How do indemnification clauses work in construction contracts?

It is common for one or more of the parties involved in a construction project to insist on the inclusion of an indemnification clause in the final contract. Indemnity clauses offer protection against damages by transferring risk from one party to another. The danger inherent in an indemnity provision is not having a clear understanding of the potential costs of taking on responsibility for the negligence, breach of contract or other act of another party. The advice of a knowledgeable general construction law attorney can help you avoid costly mistakes.

Transferring risk by contractual agreement

Indemnification clauses are contractually enforceable agreements transferring the risk of being liable for damages caused by the acts of other parties. For example, a property owner might be concerned about being forced to incur legal fees to defend against claims made by someone injured through the negligence of a subcontractor working under the supervision of the general contractor.

An indemnity provision in the contract between the general contractor and the property owner could make the general contractor responsible for the cost of the defense and payment of damages in the event of a third-party claim against the property owner. It would then be incumbent upon the general contractor to include an indemnity clause in contracts with its subcontractors to pass the risk on to each of them.

Are indemnity clauses enforceable?

As a general rule, indemnity clauses are enforceable provided they do not serve to indemnify a party for its own negligent acts. Some states, including Illinois with its Construction Contract Indemnification for Negligence Act, place limitations on the ability of a party to be indemnified for damages caused by its negligence.

This might arise in a situation in which a worker is injured in a fall from a faulty ladder supplied by the general contractor on a project. The victim, who works for a subcontractor, sues the general contractor. The general contractor attempts to enforce an indemnification clause it has with its subcontractor. Because the general contractor is attempting to obtain indemnity for its own negligence, courts, particularly in states such as Illinois, would not enforce the clause as being against the policy of the state as reflected by its statute.

Engaging a competent construction litigation attorney

Construction contracts and indemnity clauses are important to a construction project, but care must be taken to ensure all parties understand the rights, obligations and remedies under them.

An improperly drafted indemnification provision in a construction contract could leave a party at risk in the event of a claim for damages. It could also be in violation of state law. It is important to be represented and advised by experienced and skilled general construction law attorney during the negotiation and execution of a construction contract and an indemnification agreement. An attorney from McKenna Storer is your best source of advice and guidance.


Defending Bad Faith Actions

In insurance coverage litigation, bad faith claims are somewhat common. Bad faith actions, under section 155 of the Illinois Insurance Code, provide a remedy to insureds for an insurance company’s vexatious and unreasonable refusal to honor its contract with the insured.

Section 155 provides:
“(1) In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees.”

In determining whether bad faith applies, a court must consider the totality of the circumstances, including an insurer’s attitude, whether the insured was forced to sue to recover and whether the insured was deprived of the use of his or her property. Illinois Founders Insurance Co. v. Williams, 2015 IL App (1st) 122481 ¶31.

Courts can consider a number of factors in determining whether an insurance company’s actions constitute bad faith including 1) potential for an adverse verdict; 2) potential for damages in excess of policy limits; 3) refusal to negotiate; 4) communication with the insured; 5) adequate investigation and defense; and 6) advice of the insurance company’s own adjusters and defense counsel. O’Neill v. Gallant Insurance Co., 329 Ill.App.3d 1166, 1172, 769 N.E.2d 100 (2002).

How can a bad faith claim be defended? The insurer needs to show that any delay was not vexatious and unreasonable. This is generally a factually specific showing, numerous examples of which can be found in Illinois case law. Often times an insured will believe that an insurer has acted vexatiously and unreasonably when the insurance company has followed the law.

In addition, the insurance company can defend a bad faith claim by showing there was a bona fide dispute in coverage. However, just because there is a bona fide dispute to coverage does not give an insurance company carte blanche to mishandle or mismanage an insured’s claim.

A finding of bad faith can result in an insurance company paying damages, including attorney’s fees to the insured. Therefore, it is important to be knowledgeable of bad faith actions.

If you have questions about insurance coverage laws, contact Kelly Purkey

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Motor Carriers and ELDs: How to Avoid a Complaint Of Harassment From the Federal Motor Safety Carrier Administration Under 49 CFR § 386.12.

