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.