Lots of times, businesspeople who buy insurance make (reasonable) assumptions. For example: “If I have employment practices liability insurance, I must be covered for claims arising out of employment practices…right?”
Mmmmm…not so fast. Most EPLI policies contain a hidden gap that’s wide enough to drive an eighteen-wheeler through.
EPLI coverage came on the market a few years back when employers started to try to make claims for workplace harassment suits under Part Two of their workers’ compensation policies (the “employers’ liability” coverage). Of course, what the claims department views as “no pay,” the marketing department views as an opportunity. (Remember environmental impairment liability insurance?)
Basically. EPLI is supposed to provide protection from employment law claims made by employees, former employees, or potential employees. This includes claims of discrimination, wrongful termination of employment, and sexual harassment. The policy provides coverage to the business, its directors and officers.
EPLI is less standardized than other forms of coverage, which makes it scary as a matter of principle. Sometimes it’s bundled in a business owner’s policy, or as a part of other liability insurance.
Now, let’s consider how some employment claims actually work. In certain circumstances (federal Title VII claims), the employee has to file a charge with the EEOC first. The EEOC investigates the matter and tries to resolve it. In some circumstances, though, the EEOC will file suit on behalf of the employee. Obviously, when the EEOC files such a suit, it does so on behalf of the employee. (The basic process can be found at the EEOC website here.)
All of which brings us to the recent federal case of Cracker Barrel v. Cincinnati Insurance Company, a federal case from the great state of Tennessee. (I’m writing about a Tennessee case because we have plenty of “strict constructionist” judges here in New Jersey, too.) Between December 1999 and March 2001, ten Cracker Barrel employees filed charges with the State of Illinois and with the EEOC, alleging sexual or racial discrimination. In 2004, the EEOC brought suit against Cracker Barrel on behalf of the charging parties (the employees). Cracker Barrel duly filed an insurance claim under its EPLI policy.
The policy covered “a civil, administrative or arbitration proceeding commenced by the service of a complaint or charge, which is brought by any past, present or prospective employee.”
The carrier’s claims department and its lawyers took the position that the underlying lawsuit had been brought solely by the EEOC, which was not an employee of Cracker Barrel, and that, therefore, the EEOC lawsuit was not even arguably covered under the definition. (Maybe I’m jaded by 26 years of representing policyholders, but to me, that argument didn’t even get past the “red face” test. Shows what I know.) In response, Cracker Barrel argued that the policy language meant that the underlying complaint or charge must be brought by an employee, not the proceeding; in other words, the proceeding must merely be commenced by a complaint or charge brought by an employee.
Remarkably (given the generally accepted principle that the policyholder gets the benefit of the doubt when it comes to policy language), the Court bought the carrier’s argument. The Court wrote: “The EEOC Lawsuit was not ‘commenced by the service of’ a charge, according to the plain meaning of that language, even though it may have arisen because previous administrative charges brought potentially illegal activity to the EEOC’s attention…The complaint that commenced the EEOC Lawsuit was not brought by an employee, and, therefore, even under [Cracker Barrel’s] interpretation of the definition, the lawsuit is not a ‘claim’ under the policies.”
The judge who wrote the opinion, Senior Judge John T. Nixon of the Middle District of Tennessee, recently awarded $1 million to an employee of Whirlpool for alleged race and sex discrimination. I have to wonder whether he takes a dim view of management generally, and feels that management needs to be punished for discrimination, without access to insurance. (Sometimes we forget that judges are people too, and bring their own worldview to the bench, just as jurors bring their life experience to the deliberation room. In other words, settle whenever you can.)
In any event, the Cracker Barrel decision seems to miss a major point: the purpose of the policy was to provide protection (in exchange for substantial premiums) against discrimination claims. If the EEOC brings suit on behalf of an employee, it is the functional equivalent of the employee bringing suit himself. Judge Nixon elevated form over substance. You can almost hear the claim department twittering (small “T”).
Takeaway: if you have EPLI coverage, go over it with your broker to see what is and isn’t covered. If claims brought by administrative agencies are not covered, see whether you can plug that gap (and how much it would cost to do so). More importantly, make sure your organization is engaged in good management practices, to minimize the chances of such claims ever happening.