By now, most motor carriers1 should be familiar with electronic logging devices (ELDs) or alternative on-board recording devices (AOBRD). As of April 1, 2018, inspectors for the Federal Motor Safety Carrier Administration (FMCSA) may issue out-of-service orders to drivers for failure to install or use an ELD. However, if you are a motor carrier whose drivers use ELDs, then also be aware that ELDs may not be used for purposes considered by the FMCSA as “harassment.” 49 CFR § 390.36. This may pose an issue for motor carriers who use ELDs to monitor driver productivity, even though doing so is expressly permitted in the FMCSA “harassment” provision. See Id.

In 2010, a federal appeals court struck down the FMCSA’s rule about ELDs for inadequately addressing issues surrounding the use of ELDs for “harassment.” Owner-Operator Indep. Drivers Ass’n v. Fed. Motor Carrier Safety Admin., 656 F.3d 580, 588 (7th Cir. 2011).Now, the current ELD rules more extensively address the issue of harassment and create procedures for a driver to file a complaint of harassment against a motor carrier. 49 CFR §§ 386.12, 390.36. As discussed below, motor carriers can take precautions to avoid liability for harassment involving an ELD device.

How Drivers can be Harassed by A Motor Carrier Using An ELD
The Owner-Operator Independent Drivers Association (OOIDA) claims that motor carriers can use ELDs to monitor driving progress in real time and impose pressure on drivers in violation of the FMCSA’s rules. Owner-Operator Indep. Drivers Ass’n, 656 F.3d at 589. According to an OOIDA survey, more drivers with ELDs feel pressure to speed and drive while fatigued. Some drivers have also reported feeling “more harassed” from motor carriers as a result of ELDs.

The FMCSA’s definition of “Harassment”
According to the FMCSA, harassment with an ELD involves the following: (1) an action by a motor carrier toward a driver (2) involving the use of information from an ELD (3) where the motor carrier knew or should have know that doing so would result in the driver violating 49 CFR § 392.3 or § 395. 49 CFR § 390.36.

Under the FMCSA’s definition of harassment, motor carriers should be mindful of the role ELDs can play in violating rules prohibiting impaired driving and Hours of Service (HOS) requirements. 49 CFR §§ 392.3, 395. Part 392.3 prohibits operation of a commercial vehicle “while the driver’s ability or alertness is so impaired, through fatigue, illness, or any other cause, as to make it unsafe for him/her to begin or continue to operate the commercial motor vehicle.” 49 CFR § 392.3. Rules for HOS requirements, reporting and maintenance of ELDs are covered by Part 395. 49 CFR § 395.

The FMCSA expressly allows use of an ELD to monitor productivity. 49 CFR § 390.36. More specifically, the FMCSA rules stat a motor carrier may “monitor productivity of a driver provided that such monitoring does not result in harassment.” 49 CFR § 390.36.

How A Commercial Motor Carriers Can Safeguard Against “Harassment”
Motor carriers should not be afraid to use ELDs to monitor productivity as long as doing so would not result in violating federal regulations against fatigued/impaired driving, as well as HOS and ELD requirements.

Therefore, a motor carrier should not use an ELD to monitor a driver while knowing or permitting that driver to drive while tired or intoxicated. Motor carriers should lean toward using ELDs to occasionally check up on drivers and should avoid making statements that may cause a driver to prolong driving.

Motor carriers can minimize accusations of harassment by avoiding overly frequent or unnecessary contact with drivers while using ELDs. Overly frequent driver contact may cross over into the FMCSA’s definition of harassment even if done to ensure driver productivity. Constantly trying to ensure productivity could cause a driver to feel intimidated or otherwise pressured to drive fatigued.

Another way to avoid harassment accusations is by both maintaining accurate HOS reporting and ensuring that drivers do not drive over the maximum driving time under 49 CFR § 395.3. While it is important to ensure compliance with rules for ELDs under 49 CFR § 395, motor carriers should also take seriously any concerns from drivers as to ELDs. For instance, if a driver expresses concern or difficulty in using an ELD or in complying with ELD regulations, then such issues must be addressed.

When using an ELD to monitor productivity, be sure that productivity is considered alongside FMCSA rules and maximum driving requirements. If there is any concern that harassment may be alleged, then it is important to document any related instances and how ELD was used in those instances.

What Happens When a Driver Files A Complaint of Harassment
A driver alleging harassment must file a complaint with the FMCSA 90 days “after the event.” 49 CFR § 386.12. The FMCSA Division Administrator for the state in which the driver is employed determines whether a complaint alleging harassment is frivolous. Id. If non-frivolous, the Division Administrator conducts an investigation. During this time, a motor carrier under investigation is supposed to be put on notice that “49 U.S.C. 31105 includes broad employee protections,” and (2) retaliation against a driver may result in action from OSHA. Id. Moreover, the FMCSA is also supposed “to ensure that the driver is not subject to coercion, harassment, intimidation, disciplinary action, discrimination or financial loss” following the filing of a complaint. Id.

