Workers' Compensation: Insurance Coverage Denied in Employee Suit

A recent case, Rice Enterprises, LLC v. RSUI Indemnity Co., highlights the complexities of insurance coverage for employers facing lawsuits from employees. The case involved a former employee who sued Rice Enterprises for negligence related to alleged sexual harassment and assault by a manager. Rice Enterprises sought coverage under its insurance policies, specifically a Workers' Compensation and Employers' Liability policy from Zenith Insurance Company and a Commercial Umbrella liability policy from RSUI Indemnity Company.

The Court ultimately dismissed the claims against both insurers based on specific policy exclusions and conditions.

Zenith Policy (Workers' Compensation and Employers' Liability)

The Zenith policy covered liability for bodily injury arising out of and in the course of an employee's employment. However, the court found that two exclusions in the policy applied:

Exclusion C.4: This exclusion barred coverage for obligations imposed by workers' compensation law or similar laws. The court determined the employee's suit fell within the exclusive domain of Pennsylvania's Workers' Compensation Act because the alleged injuries occurred during the course of employment and at the worksite.
Exclusion C.7: This exclusion barred coverage for damages arising from harassment and other personnel practices. The court concluded that this exclusion applied because the employee's allegations described harassing conduct, and the term "harassment" can include sexual misconduct. The court found the application of Exclusion C.7 sufficient to dismiss the claims against Zenith.

RSUI Umbrella Policy

The RSUI Umbrella policy provided coverage if the limits of the underlying insurance were exhausted or unavailable. The court found that coverage under this policy was not "triggered" because the lawsuit did not allege that other insurance policies had been used up or were unavailable to cover the liability. Although Rice Enterprises later conceded that the underlying policies had not been exhausted, the court affirmed the dismissal based on the lack of such a claim in the initial complaint.

This case serves as a reminder for businesses to carefully review their insurance policies, particularly the exclusions and conditions, to understand the scope of their coverage for employee-related claims.

The Rice Enterprises case shares some similarities with New Jersey Supreme Court decisions concerning workers' compensation insurance coverage and employer liability, particularly regarding the interplay between workers' compensation exclusivity and exceptions allowing employees to sue employers, as well as the application of policy exclusions. However, there are also notable differences in how these issues have been addressed.

Similarities:

Workers' Compensation Exclusivity: Both Pennsylvania law, as seen in Rice Enterprises, and New Jersey law, as discussed in cases like Rodriguez v. Shelbourne Spring, LLC, generally establish workers' compensation as the exclusive remedy for employees injured on the job. This means that employees cannot sue their employers in civil court for work-related injuries.

Exceptions to Exclusivity: Both states recognize exceptions where employees can file a lawsuit against their employer outside the workers' compensation system. In New Jersey, this is primarily the "intentional wrong" exception. While the specific test for this exception differs from the legal framework in Pennsylvania, the underlying principle that egregious employer conduct can allow an employee to bypass the exclusivity bar is present in both jurisdictions.

Employer Liability Insurance and Exclusions: Both the Rice Enterprises case and the New Jersey Supreme Court cases examine the coverage provided by employer liability insurance policies (often part of a workers' compensation policy) and the effect of exclusions within these policies on employee lawsuits. The question of whether these policies cover claims that fall outside the workers' compensation system is central in both contexts.

Differences:

Harassment Exclusions: A significant point of comparison lies in the treatment of exclusions for claims arising from harassment or personnel practices. In Rice Enterprises, the court upheld the application of an exclusion barring coverage for damages arising out of harassment and personnel practices to the employee's claims, which included allegations of sexual harassment. In contrast, the New Jersey Supreme Court in Schmidt v. Smith held that an exclusion in an employer's liability policy for damages arising out of harassment was void as against public policy to the extent it denied coverage for bodily injury (including emotional injuries with physical manifestations) caused by workplace sexual harassment. The Schmidt court reasoned that employers are required by statute to have sufficient coverage for obligations incurred due to employee bodily injuries, and denying coverage for injuries from sexual harassment would violate this policy. This suggests a potentially broader scope of coverage for certain harassment-related claims under New Jersey law compared to the outcome in Rice Enterprises.

Intentional Wrong Interpretation: The specific legal standards and judicial interpretation of what constitutes an "intentional wrong" sufficient to overcome the workers' compensation bar differ between Pennsylvania and New Jersey. New Jersey case law, such as Laidlow v. Hariton Machinery Co., Inc., has developed a two-prong test focusing on the employer's knowledge of substantial certainty of injury and whether the resulting injury was more than a fact of industrial life.

Umbrella Policy Trigger: The Rice Enterprises case also involved the specific conditions for triggering coverage under an umbrella liability policy, an aspect not detailed in the summaries of the New Jersey Supreme Court cases provided.

In summary, while the general landscape of workers' compensation exclusivity and employer liability insurance is similar in both states, New Jersey case law, particularly Schmidt v. Smith, appears to take a different approach regarding the enforceability of harassment exclusions in employer liability policies when bodily injury results from workplace sexual harassment.

RICE ENTERPRISES, LLC v. RSUI INDEMNITY CO., Court of Appeals, 3rd Circuit 2025

(Not Precedential, Filed: April 30. 2025

RELATED RESOURCES

NJ Supreme Court Limits Employer Insurance Coverage for Worker Injuries workers-compensation.blogspot.com 12/13/2024

Recommended Citation: Gelman, Jon, Insurance Coverage Denied in Employee Suit, www.gelmans.com (05/06/2025) https://workers-compensation.blogspot.com/2025/05/insurance-coverage-denied-in-employee.html

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*Jon L. Gelman of Wayne, NJ, is the author of NJ Workers' Compensation Law (West-Thomson-Reuters) and co-author of the national treatise Modern Workers' Compensation Law (West-Thomson-Reuters). For over five decades, the Law Offices of Jon Gelman 1.973.696.7900
jon@gelmans.com has represented injured workers and their families who have suffered occupational illnesses and diseases.