The New Jersey Appellate Division Finds Exclusion in Insurance Carrier's Policy Valid Where CEPA Plaintiff Did Not Complain Of 'Emotional Injuries Accompanied By Physical Manifestations'


The Employment and Labor Law Alert

December 20, 2005

Recently, in United States Liability Ins. Group v. Security Ins. Co. of Hartford, 381 N.J. Super. 211 (App. Div. 2005), the New Jersey Appellate Division revisited the issue of the circumstances under which the typical Workers’ Compensation And Employer’s Liability Insurance policy will or will not provide coverage for injuries allegedly resulting from wrongful terminations of employment. The court affirmed summary judgment for the employer’s workers compensation carrier because the allegations of the complaint brought against the employer by its former employee under the Conscientious Employee Protection Act, N.J.S.A. § 34:19-1, et seq., (CEPA) did not allege any “physical manifestations” resulting from the emotional distress allegedly resulting from the CEPA violation. In the absence of allegations of such manifestations, there were no alleged “bodily injuries” for which the policy afforded coverage.

The CEPA Action

Former employee Regina Marcacci (“Marcacci”) alleged that her employer, Seabrook House, violated CEPA when it terminated her in retaliation for her complaints concerning alleged fraud committed by the employer. In Marcacci’s complaint, she alleged that she became aware that employer was engaged in illegal activities, or activities she reasonably believed were illegal, with respect to state audits, state and federal healthcare and treatment licensing regulations, and other public policies. Marcacci alleged, inter alia, that the employer “fixed” incomplete clinical records, billed for unperformed services, violated legal regulations regarding the placement of patient bed’s, hired employee’s without conducting legally required criminal background checks and fingerprint testing, and approved improper expenses. Further, Marcacci alleged that she objected to the employer’s illegal conduct and reported it to her direct supervisor, the President of Seabrook House, and to other supervisors, managers, and employee’s. Marcacci, who worked for Seabrook House for almost 20 years, claimed her employer terminated her in retaliation to her objections. Finally, she claimed she suffered injuries “…including but not limited to emotional distress and mental anguish, humiliation…”, and economic losses. In her interrogatory answers, Marcacci stated that she visited her family physician eight times over a 5-month period for depression, stress, and anxiety. She sought treatment for sleeplessness and she complained of anxiousness, crying, and stress. Her physician prescribed anti-depression and anti-anxiety medications, noting that although she was not suicidal, she was depressed.

The Dispute Between the Insurance Carriers

Both USLIG and SIC provided insurance coverage to Seabrook House. USLIG provided a “professional liability policy” while SIC provided a “workers’ compensation and employer’s liability” policy. USLIG brought a declaratory judgment action to establish SIC’s responsibility to provide coverage for the costs of defending Marcacci’s CEPA action against Seabrook House. But on the parties’ cross motions for summary judgment, the Law Division ruled in favor of SIC. USLIG appealed. Exclusion C-5 excluded insurance coverage for intentional bodily injury caused by the employer.

The Appellate Division’s Decision

At issue before the Appellate Division was Exclusion C-7 in SIC’s policy, which purported to exclude coverage for “…damages 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….” Thus the appellate court first reviewed the analysis undertaken by the New Jersey Supreme Court in Schmidt v. Smith, 155 N.J. 44, 50 (1998), an action that involved a workers’ compensation and employer’s liability” policy with a similar exclusion. The Schmidt court made clear that, by statute, an employer must obtain sufficient insurance coverage to pay any obligation incurred for work-related “bodily injuries” to an employee. See N.J.S.A. § 34:15-72. Additionally, the Schmidt court found that the “employer’s liability” section of the policy provided payment for employees’ bodily injuries falling outside the scope of the workers’ compensation system, i.e., accidental injuries. In Schmidt, the Supreme Court held that an exclusion such as Exclusion C-7 in SIC’s policy violates public policy insofar a it purports to exclude from coverage “emotional injuries accompanied by physical manifestations'” because such-injuries qualify as “‘bodily injuries” for which the employer expected coverage when purchasing insurance.

In Schmidt, the employee had alleged bodily injuries resulting from sexual harassment by the employer’s president. The Appellate Division distinguished Schmidt, however, noting that Marcacci’s alleged injuries, “depression, stress and anxiety” did not constitute “emotional injuries accompanied by physical manifestations” and that Marcacci’s difficulty sleeping and irritability also did not rise to the level of physical manifestations. Rather, Marcacci’s primary contention focused on her improper termination under CEPA. Furthermore, the employee in Schmidt endured physical touching, assault, and harassment, whereas Marcacci’s complaint failed to allege any physical contact. Thus the court concluded that SIC could justifiably rely on Exclusion C-7.


While most employees who claim they were wrongfully terminated will allege emotional distress and/or humiliation as part of their damages, many, if not most, do not allege what would amount to “physical manifestations” as a consequence thereof. Employers who desire to protect themselves through insurance against suits by former employees must keep in mind that their workers compensation and employer’s liability policy may very well afford them with insufficient coverage.