Motor Carriers under investigation from the FMCSA or those who have received a complaint should avoid any action that could be construed as retaliation against the complainant. This includes termination of employment or services, nasty e-mails, inappropriate or rude comments, threats, docking of pay, refusal to pay or settle wage claims, demotion, and acts targeting the complainant.

If a complaint is filed, a motor carrier should consider retaining counsel. Please contact Paul Steinhoffer, Alex Sweis, Kristin Taurus, or James Cook.

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1Some drivers not subject to ELD requirements include: (1) drivers who use paper Records of Duty Status (RODS) for not more than 8 days during any 30 day period; (2) drivers who conduct driveaway-towaway operations, where the vehicle being driven is the commodity being delivered; and (3) drivers of commercial trucks manufactured before model year 2000. 49 CFR 395.8(a)(1)(iii)

Protection Against Discriminatory Treatment After Filing For Relief Under The Bankruptcy Code

Many individuals struggling with debt often do not explore the option of seeking financial relief under the U.S. Bankruptcy Code out of fear of losing a job or discriminatory treatment by an employer. The Bankruptcy Code offers not only tremendous debt relief to those facing financial hardship but also offers far reaching protections against retaliatory actions by employers. In this article we discuss the Bankruptcy Code and implications.

Section 525 of the Bankruptcy Code provides:

(a) Except as provided in the Perishable Agricultural Commodities Act, 1930 , the Packers and Stockyards Act, 1921, and section 1 of the Act entitled “An Act making appropriations for the Department of Agriculture for the fiscal year ending June 30, 1944, and for other purposes,” approved July 12, 1943, a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.


(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt–

(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;

(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or

(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.



(1) A governmental unit that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a student grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, or another person with whom the debtor or bankrupt has been associated, because the debtor or bankrupt is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of a case under this title or during the pendency of the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

(2) In this section, “student loan program” means any program operated under title IV of the Higher Education Act of 1965 or a similar program operated under State or local law.


This section of the Bankruptcy Code prohibits employers from demoting or transferring an employee because they sought debt relief under the Code. The anti-discriminatory protections extend to private and government employees. The protections also extend to matters including but not limited to: utility services, promotions, and transfers. Utility companies cannot deny services because if a bankruptcy filing but they can require a security deposit. See In re Heard, 84 B.R. 454 (Bankr. W.D. Tex. 1987). An employer cannot demote someone that routinely works with the public to a position that requires zero contact with the public. See In re Hicks, 65 BR 980 (Bankr. W.D. Penn. 1986). Additionally, an employee cannot be fired because an employer may be potentially embarrassed by the employee’s filing. See In re Hopkins, 66 B.R. 828 (Bankr. W.D. Ark. 1986) .


Businesses that reorganize under chapter 11 of the Bankruptcy Code also are protected under Section 525 from being denied licenses and permits. The U.S. Supreme Court has determined that a state could not revoke a license if a business fails to make an installment payments. See FCC v. NextWave Personal Communs. Inc., 537 U.S. 293 (2003). Some courts have extended the prohibition on revoking a license to prohibiting a state from denying a license because of a bankruptcy filing. See In re Island Club Marina, Ltd., 38 B.R. 847 (Bankr. N.D. Ill. 1984) and In re Fintel, 10 B.R. 50 (Bankr. D. Or. 1981). States also cannot require repayment of dischargeable, or discharged, debt a condition for a business or individual to maintain or reinstate professional license. See In re Borowski, 216 B.R. 922 (Bankr. E.D. Mich. 1998) and In re Fasse, 40 B.R. 198 (Bankr. D. Colo. 1984).


The protections against discriminatory treatment after filing for bankruptcy extends to small business working with state and federal government agencies. Business cannot have service contracts terminated or be prohibited from bidding for work solely because the business filed bankruptcy. See In re Son-Shine Grading, Inc., 27 B.R. 693 (Bankr. E.D.N.C. 1983) and In re Exquisito Services, Inc., 823 F.2d 151 (5th Cir. 1987).


