STEPTOE & JOHNSON LLP ATTORNEYS AT LAW INSTITUTE FOR CORPORATE COUNSEL NINETEENTH ANNUAL SEMINAR MARCH 30-31, 2000 EMPLOYMENT PRACTICES LIABILITY INSURANCE LLOYD C. LOOMIS STEPTOE & JOHNSON LLP 633 West Fifth Street, Suite 700 Los Angeles, California 90071 (213) 493-9466 lloomis@steptoe.com Doc. #40057 v.01
EMPLOYMENT PRACTICES LIABILITY INSURANCE I. INTRODUCTION With the ever-increasing volume of employment claims and litigation along with escalating jury verdicts, employers have been looking to their insurance carriers for assistance with defense costs and reimbursement for settlements and judgments. Throughout the 1980 s and the early 1990 s employers were submitting employment matters to insurance carriers who issued General Liability policies, Directors and Officers policies, Error & Omissions policies, and at times, even to their workers compensation carrier with varying degrees of success. Insurers soon realized a growing problem since employment claims were not the type they intended to cover with these types of policies. Today, most of these policies have specific exclusions for employment related claims. Currently, employment claims are covered either by specific employment practices endorsements to General Liability policies or under Employment Practices Liability Insurance (EPLI) policies. There is no standard EPLI policy; rather each carrier has developed its own approach to the scope and form of this type of insurance. Likewise, the coverage needs of employers vary greatly depending on numerous factors. With careful evaluation of the EPLI products that are available, and a concurrent evaluation of an employer s needs, appropriate coverage can be obtained. The purpose of this paper is to set forth the various factors
STEPTOE & JOHNSON LLP ATTORNEYS AT LAW an employer should consider in determining whether or not to purchase EPLI coverage, and where it is determined that coverage should be obtained, to consider what should be included in the coverage. II. WHAT IS INCLUDED IN EPLI COVERAGE A. TYPES OF CLAIMS Generally, EPLI insurance covers most forms of discrimination, including discrimination because of race, sex, color, national origin, age, religion, disability, pregnancy, sexual orientation, and may include a catch-all clause to cover any status protected pursuant to any applicable law that considers such status to be protected. (For example, California law protects marital status, and persons who have recovered from cancer.) These policies also cover wrongful termination, including constructive discharge, as well as, wrongful demotion, failure to promote, breach of contract, termination in violation of public policy and breach of an implied contract. Most policies will specifically provide coverage for sexual harassment and other forms of prohibited harassment. Doc. #40057 v.01
Many EPLI policies will also provide coverage for other causes of action such as defamation, invasion of privacy, and intentional or negligent infliction of emotional distress. Additionally, the employer will want to ensure that other claims such as misrepresentation, negligent hiring and/or retention, negligent evaluation whether based upon statute or common law are also part of the coverage. Coverage for these tort causes of action can be very important since they are very often included in the claims filed on behalf of employees, especially in California. It is very important that the policy broadly covers retaliation, even where the alleged basis for retaliation is not part of the coverage. For example, EPLI policies generally do not cover ERISA claims or statutory wage-hour claims; however, under a broadly written retaliation provision, a claim that an employee was terminated in retaliation for making a wagehour claim would be a covered claim. B. EXCLUSIONS Exclusions from coverage will vary from carrier to carrier. 1. Intentional Acts Some policies attempt to exclude loss that results from intentional acts. This exclusion can lead to significant difficulty since most employment litigation arises from some type of intentional act such as discharge or some form of discrimination. The intentional acts exclusion has been the subject of extensive litigation
STEPTOE & JOHNSON LLP ATTORNEYS AT LAW both in the context of insurance coverage for employment practices and other forms of discrimination. In the employment context today, this exclusion should only apply to situations where the actor specifically intended to improperly harm or injure the employee as opposed to simply intending to undertake the employment action at issue. California has a specific statute which precludes insurance coverage for intentional acts, Cal. Ins. Code 553. See, Coit Drapery Cleaners, Inc. v. Sequoia Ins. Co., 14 Cal.App.4 th 1595, 18 Cal.Rptr.2d 692 (1993), B&E Convalescent Ctr. State Compensation Ins. Fund, 8 Cal.App.4 th 78, 9 Cal.Rptr.2d 894 (1992), Panko Architects Inc. v. St. Paul Fire and Marine Insurance, 1996 WL 162968 (N.D. Cal. 1996), and State Farm Fire and Casualty Co. v. Panko, 1996 WL 162977 (N.D. Cal. 1996). However, California courts have recognized the distinction between the intent to cause harm and the intent to make normal employment decisions that may result in an employment claim. Moreover, even where there are allegations of intentional acts, if there is a possibility of liability without a finding of an intentional act, there will be Doc. #40057 v.01
