Umbrella Policy Only Effective After Primary Policy is Exhausted

Workers’ Compensation Availability Eliminates Cover Under D&O Policy

May 08, 2025

Sexual Harassment in the Workplace is Subject to Workers’ Compensation Law

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Rice Enterprises, LLC (“Rice”) appealed the District Court’s order dismissing its claims for insurance coverage against Zenith Insurance Company and partially dismissing its claims against RSUI Indemnity Company. Rice argued the District Court erred in applying two exclusions from the Zenith policy and in finding that coverage under RSUI’s “Umbrella” policy had not been “triggered.”

In Rice Enterprises, LLC v. RSUI Indemnity Co and Zenith Insurance Company, No. 24-1880, United States Court of Appeals, Third Circuit (April 30, 2025) affirmed the decisions of the District Court.

FACTS

Rice operated eight McDonald’s franchises in Allegheny County, Pennsylvania. On September 21, 2021, Rice’s former employee, L.H., sued Rice in the Allegheny County Court of Common Pleas for negligence. L.H. alleged Rice had hired a manager who was a “Lifetime Offender” under Megan’s Law, who proceeded to sexually harass and ultimately rape L.H.

Rice sought coverage with respect to L.H.’s suit under three insurance policies: one issued by Zenith and two by RSUI. The Zenith policy was the “Employers’ Liability” half of a dual “Workers’ Compensation and Employers’ Liability” policy, which covered liability due to “bodily injury . . . aris[ing] out of and in the course of [an] injured employee’s employment.” RSUI’s two policies were a “Directors and Officers Liability” policy and a “Commercial Umbrella” liability policy.

The Umbrella policy, the only RSUI policy provided for a defense if: a. The applicable limits of insurance of the “underlying insurance” and other insurance have been used up in the payment of judgments or settlements; or b. No other valid and collectible insurance is available to the insured for damages covered by this policy.”

Zenith moved to dismiss all claims against it, and RSUI moved to dismiss Rice’s claims only as to the Umbrella policy. The District Court granted both motions.

THE DISTRICT COURT DECISIONS

As to the Zenith policy, the District Court ruled that two exclusions applied. The first, termed “C.4,” excluded coverage for “[a]ny obligation imposed by a workers’ compensation, occupational disease, unemployment compensation, or disability benefits law, or any similar law.” The District Court interpreted C.4 to bar coverage for any claim falling within the exclusive domain of Pennsylvania’s Workers’ Compensation Act and it determined L.H.’s suit was such a claim because “the injuries and damages alleged by L.H. occurred during the course of L.H.’s employment and at L.H.’s Rice employment worksite.”

The second exclusion, “C.7,” barred coverage for “[d]amages arising out of coercion, criticism, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination against or termination of any employee, or any personnel practices, policies, acts or omissions.” Because all allegations in L.H.’s complaint described harassing conduct by her supervisor, the District Court concluded C.7 applied.

As to the RSUI Umbrella policy, the District Court determined that coverage was not “triggered” because there was no allegation that other insurance had been used up or was unavailable.

ZENITH POLICY

Rice argued the District Court erred in applying C.7 because Rice’s liability arose out of “sexual misconduct” rather than “harassment.” However, instances of physical contact have the potential to be among the most severe and psychologically damaging types of sexual harassment.

The Third Circuit concluded that Rice’s claims against Zenith were properly dismissed.

RSUI Umbrella Policy

The RSUI Umbrella policy provides for a defense if other insurance policies have been used up or are unavailable. Rice’s complaint does not allege that either condition was met. The Third Circuit concluded Rice’s claims under the RSUI Umbrella policy were properly dismissed.

While Rice conceded that “the underlying insurance policies had not yet been exhausted,” Rice nevertheless argued that the RSUI Umbrella policy should have been kept in the case for convenience which argument was summarily rejected.

ZALMA OPINION

It continues to amaze me that lawyers will bring cases to an appellate court when faced with clear and unambiguous policy exclusions and even ask to keep an umbrella insurer as a defendant “for convenience” when the underlying policy had not been exhausted. Insurance policies are contracts and must be interpreted, as did the Third Circuit, as they are written.

(c) 2025 Barry Zalma & ClaimSchool, Inc.

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