Costco Gender Discrimination Suit To Be Covered by Excess Insurance, Says Court

Poor employment practices at Costco have left the retail giant's insurer on the hook for an underlying discrimination case.
By: | April 24, 2019

In 2004, Costco Wholesale Corporation faced a class action lawsuit alleging gender discrimination in its promotion decisions. It notified its insurer of a potential claim and promptly provided notice of the lawsuit when it was filed.

In 2013, Costco reached out to the other insurers on its employment practices liability tower, including Arrowood Indemnity Company, alerting them to the state of the underlying suit. The parties had moved to mediate the dispute, and Costco wanted to see if Arrowood planned to attend. But Arrowood did not respond.

As mediation progressed, Costco rejected an offer to settle, instead preferring a process where each class member would prove her right to relief and her damages through individual litigation or arbitration. Arrowood knew of the decision, but again made no attempt to respond or question.

By August 2013, Arrowood realized Costco’s potential exposure exceeded $35 million, at which Arrowood’s excess policy would be triggered.

Meanwhile, Costco had agreed to settle the class action, with its liability fixed at $8 million regardless of how much individual class members might be awarded through arbitration. Costco never obtained Arrowood’s consent before entering into the settlement.

By March 2017, Costco notified Arrowood that its underlying layers would soon be exhausted, with a total of $32 million in fees and costs being paid out in arbitration. Arrowood was not pleased, citing Costco never sought Arrowood’s consent on settlement.

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The insurer made all payments requested, including arbitration-related expenses that totaled $565,898 and the settlement balance of $7,945,0000. But, Arrowood also reserved the right to recover amounts paid. Costco filed suit.

It claimed Arrowood was obligated to pay losses incurred from the underlying suit. Costco also asserted Arrowood had breached its contract, acted in bad faith, violated the Washington Consumer Protection Act and violated the Insurance Fair Conduct Act.

Upon review, the court sided with Costco. It said the employment practices liability insurer was aware of the fixed $8 million fee and was therefore responsible for that amount.

However, the court said, Arrowood would still be entitled to reimbursement of the more than half a million dollars in post-settlement arbitration costs.

Scorecard: Because Arrowood’s policy was triggered for the underlying gender discrimination lawsuit against Costco, the insurer could not receive reimbursement for the $8 million settlement.

Takeaway: To avoid possible litigation, insurers may invest in producing best employment practices training products for insureds to ensure discriminatory actions are preempted in the first place. &

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]