The relief available to employees that have been discriminated against is broad and decided by bankruptcy judges. Bankruptcy judges are able to adjudicate claims of discrimination by private and government employers, and government agencies involved in licensing matters. A powerful provision in the Bankruptcy Code, provides;


The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. 11 USC § 105(a).


Bankruptcy Courts have interpreted this provision to allow judges to award back pay and employment reinstatement. See Robinette v. WESTconsin Credit Union, 686 F. Supp. 2d 1206 (W.D. Wis. 2010) and In re Hopkins, 66 B.R. 828 (Bankr. W.D. Ark. 1986). It follows that a judge would be able to order an employer to re-promote an employee or undo a transfer.


As demonstrated by the information above, you should not be discouraged from considering a bankruptcy filing as the best debt relief option out of fear of problems with an employer or even a professional licensing board.


McKenna Storer is a debt relief agency. We help people file for bankruptcy under the bankruptcy code. Contact Jaine Dowell for questions about the U.S. Bankruptcy Code or any other debt relief questions or concerns.


If you found value in this article, you may also wish to read our other bankruptcy related posts or download our free Bankruptcy Checklist.


Legal Advertisement: This content is provided for informational purposes only and is not intended as legal advice. McKenna Storer is not liable for any actions taken on the information provided and is not liable for any errors or omissions.

Federal Courts Are Expanding Title VII Protections to Transgender Status and Sexual Orientation

Title VII of the Civil Rights Act of 1964 prohibits employment discrimination“because of . . . sex.” 42 U.S.C. § 2000e-2(a) (2012 Since its enactment, the Supreme Court has interpreted Title VII expansively to prohibit not only discrimination based on gender, but also same-sex sexual harassment and discrimination based on gender stereotypes. Nevertheless, the U.S. Supreme Court has not yet ruled on the issue of whether discrimination based on sexual orientation or transgender status violates Title VII.

The landmark case for sex discrimination based on gender stereotypes is Price Waterhouse v. Hopkins, 490 U.S. 228 (1989). In Price Waterhouse, the Supreme Court recognized that employment discrimination based on sex stereotypes (e.g., assumptions and expectations about how persons of a certain sex should dress, behave, etc.) is unlawful sex discrimination under Title VII. Price Waterhouse had denied Hopkins a promotion in part because the firm felt that she did not act as woman should act. She was told she needed to “walk more femininely, talk more femininely, [and] dress more femininely” in order to secure a partnership. The Court found that this constituted evidence of sex discrimination as “[i]n the . . . context of sex stereotyping, an employer who acts on the basis of a belief that a woman cannot be aggressive, or that she must not be, has acted on the basis of gender.” The Court further explained that Title VII’s “because of sex” provision strikes at the “entire spectrum of disparate treatment of men and women resulting from sex stereotypes.” The Supreme Court opened the door for LGBT workers to bring Title VII claims when it held that sex-role stereotyping can constitute discrimination in violation of Title VII’s prohibition against sex discrimination, but it would take years for the Federal Courts to extent Title VII protection based on sexual orientation or transgender status.

Until recently, courts have been reluctant to extend the gender stereotyping theory under Title VII protections to individuals discriminated on the basis of sexual orientation or transgender status without any additional evidence related to gender stereotype nonconformity. The theory advanced by past courts was that discrimination based on sexual orientation or against a transsexual because she is a transsexual is not ‘discrimination because of sex’ and, therefore, employees discriminated on the basis of sexual orientation and transsexuals are not protected under Title VII.

This limited view of Title VII is changing. Within the past year, several circuits have expanded Title VII protection to include discrimination based on transgender status and sexual orientation. Although the courts are using different theories, the courts are expanding the “failure-to-conform stereotyping” protection from Price Waterhouse to include transgender status and sexual orientation.

Title VII Protection Granted to Transgender Status

The Sixth Circuit recently held that “Title VII protects transgender persons because of their transgender or transitioning status, because transgender or transitioning status constitutes an inherently gender non-conforming trait.” EEOC v. R.G. & G.R. Harris Funeral Homes, Inc., No. 16-2424 (6th Cir. Mar. 7, 2018). In that case, an employee was terminated after she told her employer that she was transgender and would begin presenting as a woman. The Sixth Circuit ruled that RG & GR Harris Funeral Homes unlawfully discriminated against its employee “because of sex.” The decision reversed the lower court’s decision, which held that religious belief was sufficient to exempt the employer from anti-discrimination laws. The Sixth Circuit explained that an employer cannot take action against an employee “based on that employee’s status as a transgender person without being motivated, at least in part, by the employee’s sex.” The Sixth Circuit explained that “discrimination against transgender persons necessarily implicates Title VII’s proscriptions against sex stereotyping. . . . There is no way to disaggregate discrimination on the basis of transgender status from discrimination on the basis of gender non-conformity.”

