by Jackson Lewis

(first in a two part article)

A. The Origins of the Coverage

As employers continue to take hits on claims for unlawful discrimination, wrongful discharge, invasion of privacy, and other causes of action, employment practices liability insurance has become a hot topic among insurance products. In 1991, a few watershed events fueled the growth of employment-related litigation and sparked interest in EPLI. First, the Civil Rights Act of 1991 was enacted allowing plaintiffs to seek jury trials and to recover punitive damages in Title VII cases.

Second, the nomination and confirmation of Clarence Thomas as a U.S. Supreme Court Justice focused national attention on the issue of sexual harassment. Since then, the Navy Tailhook scandal, the resignation of Senator Packwood, the scandals among securities brokerage houses, and the Monica Lewinsky affair have thrown American businesses into a state of near panic about their potential for liability for employment disputes.

This panic is not without justification. The size of awards, many in the tens of millions of dollars, and the frequency of claims have sent corporate counsel, risk managers, and business owners scrambling for protection. At first, employers sought coverage under their general liability insurance. Claims were submitted under the theory that this type of harm was somewhat physical in nature, i.e., the mental anguish and emotional distress were bodily injuries. The general liability markets, quickly realizing they were paying claims they originally had no intention of covering, began incorporating exclusions of employment-related claims. As these exclusions expanded, EPLI was developed to fill in the gap.

With the exposure growing and number of claims expanding, some professional liability carriers began to endorse Director's & Officer's (D&O) and Error's & Omission's (E&O) policies to cover non-entity employment practices liability claims against named insureds in their individual capacity. However, EPL claims tend to be brought against corporations, not officers or directors. Without entity coverage, the value of EPL insurance is extremely limited. Further, the individual being sued tended a director or officer of the company. While later endorsements tended to expand the "named insured" for purposes of en EPL suit, there still was a gap.


B. The Original EPL Coverage

The three types of employment claims that were covered in the original EPLI policies were sexual harassment, discrimination and wrongful termination. As the legal definition of discrimination has expanded, the scope of EPLI policies has grown to cover claims of discrimination based on race, color, religion, age, sex, national origin, disability, pregnancy, sexual orientation or preference, or other status protected pursuant to any applicable federal, state or local statute or ordinance. With respect to wrongful discharge claims, coverage is now often extended to cover actual and constructive terminations.

C. The Expansions of EPL

1. Harassment coverage has broadened to include misconduct of a non-sexual nature. Harassment of a non-sexual nature tends to be defined as a hostile work environment which interferes with job performance or other terms or conditions of employment. Typical situations include patterns of verbal abuse, demeaning comments, or other hostile or offensive behavior not of a sexual nature which impact the victim's work performance and may cause economic harm and emotional distress. Indeed, in a recent federal district court case the employer liability standards announced by the U.S. Supreme Court in Faragher v. City of Boca Raton, 118 S.Ct. 2275 (1998) and Burlington Industries, Inc. v. Ellerth, 118 S.Ct. 2257 (1998)) were applied to non-sexual harassment.
   
   
2. There has been an increasing need for coverage for employment-related torts as plaintiffs attempt to avoid the caps on awards under Title VII. Typical claims are defamation, invasion of privacy and intentional infliction of emotional distress.

D. Claims By Non-Employees

While EPLI historically has offered protection for claims arising from employee disputes, some employers have sought coverage against discrimination claims by third parties, such as customers, vendors, or clients. Racial discrimination claims by third parties, such as customers, vendors, or clients. Racial discrimination and sexual harassment claims are the most common types of claims from third parties with whom an organization's employees interact. They can bring a lawsuit against the offending employee and the organization itself where it knew or should have known of the employee's propensity to harass.

Third party discrimination and sexual harassment claims are most common in an industry where there is a lot of interaction between employees and third parties, for example, restaurants, retail stores, doctors' offices, law firms and other sales and service-related functions and businesses.

