REQUIRE AN “ILLEGAL ALIEN” EXCLUSION IN INSURANCE POLICIES

By Allan J. Favish*

February 11, 2006

Sometimes asking the right questions can lead to simple answers. Is there a wealthy segment of corporate America that can defeat the massive economic power of those who support illegal immigration? Can a federal law harness the economic self-interest of this segment of corporate America to fight illegal immigration? What if the potential economic benefit to this segment of corporate America was so great that members of Congress and Congressional candidates who supported the idea were generously supported by these corporations and those who work for these corporations? Further, could such a law make the hiring of illegal aliens so economically damaging to employers that there will be little need for the federal government to enforce the laws against knowingly hiring illegal aliens because so few employers will find it in their economic self-interest to do so?

          The answer to all of these questions is yes. Nearly every person and business in America has a liability insurance policy, a moving vehicle insurance policy, a business income insurance policy, a property insurance policy, an errors and omissions insurance policy or some combination of these. A liability policy protects the insured from claims that the insured caused bodily injury or property damage. Moving vehicle insurance provides liability coverage for use of a moving vehicle and pays to repair or replace the insured’s vehicle when it is involved in an accident. Business income insurance reimburses the insured for the net income that would have been earned if not for the occurrence of specified events. Property insurance covers losses from damage to the insured’s property from various perils that can include fire, lightning, flood, windstorm, hail, explosion, earthquake, riot and civil commotion and damage caused by aircraft, automobiles or vandalism. Errors and omissions insurance policies provide coverage for people who give advice, make educated recommendations, design solutions or represent the needs of others. “E&O” insurance also is referred to as professional liability or malpractice insurance. This type of liability insurance is often excluded from more general liability policies and would cover the insured in the event someone claims the insured incorrectly performed or failed to perform a professional duty. Liability policies, including the most general policies and E&O and moving vehicle policies provide for the costs of defending a lawsuit, including attorney fees, and payment of any judgment that may be imposed against the insured.

Given the ubiquitous nature of insurance, consider a federal law stating something to this effect: “No liability insurance policy, moving vehicle insurance policy, business income insurance policy, property insurance policy or errors and omissions insurance policy, issued to an insured who is employed in, or doing business in the United States during the policy period of such policy, shall be issued without containing the following exclusion:” The exclusion would state something to this effect:

There is no coverage under this policy if during the policy period the insured had a person working for it in the United States as an employee or contractor who was not authorized under the laws of the United States to work in the United States. However, this exclusion will not prevent coverage if the insured used the federal government’s instant employment eligibility verification program to verify the employment eligibility of the person upon whom a denial of coverage under this exclusion would otherwise be based.

As used in this exclusion, “person” means human being, not a corporation or other business entity.

The phrase “working for it in the United States as an employee or contractor” means directly working for the insured. It does not mean working for a contractor or subcontractor of the insured.

This exclusion shall be deemed controlling over any other part of the policy with which it conflicts.

The second and third paragraphs of the exclusion make it clear that the insured only will have to be concerned about the employment eligibility of actual people that the insured directly hires. This will prevent insurers from trying to invoke the exclusion based on the illegal status of people with whom the insured was not directly involved and did not have an opportunity to screen for employment eligibility.

There could be a fine or other civil or criminal penalty for insurers who fail to include the exclusion in their policies. However, the need for such penalties would be virtually eliminated if the federal law stated that if the exclusion is absent from any policy required to have it, all exclusions of coverage in the policy shall be deemed null and void. This will provide the economic incentive for every insurer to include the exclusion.

The federal law also would require every insurance policy containing this exclusion to contain provisions that allow the insurer to, 1) conduct an examination of its insured under oath limited to matters relevant to the insured’s claim, including any claim being made against the insured by a third party and any coverage issues, and 2) examine and obtain copies of the insured’s documents to the same extent. Such provisions are typical in most policies.