Title VII Protection Granted to Sexual Orientation

Two United States Court of Appeals have recently held that Title VII prohibits discrimination on the basis of sexual orientation: Hively v. Ivy Tech, 853 F.3d 339, 351-52 (7th Cir. April 4, 2017 2017) (en banc), Zarda v. Altitude Exp., Inc., 883 F.3d 100 (2d Cir. Feb. 26, 2018) (en banc).

Hively was the first federal appellate court to extend protection under Title VII on the basis of sexual orientation. Kimberly Hively was a part-time adjunct professor at Ivy Tech Community College, who was allegedly repeatedly denied consideration for full-time teaching positions and her part-time contract was not renewed due to her sexual orientation. The Seventh Circuit initially ruled that Title VII did not provide protection for sexual orientation but then granted a rare en banc hearing and reversed. The Hively court , in an 8 to 3 decision, held that a plaintiff “who alleges that she experienced employment discrimination on the basis of her sexual orientation has put forth a case of sex discrimination for Title VII purposes.”

Chief Judge Diane Wood, writing for the majority, framed the court’s decision not as an “amendment” to Title VII but as a “pure question of statutory interpretation” of the meaning of “because of sex.”

The Court considered Hively’s two theories of discrimination: (1) a comparative method and (2) discrimination by association. The Court determined that both arguments support a possible actionable theory of discrimination based on sexual orientation.

Under the comparative method, the court looked to whether if Hively had been a man attracted to women, Ivy Tech would have refused to promote and fired her. If proven that the employment determinations would have been different if Hively were male, all other things equal, it would be a classic case of gender non-conformity, which the Supreme Court has already held is a form of sex discrimination under Title VII. The majority also relied upon the gender-based stereotyping theory articulated in Price Waterhouse: “Viewed through the lens of the gender non-conformity line of cases, Hively represents the ultimate case of failure to conform to the female stereotype (at least as understood in a place such as modern America, which views heterosexuality as the norm and other forms of sexuality as exceptional): she is not heterosexual.”

Under the discrimination by association theory, the court looked to whether Hively had the right to associate intimately with a person of the same sex and ruled that under either theory, she had alleged a claim for discrimination based on sex. The Supreme Court has already ruled that Title VII extends protection for association with person of another race; the Hively court reasoned that the same principles would mean that Title VII prohibits discrimination based on someone’s romantic association with a person of the same sex.

The Second Circuit in Zarda, following the Seventh Circuit’s decision in Hively, recently held that discrimination based on sexual orientation is a form of sex discrimination under Title VII. The Zarda court stated, “Because one cannot fully define a person’s sexual orientation without identifying his or her sex, sexual orientation is a function of sex. Indeed sexual orientation is doubly delineated by sex because it is a function of both a person’s sex and the sex of those to whom he or she is attracted. Logically, because sexual orientation is a function of sex and sex is a protected characteristic under Title VII, it follows that sexual orientation is also protected.

Employers Best Practices Related to Sexual Orientation or Transgender Status Discrimination

The U. S. Supreme Court has not ruled on the issues of whether sexual orientation or transgender status are protected under Title VII, and federal attempts to legislate specific LGBT rights have not been successful.

Companies who employ workers in the Second Circuit (New York, Vermont, Connecticut), the Sixth Court (Michigan, Kentucky, Ohio) and Seventh Circuit (Illinois, Wisconsin, Indiana), which have recognized transgender or sexual orientation discrimination as a prohibited activity under Title VII, should update their employment policies and practices to assure they are not violating the law.

Companies who employ workers in other jurisdictions should be mindful of local laws that may prohibit gender discrimination under Title VII because of sexual orientation or transgender status. The majority of states now have local laws that protect against discrimination based on sexual orientation and transgender status and employers should update their employment policies and practices to assure they are not violating the local laws.

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How is the Duty to Defend Determined in Insurance Coverage Cases?

One of the most important considerations in insurance coverage cases is determining whether an insurance company has a duty to defend and a duty to indemnify its insured. But how is this determination of insurance coverage made?