coverage at least for defense costs. See, Melugin v. Zurich Canada, 50 Cal.App.4 th 658, 57 Cal.Rptr.2d 781 (1996). In jurisdictions other than California, the law is more favorable with respect to coverage for punitive damages. In a recent Illinois Supreme Court case, Dixon Distribution Co. v. Hanover Insurance Co., 641 N.E.2d 395 (Ill. 1996), the plaintiff sued the employer for wrongful termination in retaliation for having filed two workers compensation claims. On appeal from a summary judgment in favor of the insurer, the appellate court held that public policy did not bar enforcement of the contract because the availability of insurance would benefit all parties and would not induce wrongful behavior. The court found that it was more in keeping with public policy to allow businesses to protect themselves through insurance. Furthermore, insurance coverage would not make employers more likely to fire employees because insurance companies would refuse to insure or would increase their premiums and this would act as a deterrent. The Illinois Supreme Court affirmed, holding that public policy is implicated only when an employer seeks indemnification for injuries that it intended to inflict and not when an employer seeks coverage for intentional actions that have resulted in injuries. 1 Recent court cases such as Dixon evidence a trend to permit insurance coverage even for intentional acts by the employer. However, 1 Dixon, 641 N.E.2d at 401-02.
STEPTOE & JOHNSON LLP ATTORNEYS AT LAW if the act amounts to an intentional effort by the employer to cause injury to the employee, courts generally will still refuse to enforce otherwise available insurance. Irrespective of the foregoing, most EPLI policies today do not include an intentional acts exclusion. Any attempt to impose an exclusion will be based upon specific state public policy or a specific statute. See, Mootz, Insurance coverage of Employment Discrimination Claims, 52 U. Miami L. Rev. 1 (1999). 2. Downsizing Some EPLI policies have exclusions for claims arising out of downsizing or reductions in force. Again, most policies today will not have this type of exclusion. However, as part of the application process the employer will be questioned about recent reductions or planned reductions. While the downsizing exclusion is not common, most policies will exclude claims premised upon a violation of the Worker s Adjustment and Retraining Notification Act (WARN) -- the federal statute which requires employers under certain circumstances to provide workers with at least 60 days notice of a layoff or facility closing. Doc. #40057 v.01
3. Most EPLI policies will exclude claims for benefits under the employer s benefit plans, and claims arising under ERISA, and claims asserting a violation of the Consolidated Omnibus Budget Reconciliation Act (COBRA). 4. There is a universal exclusion for workers compensation claims, unemployment benefits claims, social security benefits claims, or other claims arising from other forms of disability benefits. 5. Breach of Contract Most policies will exclude claims based upon allegations of breach of an express written contract, although some carriers will provide defense costs for such claims. 6. EPLI policies generally will not cover claims subject to a grievance procedure, which is part of a collective bargaining agreement, or claims arising out of strikes or lockouts or other actions in connection with labor disputes or labor negotiations. (I have not seen any EPLI policies which preclude coverage for claims brought under arbitration or alternative dispute resolution procedures that are not part of collective bargaining agreements.) 7. Generally, EPLI policies have an exclusion for bodily injury and property damage which excludes claims for bodily injury, sickness, disease, and property damage. Most carriers will then carve
STEPTOE & JOHNSON LLP ATTORNEYS AT LAW back into the policy coverage for emotional distress, mental anguish or humiliation resulting from a wrongful employment practice act. This is a very important provision since emotional distress is such a common claim in employment litigation. 8. EPLI policies will not cover civil or criminal fines, sanctions, liquidated damages (except the multiple damages allowed under ADEA), taxes or other penalties. 9. EPLI policies will not cover the costs of making modifications to buildings, facilities, or equipment in order to comply with the reasonable accommodation requirements of the various laws relating to disability discrimination. 10. Most EPLI policies will not reimburse the costs of any employee or management training that may be required as part of a settlement of claims of discrimination. III. WHO ARE THE COVERED EMPLOYEES Doc. #40057 v.01
