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Insurance Implications of High Court Affirmative Action Ruling

For decades, affirmative action programs were implemented within educational institutions across the country with the stated goal of maintaining a diverse student body.

This practice was severely curtailed on June 29, when the U.S. Supreme Court issued a ruling in Students for Fair Admissions Inc. v. President and Fellows of Harvard Collegestriking down race-conscious admissions programs at Harvard University and the University of North Carolina at Chapel Hill as violating the Constitution’s equal protection clause and Title VI of the Civil Rights Act.

Specifically, the Supreme Court found that the challenged programs “lack sufficiently focused and measurable objectives warranting the use of race, unavoidably employ race in a negative manner, involve racial stereotyping, and lack meaningful end points.”

This sea change in the world of college admissions could soon have reverberations in the business world for hiring and employment practices and be a source of future litigation. Indeed, 13 state attorneys general recently sent a letter to Fortune 100 companies warning of potential legal consequences for racial preferences in hiring.

This in turn gives rise to numerous insurance implications. Policyholders should take note of pathways to coverage under certain types of insurance, but they must also remain wary of exclusions and other potential roadblocks.

New Challenges and Risks
The Students for Fair Admissions decision has effectively outlawed race-conscious admissions programs prevalent at many institutions of higher education, and many colleges and universities will have to reshape their admissions programs.

Both critics and supporters of the decision appear to agree on one thing: There will likely be years of litigation as a result of the ruling.

Indeed, on July 3, only days after the decision was issued, three civil rights groups filed a complaint against Harvard with the U.S. Department of Education’s Office of Civil Rights, alleging that Harvard’s preferential admissions treatment of relatives of wealthy donors and alumni—allegedly mostly white students—violates the Civil Rights Act and is discriminatory in light of the limitations on the use of race as a factor in admissions under Students for Fair Admissions.

Educational institutions may also face:

  • Legal challenges to facially race-neutral efforts aimed at maintaining diversity that plaintiffs may characterize as proxies for race-based admissions;
  • Challenges to race-based efforts that are not strictly admissions programs, such as scholarship, recruitment and retention programs; and
  • Challenges to feeder programs that help colleges and universities identify highly qualified underrepresented minorities.

Students for Fair Admissions may increase for-profit businesses’ exposure. Styling themselves the “major American business enterprises,” many large corporations from a wide range of sectors, collectively employing millions of people—including such giants as Apple Inc., Dell Inc., General Electric, Google LLC, Johnson & Johnson, Northrop Grumman Corp., General Dynamics Corp., Procter & Gamble Co., Starbucks Corp., American Airlines, Lyft Inc., Meta Platforms Inc., and many others—signed on to an amicus briefing submitted to the Supreme Court.

These companies argued that diverse workforces improve business performance, and that they rely on educational institutions’ affirmative action programs to admit and train racially and ethnically diverse student bodies.

In a post-Student for Fair Admissions world, these businesses may have to work harder to recruit diverse talent, and some businesses are starting to question whether their own diversity, equity and inclusion programs will face similar legal challenges.

Potential challenges to companies’ DEI efforts are not limited to lawsuits involving constitutional jurisprudence. Employment law is a fertile ground for governmental investigations and litigation as well.

As summarized by the Equal Employment Opportunity Commission, it is illegal for an employer to discriminate based on race and other factors in the hiring process. With Students for Fair Admissions casting its shadow, many companies are concerned that their DEI efforts will be characterized as running afoul of such laws.

Companies may also begin to see challenges from within.

For example, shareholders who oppose DEI and other corporate social responsibility efforts have been targeting these programs with their own competing proposals, as occurred at Apple’s March 10 shareholder meeting.

This internecine conflict may become more contentious given the newly increased litigation risk and other exposures in the wake of Students for Fair Admissions.

Potential Liability Insurance Issues
The first high-profile insurance coverage battle to be waged in the affirmative action space involves the Students for Fair Admissions case itself.

In addition to the lawsuit brought by the student and parent action group Students for Fair Admissions, Harvard faced an investigation opened by the Trump-era U.S. Department of Justice in 2017.

Harvard allegedly incurred millions of dollars in costs defending the lawsuit and investigation, and had in place certain educational institution risk policies apparently designed to respond. The policies covered claims for wrongful acts arising out of, inter alia, the provision of education services, defined broadly as including “educational services, counseling, academic placement, instruction or oversight of university operations.”