Someone is injured and the injured person is claiming her or his injuries are the responsibility of your insured’s company. A lawsuit is filed. The insured submits the lawsuit to your insurance company because he or she believes their insurance premiums include a duty to defend the company in lawsuits as well as a duty to indemnify or pay any settlement or judgment for a lawsuit against them.

You, the insurance company, sends a letter denying insurance coverage for the pending lawsuit, stating that there is no duty to defend or indemnify the insured in the lawsuit pending against them. What happens next for both the insured and the insurer?

Insurance companies do not have a duty to defend and indemnify an insured for every lawsuit that is filed. Insurance policies will contain conditions and exclusions which could serve as a basis for the insurance company to deny coverage under the particular policy.

Duty to Defend Determination in a Typical Illinois Insurance Coverage Scenario

In Illinois, if an insurance company denies coverage, the proper course of action is for the insurance company to file a declaratory judgment action, which is a lawsuit seeking a determination of whether there is coverage for the lawsuit under the insurance policy. The insured will be named as the defendant in the declaratory judgment action, as will the plaintiff in the underlying case.

In most declaratory judgment actions, the determination of insurance coverage is made by a comparison of the allegations in the underlying complaint to the insurance policy at issue. If the allegations of the underlying complaint come within or potentially within the terms of the insurance policy, the insurance company will have a duty to defend. If the allegations do not come within or potentially within the terms of the insurance policy, the insurance company will not have a duty to defend or indemnify the underlying lawsuit.

There are circumstances where it is proper for evidence beyond the underlying complaint to be considered in determining an insurer’s duty to defend. One situation is where the insurer has knowledge of true but unpleaded facts that, when taken together with the allegations in the complaint, indicate that the claim is within or potentially within coverage. See Shriver Insurance Agency v. Utica Mutual Insurance Co., 323 Ill.App.3d 243, 247, 750 N.E.2d 1253 (2001).

In order to avoid future insurance defense litigation, it’s important for insurers to make their insureds aware of the terms and exclusions of any insurance policies as insurance policies do not have blanket insurance coverage for any lawsuit filed against the insured.

McKenna Storer attorneys are skilled in all facets of insurance coverage in Illinois. Please contact Kelly Purkey for questions about this articles or any insurance coverage concerns.

Department of Labor Relaxes the “Unpaid Intern Test” in time for Summer Employment.

This is the season when employers are finalizing their plans for summer interns. The summer internship gives students experience in the working world and the company is provided the opportunity to get to know the student prior to extending post-graduation employment offers. The Department of Labor recently amended its guidelines for determining whether an unpaid intern should be designated an employee. The Department of Labor’s new guidelines for the unpaid intern test is significantly more relaxed than the prior test.

Old Unpaid Intern Test Criteria

Under the prior Department of Labor test, established in 2010, the internship had to meet six rigid requirements in order to validate its unpaid designation, making it difficult for an employer to validate the unpaid designation.

The prior six mandatory criteria were:

  1. The internship is similar to training given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Under this old test, if all the listed factors existed, then there would be no employment relationship under the FLSA, and the minimum wage and overtime provisions would not apply to the intern; however, if any one factor was not met, then the intern was considered an employee and had to be paid as an employee. The most-limiting factor was that the employer could not derive a benefit from the intern’s activities. Even where an internship was well-designed for the benefit of the intern, if the employer derived some benefit from the intern’s work, then the intern was reclassified as an “employee” and entitled to all the benefits under the FSLA.

2018 Amendments to the Unpaid Intern Test Criteria

In 2018, the DOL amended the test for determining whether an unpaid intern is misclassified and relaxed the standards. The DOL standards (Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act) now utilize a “primary beneficiary test” to determine whether an intern or student is, in fact, an employee under the FLSA. This test permits courts to examine the “economic reality” of the intern-employer relationship to determine which party is the “primary beneficiary” of the relationship. The DOL identified the following seven factors as part of the test:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

The “primary beneficiary test” is a flexible test where no single factor is determinative. Whether an intern is an employee under the FLSA will depend on the unique circumstances of each case.

The primary beneficiary test should open the possibilities for more employers seeking to have summer interns. Prior to making the decision of whether your company should offer unpaid summer internships, make sure to follow the above-guidelines and create a program that is a well-tailored educational experience for the intern.

Our employment law defense attorneys are experienced in defending employers in all facets of employment relations. Please contact Kristin Tauras for questions about this topic or any other related concerns.