In today s world of contractors, independent contractors, leased employees outsourced functions within companies, service companies, payrolling services, part-time employment, job sharing, etc., it is hard to classify workers in the traditional employer-employee sense. EPLI policies will cover full-time and part-time employees. Additionally, it is important that coverage also extends to claims brought by independent contractors and leased employees who are working for the employer. Even though these workers are not employees in the legal sense, because the insured company exercises some control and influence over the independent contractor or leased employee, they may nonetheless have standing to assert employment claims. In this regard it is interesting to note that the California Fair Employment and Housing Act was recently amended to specifically include independent contractors as a category of worker protected from harassment. Cal. Gov t Code 12940(h)(1). Of course, the employer will want to make sure the policy covers partners, officers, directors and all other categories of persons who are engaged in the enterprise but may not meet the exact definition of employee. IV. THIRD-PARTY ISSUES
STEPTOE & JOHNSON LLP ATTORNEYS AT LAW EPLI policies may extend coverage beyond claims brought by employees. Many carriers provide for coverage for third-party coverage in cases of discrimination and/or harassment. For example, if an employee of a business discriminates against the customers or clients of the business and such discrimination is actionable, the third-party coverage should apply. Similarly, if an employee engages in some form of harassment, sexual or otherwise, with respect to a client or customer, the third-party coverage would apply. Often the provisions applying to third-party discrimination and third-party harassment are separate provisions of the policy. V. WHAT WILL THE EPLI POLICY PROVIDE Today, most EPLI policies will provide for both defense costs and any settlements or judgements for covered losses up to the maximum provided in the policy. Some EPLI policies provide only for defense costs. Doc. #40057 v.01
Most EPLI policies are claims made policies and generally the defense costs and expenses are included in the limits on liability. EPLI policies generally require a retention by the insured. Employers can have a significant influence over the cost of EPLI insurance by making decisions as to the amount of retention and the ultimate policy limits. This seems to be an important decision point for all insured. What does the insured want to protect against? Does the insured want to insure against all or a majority of the employment litigation that may be filed against the insured or does the employer want to only have EPLI insurance protection in the event of a major class action or other type of lawsuit with very substantial exposure? Larger companies may find it advantageous to only insure against substantial exposures. For example, one large California company arranged for a three-year policy with a $50 million policy limit and a $250,000 per claim retention. Clearly this type of policy was aimed at major class action exposure. But the premium for this type of coverage was quite reasonable because of the large retention and fact that the carrier was not going to be responsible for smaller or routine employment litigation costs. VI. DEFENDING THE CLAIM - WHO IS IN CONTROL? A. DUTY TO DEFEND DUTY TO INDEMNIFY
STEPTOE & JOHNSON LLP ATTORNEYS AT LAW Many EPLI policies provide that the insurer has the duty to defend. By undertaking the duty to defend, the insurer also gets to control the litigation or administrative procedure, control settlement, and control the selection of counsel. This approach may be appropriate for some employers, especially smaller employers with very few employment claims. Other employers are more interested in having some say in how the employment claim will be defended and/or settled, as well as, being involved with the selection of counsel. Accordingly, carriers are issuing EPLI policies with only the duty to indemnify. Many EPLI policies are really a hybrid between a duty to defend policy and a duty to indemnify policy. Quite often the carrier will preapprove a law firm, or in the case of a large multi-state employer, a panel of law firms as defense counsel for claims filed against a particular insured. Alternatively, the carrier may have approved panels of law firm for the defense of these claims and the employer can select counsel from these panels. Possibly, the employer can arrange to have their regular employment counsel added to these panels of approved counsel. Generally, EPLI carriers have determined that it is important to select defense counsel with significant employment experience rather than Doc. #40057 v.01