Also, the law would provide immunity for the insurer against civil claims by insureds or government agencies that the insurer either should or should not have tried to discover if the insured hired an illegal alien. This immunity would be necessary because the decision about whether an insurer should spend the time and money to find if an insured comes within the exclusion should be the insurer’s, exclusively. Sometimes, because of the amount of money involved in the claim for which coverage is sought, the insurer may not find it to be worth the expense of discovering whether an insured hired an illegal alien. Some insureds may make claims against their insurers arguing that the insurer acted in bad faith or committed some other tort by conducting examinations under oath and obtaining documents in certain cases and not others. This immunity will prevent such claims.

Presently the federal government does not have an instant employment eligibility verification program for use by employers to screen potential employees and independent contractors. The precursor to such a program that is operating now is called the Basic Pilot Program and is being conducted by the Social Security Administration and the Department of Homeland Security’s U.S. Citizenship and Immigration Service. The Basic Pilot Program involves verification checks of the SSA and DHS databases, using an automated system to verify the employment eligibility of all newly hired employees. However, this proposed legislation requires that insureds have an easy and instant way to verify the employment eligibility of potential employees or contractors, not only those that have already been hired. Therefore, the present Basic Pilot Program has significant limitations that make it unsuitable for purposes of this proposed legislation. If the Basic Pilot Program is expanded to cover prospective employees then it would be suitable. Many in Congress want such an expansion. The Basic Pilot Program would be made mandatory and expanded to cover prospective employees under the “Border Protection, Antiterrorism, and Illegal Immigration Control Act of 2005” (House Resolution 4437), which was passed by the United States House of Representatives and sent to the United States Senate on December 17, 2005.

However, there is no technological reason why such a program could not be created that would allow employers to verify employment eligibility of potential employees and contractors as quickly as most businesses process a credit card. For example, the U. S. Department of Homeland Security’s Transportation Security Administration is beginning a Registered Traveler Program that will allow airline travelers with specially-issued identity cards containing some of the cardholder’s biometric information like fingerprints and iris images to bypass much of the security checks at airports. These so-called “smart cards” exist now and are produced by private companies such as Verified Identity Pass, Inc., which is running a pilot program at Orlando International Airport. Such a program would be a necessary prerequisite to enactment of this proposed legislation.

As an attorney whose practice includes insurance coverage work, I know that insurance companies are always looking for ways to deny coverage to their insureds, if justified by the facts, the insurance policy and the law. Insurance companies might be very happy for the federal government to require an exclusion that could help them deny coverage and thereby potentially save hundreds of millions of dollars, if not more. The insurance companies can easily defend their support of such legislation and their support of politicians who favor such legislation, by stating that the knowing hiring of illegal aliens is presently a violation of existing federal law and the illegal alien exclusion law achieves the same goal more efficiently, thereby improving our national security.

          If this becomes law, when an insurance company receives a claim from its insured and does a coverage analysis, its coverage counsel, either in-house or outside counsel, will want to know if this exclusion applies. The coverage counsel, acting at the insurance company’s expense, will do the investigation to see if any illegal aliens were working for the insured during the policy period. The investigation may require the insured to submit to an examination under oath and provide documents. The cost of this investigation will be borne by the insurance company. The insurance company gladly will do it in most cases because of the economic incentive provided by invocation of the exclusion. The government will not have to bear the cost of this investigation, either in terms of tax dollars or manpower.

          Congress has the constitutional authority to enact such a law. In Plyler v. Doe, 457 U.S. 202, 225 (1982), the Supreme Court stated:

The Constitution grants Congress the power to “establish a uniform Rule of Naturalization.” . . . Drawing upon this power, upon its plenary authority with respect to foreign relations and international commerce, and upon the inherent power of a sovereign to close its borders, Congress has developed a complex scheme governing admission to our Nation and status within our borders.

          It is nothing new for government to use insurance policies to further various public policy goals by requiring insurers to include certain provisions in their policies. One such example is California Insurance Code section 2071, which requires fire insurance policies to contain various provisions. There are many examples of states requiring health insurance policies to cover various procedures and medical conditions.

With an instant employment eligibility verification program and the enactment of this proposed legislation, the insurance companies can finally have exclusions in their policies that most of those legally in the country will be happy about.