E. Punitive Damages

The catastrophic exposure for most companies, aside from class actions, is a punitive damages award. An employee who earned $30,000.00 in salary may not recover significant back pay but could win millions of dollars in punitive damages. For the most part, insurers are now offering punitive damages as a standard coverage, and employers conduction business instates that allow insurability against punitive damages should seriously consider this coverage as part of their risk management strategy.

F. Who Is an Employee for EPLI Coverage Purposes?

In an age where companies are using employee leasing, contract employees, and other "flexible" arrangements, determination of employee status sometimes is difficult. The "standard employee" hired by, managed by, controlled by and directed by a company is an "employee." This can include part-time workers, seasonal employees and temporary employees.

"Leased employees" are individuals working at a company site or facility but who are employed by the leasing company. While a leasing company may employ all of the client company's staff, the client company may be liable for their employment related claims. Depending upon the degree of control the client company retains over the workers in terms of performance reviews, salary evaluations, assignment, and placement, the leasing arrangement may not shield the client company from liability for their employment practices claims.

Temporary agency staff is another source of potential liability depending upon the length of the assignments and the degree of control exercised by the client company. While temporary staff claims for wrongful termination usually are weak, claims for sexual harassment and discrimination are more likely to pass muster.

The bottom line is if the person is working in your office or worksite, you may have an EPL exposure. Claims brought by virtually anyone as a result of conduct any person acting on behalf of your organization can create EPL exposure.


G. Exclusions - What's Left Of Them?

The EPL policies of the past contained broad exclusions. Perhaps the most controversial exclusion was the "intentional acts" exclusion. As its name suggests, it barred coverage for claims resulting from the intentional acts of the insured. While the organization itself virtually will never be deemed to have acted intentionally, an insured employee responsible for the wrongful act in question will almost always have acted intentionally. Other than adverse impact resulting from seemingly neutral selection processes or personnel policies, there is really no EPL wrongful act that is done intentional. If you fire an employee, it is intentional. If you sexually harass someone, you intentionally make the offensive comment. Racial epithets era intentionally spoken by the harasser. With an "intentional acts" exclusion, all of these situations involving traditional EPL claims arguably could be excluded.

Some EPL policies may exclude claims relating to downsizing. While an underwriter may desire to avoid coverage of a potentially vast number of charges and potentially enormous liability, this is the time an insured most needs the coverage. Thus, this exclusion has almost completely vanished from current EPL policies. Instead, underwriters address "downsizing" exposure by looking into the company's financial condition prior to insuring a company this insurance. An EPL application may ask, "Does the Applicant anticipate any branch, location, or subsidiary closings, consolidations, or layoffs? This approach puts the majority of the burden on the underwriter to assess the potential for these layoff-related EPL claims before the insurance is in place, and offers the insured the protection that it needs for unforeseen business downturns.

A similarly drastic exclusion that appears from time to time is the "class action" exclusion. Simply put, it denies coverage for claims that are brought as a class action. The intent of the insurers utilizing this exclusion is to limit exposure to big dollar lawsuits that are maintained by large numbers of plaintiffs. The obvious downside 'to the insured is a lack of coverage for what often is the largest dollar exposure type of claim. Most of the mainstream EPL insurers have removed this exclusion from their policy forms, but the exclusion occasionally still appears.

Another traditional insurance exclusion present in early EPL policies was the "bodily injury - property damage" (BI/PD) exclusion. While this is a standard exclusion in professional liability and other insurance policies, it would greatly diminish EPL coverage, since most EPL lawsuits allege emotional distress or humiliation-related damages. BI/PD exclusions in current EPL policies typically exempt claims for emotional distress, mental anguish, or humiliation actually or allegedly resulting from an employment practices wrongful act.

The exclusions that remain in today's EPL policies address claims potential excluded under ERISA, worker's compensation, and other laws. The damages under these laws typically are addressed by other forms of insurance.

Next Month: Part Two. Next month, part two of this article will discuss where coverage applies, defending claims, reporting claims and other recent developments in EPLI.