defense counsel experienced with insurance defense litigation but not necessarily experienced with employment matters. Alternatively, in some circumstances the carrier has allowed the employer to use their regular employment counsel to defend the claim with the understanding that the insured would pay the difference between the usual rate paid by the carrier and the rate charged by the employer s counsel. These are matters that should be addressed at the time the employer is negotiating for the EPLI coverage, and not left to be decided when a claim has been made. Pure duty to defend policies would give the carrier control over how the claim is defended, as well as, control over any settlement. Many considerations go into the decision of how and when to settle an employment matter. Often these considerations are tied to issues unrelated to the specific cost benefit analysis of the claim at issue. For example, does the employer believe the settlement will cause other employees to file similar claims? Will the settlement of the claim send the wrong message to the workforce? Are there other important policy or principle issues that impact on the settlement issue? In such situations the employer will want to be able to control the settlement decision. Unless the EPLI policy is a pure duty to indemnify policy, the insurance carrier
STEPTOE & JOHNSON LLP ATTORNEYS AT LAW will want to at least share the settlement decision authority with the employer. Many EPLI policies have a settlement clause, or what is commonly known as a hammer clause. With this clause, if a case could be settled for X amount and the carrier requests authority to settle but the insured refuses to allow settlement, if the eventual resolution or judgment exceeds X amount, the insured will be responsible for all amounts over X. This type of clause requires the insured to bear the risks of a poor decision not to settle. Insureds have objected to these settlement clauses and some carriers have modified such clauses so the insured and the carrier split the excess 50-50 or on some other basis. Possibly with appropriate retentions and coverage limits as well as a higher premium rate, the settlement clause can be eliminated from the policy all together. Settlement clauses may not be contrary to the best interests of the employer. Employment cases often seem to be high emotion cases. Some have referred to employment matters as simply another version of family law. Employers and members of management with emotional involvement in a case do not necessarily make good business decisions. Enabling the EPLI carrier to have an objective voice in the settlement Doc. #40057 v.01
decision may be very helpful in avoiding poor business decisions which can lead to significantly greater economic loss. B. LOSS PUNITIVE DAMAGES EPLI policies generally cover all types of economic damages, including back pay, front pay, compensatory damages, and punitive damages with a caveat that it applies only if such damages are insurable under the law pursuant to which the policy is construed. EPLI carriers try to accommodate insureds with respect to covering punitive damages even in states where either public policy or state statutes prohibit insurance coverage for punitive damages. See California Insurance Code 533 and the public policy statement contained in Ohio Cas. Ins. Co. v. Hubbard, `62 Cal.App.3d 939, 208 Cal.Rptr. 806 (1984), Peterson v. Superior Court, 642 P.2d 1305 (1982). Carriers will agree to have their policies interpreted under the laws of states that allow for punitive damages to be covered by insurance. Other companies have agreed not to raise the issue of uninsurability of punitive damages. In states where policy forms must be approved, such policy endorsements have been disapproved. Some carriers who handle larger accounts have set up share insurance facilities or have joined with foreign insurance carriers so as to be able to provide coverage for punitive damages. What is ultimately going to happen with respect to attempts to
STEPTOE & JOHNSON LLP ATTORNEYS AT LAW provide coverage for punitive damages under EPLI policies in California is unclear. Nevertheless, if there are covered claims where insurance is permissible, the insurance carrier must provide a defense or allow indemnity for defense costs. See Hubbard, supra. C. CLAIMS MADE POLICIES EPLI policies are claims made policies. The policy will cover claims that are made during the coverage period set forth in the policy. This type of policy puts a very important obligation on the employer to report to the carrier in a timely manner to insure coverage. While this may not seem like a difficult matter, it can be, especially for a large employer with multiple facilities and numerous people who may receive the first notice of a claim without realizing that they are on notice of a reporting obligation. A claim will be defined as any written notification received by the insured indicating that any person or entity intends to hold the insured responsible for a covered claim. This will include demand letters, Doc. #40057 v.01