While Harvard apparently received coverage from its primary insurer, its excess insurer, Zurich American Insurance Co., denied coverage on the basis of purportedly late notice of the claim.

Harvard sued Zurich in the U.S. District Court for the District of Massachusetts, arguing that Zurich must have had actual notice of the claims against Harvard from an earlier time given the widespread media coverage and information-gathering that was part of the policy renewal process.

In November 2022, the district court ruled in favor of Zurich, in President and Fellows of Harvard College v. Zurich American Insurance Co. Harvard’s appeal to the U.S. Court of Appeals for the First Circuit was argued last month and now awaits a ruling.

It will be interesting to see how the insurance industry responds to the newly increased admissions-related exposure faced by institutions of higher education.

Policyholders in the space should be vigilant about potentially unfavorable changes to their coverage. For example, in anticipation of widespread and costly litigation, insurers may introduce discrimination-related exclusions or even event-driven exclusions—or limitations such as sublimits—for claims arising from disputed admissions policies.

Beyond the higher education context, many businesses likely have or can obtain coverage that may respond to the types of legal challenges to hiring and other employment practices that we expect to see.

For example, employment practices liability (EPL), coverage typically applies broadly to claims—including proceedings before the EEOC and other administrative and regulatory proceedings—for wrongful employment practices, usually defined broadly as including discrimination, retaliation, wrongful termination and more.

The scope of EPL coverage typically extends to claims arising out of the claimant’s employment, application for employment, or performance of services with the company.

Policyholders should be wary, however, of purported exclusions that EPL carriers may invoke in response to claims challenging DEI initiatives. Among other things, policies often contain exclusions for claims arising out of “facts, circumstances, situations or events” about which the company’s executives had knowledge prior to a specified date.

Similarly, they typically include exclusions for intentional wrongful conduct—if established by final adjudication. Insurers could take the position that a company should be on notice of potential legal challenges to its diversity programs and should have preemptively adapted such programs to comply with the requirement of the law as interpreted in Students for Fair Admissions.

Of course, whether courts accept this coverage defense will depend upon the particular facts of the claim, the employment practices at issue, and, the impact of the Supreme Court’s ruling on private business enterprises, which remains to be seen.

Another issue that could arise under EPL policies is that a claimant is often defined as a past, present or future employee or a job applicant. This could be construed as requiring that the plaintiff be individually aggrieved by the company’s employment practices, as opposed to an organization such as the groups that have sued Harvard and UNC.

Indeed, whether an organization even has standing to sue was litigated in the Students for Fair Admissions case—and the Supreme Court held in the affirmative, in that case.

Directors and officers liability insurance may also provide an avenue for coverage for certain types of discrimination claims. Such policies typically provide entity coverage—also known as Side C coverage—for the company.

D&O forms for private companies usually grant coverage for claims alleging wrongful acts, typically defined broadly as including “any error, misstatement, misleading statement, act, omission, neglect, or breach of duty.”

This scope of coverage is arguably broad enough to encompass certain employment-related claims, although D&O policies typically include exclusions for specified employment practices acts. Such exclusions will have to be scrutinized closely to determine if and when they apply.

It is arguable that a lawsuit alleging breach of duty, mismanagement or deceptive practices with respect to race-based employment policies is outside the scope of these exclusions, which could apply narrowly to discrimination claims themselves.

Public company D&O forms usually apply to securities claims alleging a violation of securities laws or regulations. Thus, for example, a shareholder suit alleging misrepresentations in public filings concerning a DEI program’s compliance with applicable law may trigger the coverage.

Again, depending on the wording of any employment practices exclusion, it may be arguable that such a claim falls outside of the exclusion.

As the litigation landscape surrounding race-based admissions and employment practices after the Students for Fair Admissions decision continues to evolve, the insurance coverage landscape will evolve, as well.

In addition to the immediate impact on colleges and university admissions policies, other businesses also are advised to consider this decision when assessing their DEI and other programs and potential exposures.

Policyholders are advised to work with their brokers to scrutinize any purported coverage limitations before a policy is purchased.

(A version of this article originally appeared in Law360.)