acts, including discrimination, Equal Pay Act violations, and related civil-rights violations.

The policy contained a prior-acts exclusion. It excluded losses connected to wrongful acts occurring before April 30, 2012. It also treated losses arising from the same or related wrongful acts as arising from the first such act. The policy defined related wrongful acts to include acts that were the same, related, continuous, or arose from a common set of facts.

Knox and Kassen previously brought an action against Ironshore seeking to collect the judgment under New York Insurance Law § 3420(b), which permits certain judgment creditors to sue an insurer directly. In that earlier related proceeding, the court dismissed the claims because the required judgment had been vacated at that time, execution of any judgment was stayed during Varvatos’s bankruptcy proceedings, and the plaintiffs had not alleged that they served the insurer and Varvatos with the required documents. The plaintiffs did not appeal that dismissal.

Motions and analysis

In this action, the plaintiffs asserted claims under New York’s direct-action statute, insurance by estoppel, and the federal Declaratory Judgment Act. They moved for partial summary judgment on Ironshore’s liability and for certification of a class consisting of members of the class certified in the underlying litigation. Ironshore moved to dismiss, arguing that the earlier dismissal barred the claims and that the policy did not cover the conduct underlying the judgment.

The court decided that the prior-acts exclusion alone was sufficient to resolve the case. Applying New York law, the court explained that an insurance exclusion must be clear and unmistakable, and that an unambiguous insurance provision must be given its ordinary meaning.

The court held that the exclusion unambiguously applied. Varvatos adopted the discriminatory clothing policy before April 30, 2012 and maintained it afterward. The harms underlying the judgment arose from the same policy, and the earlier and later versions of the policy were related and arose from a common set of facts. The exclusion therefore barred coverage for the judgment.

The court rejected the plaintiffs’ argument that “related wrongful acts” was ambiguous. Although the language was broad, the court found that the terms “same,” “related,” “continuous,” and “common nucleus of facts” were familiar legal concepts and sufficiently clear in this policy. The court also rejected the argument that the later Allsaints discount created a separate wrongful act. The policy did not require related acts to be identical, and both versions involved denying female employees a clothing allowance. In addition, the court held that the plaintiffs were barred from taking a contrary position about the value of the Allsaints discount because they had argued in the underlying litigation that the discount was worthless and had prevailed in part on that position.

The court separately held that the insurance-by-estoppel claim failed because Ironshore’s defense-coverage letter reserved all rights, privileges, and defenses under the policy and applicable law. The declaratory-judgment claim also could not succeed because the Declaratory Judgment Act could not create coverage rights that did not otherwise exist.

Disposition

Judge Denise Cote granted Ironshore’s motion to dismiss. The court denied the plaintiffs’ motions for partial summary judgment and class certification as moot, directed the Clerk of Court to enter judgment for Ironshore, and closed the case. The opinion did not need to resolve Ironshore’s separate argument based on the earlier related proceeding because the prior-acts exclusion disposed of the litigation.