Employment Practices Liability Insurance 

Louis Pechman*

In the recent movie “Jackie Brown,” an ex-con played by Robert De Niro asks,”who’s that?” about a corpse in a car trunk. His boss replies,”that’s Beaumont.” The Robert De Niro character wonders out loud “who’s Beaumont?” to which his boss explains, “an employee I had to let go.” Employers under siege from lawsuits by disgruntled employees might secretly pine for a Jackie Brownesque solution to their workplace lawsuits. Coming to a workplace near you, however, is not the magic of Hollywood but rather employment practices liability insurance (“EPLI”), an insurance product which has seen explosive growth in the last few years.

EPLI is designed to provide risk management lawsuits which have proliferated against employers under federal, state and local anti discrimination statutes, as well as common law claims such as wrongful discharge, EPLI policies offer employers some protection against the uncertainties these lawsuits engender, by providing defense and indemnity coverage. EPLI can be obtained either as a stand-alone policy or as an endorsement to pre-existing coverage.

According to the Insurance Information Institute, a trade group, fifty percent of Fortune 500 companies have purchased EPLI coverage. Underscoring the universal appeal of EPLI, the American Bar Association recently endorsed an EPLI policy for law firms. It is not surprising that EPLI has captured the attention of risk managers who have duly noted press reports of high ticket judgements in recent years.

Traditional Coverage of Employment Disputes

Commercial general liability (“CGL”) polices have generally been an inadequate source of insurance coverage for employment claims. To begin with, insurers may assert that an employment related claim is not an “occurrence” or “accident” under the CGL policy because discrimination and other employment claims are “intentional” acts. In addition, CGL coverage of “property damage” and “bodily injury” are generally viewed as incompatible with the back pay and lost benefit elements of damages in employment cases. Moreover, CGL policies often contain an “employer liability” exclusion which excludes coverage for claims by the insured’s employees which “arise out of and in the course of employment.” Historically, this exclusion is designed to bar claims that are covered by workers’ compensation insurance, but it has also been raised by insurance companies to bar employment practices claims. Finally, most CGL policies now have some type of exclusion which expressly bars coverage for employment related claims.

Director’s and Officer’s Liability Insurance (“D&O;”) is also an ineffective protection against employment related claims. D&O; policies typically cover directors and officers personally, and as a result, the corporation is not a covered entity under the policy. Moreover, from the liability side, directors and officers of companies within the Second Circuit are not at risk personally for claims of discrimination under the federal anti-discrimination statues and are only at risk under the New York City and New York State Human Rights laws if they actually participate in the employment decision giving rise to the lawsuit.

Workers’ compensation policies cover injuries to employees arising out of and in the course of employment with the employer. These policies, however, are confined to injury and illness on the job and exclude claims for employment practices. And — with the notable exception of Bill Clinton’s defense of Paula Jones — personal umbrella liability insurance has generally not been available for defense of employment claims because they too specifically exclude coverage for employment related acts.

While existing insurance policies might be unlikely to offier a source of coverage of employment disputes, it is of course the language of the particular policy which controls. Notably, an insurer may have a duty to defend the entire lawsuit if any of the claims asserted are covered by the policy. Accordingly, a careful review of existing policies should be made when a lawsuit is filed on a claim is made or threatened because the juxtaposition of existing policies against the various claims in an employment law suit may provide a basis for coverage. For example, in a case which alleges both a discriminatory termination and defamation for giving a bad job reference, an employer could seek coverage on the basis of “personal injury” coverage for slander or libel.

Emergence of EPLI in New York

EPLI did not exist in New York prior to a 1994 Circular Letter from the New York State Insurance Department. In that letter, the Insurance Department noted that “discrimination based upon disparate treatment is an intentional wrong whose resultant harm flows directly from the acts committed, and liability coverage for it is impermissible. The Department’s longstanding prohibition against coverage for discrimination claims generally originated at a time, some thirty years ago, when virtually all discrimination claims were of this type.”

The Circular Letter then proceeded to carve out two exceptions to the public policy concerning insuring against “intentional” acts. First, the Insurance Department held that the public policy to prohibit coverage for intentional acts did not apply to “disparate impact” cases because “the discriminatory result does not directly proceed form specific discriminatory acts against individuals.” Second, the Insurance Department characterized discrimination cases as a vicarious liability issue rather than one of “intentional wrong.” The Insurance Department explained that an employer “may be held vicariously liable for the discriminatory act of an employee even though it: (1) played no active role in the commission of the act; (2) did nothing whatever to aid or encourage its commission; and (3) may have done all that it possibly could to prevent it.” The Insurance Department noted that coverage for claims of vicarious liability are generally permissible regardless of whether the underlying wrong is intentional. As such, treating discrimination like other types of covered acts merely conforms treatment of discrimination with the existing treatment of other types of vicarious liability claims.