administrative complaints such as charges filed with the EEOC or a state agency responsible for discrimination or other employment claims, and probably any written claims or grievances filed by employees under an employer s internal (non-collective bargaining agreement) dispute resolution procedure if such grievance makes a claim covered by the policy. Employers should also be sensitive to letters written by employees or former employees to management claiming that they have been subject to discrimination or some other covered alleged wrongful treatment. Such communications could be considered notice of a claim under the broad definitions of EPLI policies. Most policies require written notice to be given to the insurer as soon as practicable and within 60 days after such claim is first made. Some policies also provide for the reporting of potential claims, so as to preserve coverage if the claim is subsequently made after the end of the policy period. The policy will define a potential claim and how it is to be reported to preserve coverage. Insurers, especially with larger employers or under policies with larger retentions, will modify the reporting requirements for claims. In some situations, an insurer will not require reporting of a claim until defense costs reach a certain threshold which is usually below the retention amount. Alternatively, the insurer will provide that a claim does not have to be reported until a person or persons in specifically identified positions become aware of the claim. For example, a policy may provide
STEPTOE & JOHNSON LLP ATTORNEYS AT LAW that the obligation to report a claim only arises when the corporate manager of EEO or the Chief Labor and Employment lawyer or a member of the risk management department becomes aware of the claim. An insurer will only agree to such an arrangement if it is confident that the employees in these positions are in fact responsible for becoming aware of employment claims as part of their job responsibilities. For larger employers with multiple facilities such arrangements make the reporting obligation more rational. Even with these kinds of arrangements, it is probably prudent to make sure someone makes a routine survey of all of the facilities to make sure all of the possible claims are in fact reported. Probably, this should occur on at least a quarterly basis. D. WHO IS AN INSURED UNDER EPLI POLICIES? Very often individuals are named as defendants along with the employer. It is important that the EPLI policy include a broad range of individuals along with the company as insureds under the policy. Generally, EPLI policies will include managers, directors, supervisors, officers, shareholders and partners and persons in other positions of responsibility as insureds under the policy. If a business has some unique Doc. #40057 v.01
form or unusual arrangements care must be taken to make sure that the definition if an insured is sufficient to provide the protection that is needed. Additionally, the employer will want to make sure that all subsidiaries, operating companies, joint ventures, partnerships and other organizational units are clearly included as insureds under the policy. E. CHANGES IN THE WORKPLACE With the ever increasing number of company mergers, acquisitions, spin-offs, sales which may cause the number of employees or workers to significantly change, the insured must be mindful of an obligation to report such changes to the carrier. Such fluctuations may require some adjustment to the premium. It is better to address this issue when it occurs rather than at the time the employer is seeking coverage for a claim. EPLI policies will provide for such a reporting obligation. F. EPLI APPLICATION PROCESS The Application Process for EPLI coverage is not a simple process. Carriers will want to extensively review the employment process and policies before providing coverage. An employer can expect to be required to provide a significant amount of information which may include:
STEPTOE & JOHNSON LLP ATTORNEYS AT LAW _ A breakdown of the number of employees by various categories such as full time, part time, seasonal and/or temporary. _ Employee turnover experience. _ Number of employees terminated by year. _ Review past discrimination charges and litigation experience, including settlements and judgments. _ Employer policies, handbooks, personnel procedures. _ Employment applications for new hires. _ Employer training programs. _ Collective bargaining agreements. _ Alternative Dispute Resolution procedures. _ EEO policies and procedures. _ And other relevant data. Some carriers even hire counsel to perform an on-site audit. This process may provide a real opportunity for a constructive, critical evaluation of what the employer is doing right and help identify those areas where improvements could be made. VII. CONCLUSION Doc. #40057 v.01
mployers sued for discrimination are faced with considerable legal defense costs and liability for damage awards. With the proliferation of employment-related tort claims and the advent of compensatory and punitive damages in discrimination suits, the danger of prohibitive litigation has only risen. Naturally, employers would wish to defray these expenses through the purchase of insurance. Thus, counsel should be aware of insurance issues in both representing clients in employment discrimination litigation and in advising clients about insuring against employment discrimination suits. The provisions of EPLI insurance are not set in stone and the employer can and should work with various EPLI carriers to develop the appropriate coverage to meet the needs of the employer. Dixon, 641 N.E.2d at 401-02.