One interesting issue that may arise as EPLI policies evolve in New York is the extent to which sex harassment by supervisors is deemed intentional in nature and therefore uninsurable. In Board of Education of the East Syracuse-Minoa Central School District v. Continental Insurance Co., 604 N.Y.S.2d 399 (4th Dept. 1993), the Appellate Division held that sex harassment, like sexual abuse and child abuse, is intentional in nature and thus not an occurrence under a general liability policy.

Although the Insurance Services Offices recently issued a model EPLI program, there is no uniformity in coverage provided by insurance carriers and there are wide variations of EPLI available in the marketplace. The scope of coverage under EPLI policies generally includes the employer, as a corporate entity, and its officers, directors and employees. The coverage may also include as insureds former employees, volunteers, customers, independent contractors, and leased employees.

Insurers of EPLI policies may require employers to submit detailed applications which include loss history, employment applications, disciplinary procedures, grievance procedures, handbooks and manuals, new employee orientation procedures, employee performance appraisals and sex harassment policies.

Punitive Damages

Punitive damages are a particular concern for employers in employment discrimination cases. Under Title VII and the ADA, companies may be liable for punitive damage awards from fifty to three hundred thousand dollars, depending on the number of employees employed. Moreover, employers in New York City — any entity with four or more employees — are subject to uncapped punitive damages under the New York City Human Rights Law. Notably, the Insurance Department’s 1994 Circular stated that “in conformity with court decisions on the subject, it remains against public policy to provide insurance coverage for punitive damages.” This gap in coverage has been addressed by insurers in a variety of ways. First, some policies provide a favorable choice of laws provision.

Emerging Issues

EPLI policies are generally issued on a “claims made” basis which provides insurance coverage if the claim is made within the policy period. In the context of EPLI, however, when a claim is made may be susceptible to a variety of interpretations as to what constitutes the insurable event triggering a claim.

Unlike an accident which happens at a precise moment in time, a claim of discrimination or sexual harassment may evolve over months or even years. Moreover, the “claim”of discrimination may take a meandering path. For example, an allegation of a discriminatory failure to promote may first be raised with a manager, and then as a formal grievance to the Human Resources Department. In the absence of a satisfactory resolution the employee may file an administrative charge of discrimination with the Equal Employment Opportunity Commission and/or the New York State Division on Human Rights or the New York City Commission on Human Rights. Alternatively, the employee might file a discrimination lawsuit directly in state court or perhaps seek to resolve the dispute through grievance-arbitration if the employer is unionized. Furthermore, if that same employee is later terminated, the failure to promote case which might have been raised a few years earlier will be inexorably linked in litigation to the newer claim of discriminatory and retaliatory termination.

Some EPLI policies provide that inter-related claims are treated as one loss. Accordingly, the determination of coverage will, in turn, depend when the claim is made. Litigation regarding when claims arise and where coverage ends are sure to emerge as insured gain more experience with EPLI. There will also be important decisions to be made by insureds and insurance companies as to what role the insurer will play in risk management. Some insurers are offering programs to educate insureds about areas of potential liability, are providing access to employment counsel through a toll-free hotline, and are providing self-audit guides for companies to identify weaknesses in employment practices and policies.

There are a fascinating array of issues which make EPLI coverage unlike that of other insurance. For example, employment cases have a panoply of settlement issues (e.g., reinstatement, letter of reference, requested promotion) which may be out of the control of the insurer. Damages in employment cases (e.g., back-pay) may continue to rise while the case is in litigation or sits at an Administrative Agency for years. And the facts of an employment case may still be developing even after a “claim” is made.

Conclusion

The challenge of EPLI is that the liability which it attempts to insure against may have as much complexity as the underlying relationship between the employer and the suing employee. While the termination of an employment relationship might ostensibly appear like a discrete event, it is often the culmination of a myriad of interpersonal dynamics gone sour. Each workplace is different, and every work relationship has multiple facets that may play themselves out in litigation under a dizzying array of legal theories. It is still too early to tell how EPLI will meet this challenge. It is safe to say, however, that EPLI will be an increasingly important factor for companies to consider in managing their human resources.


ENDNOTES
*This article is reprinted with permission from the May 26, 1998 edition of New York Law Journal. ©1998 NLP IP Company.