What Employers Should Know about Insurance Policies for Employment Claims

In the aftermath of the U.S. Supreme Court's June 1998 rulings that employers can be held automatically liable for supervisor-subordinate sexual harassment, Faragher v. City of Boca Raton and Ellerth v. Burlington Industries, Inc., many employers in the Carolinas are considering purchasing Employment Practices Liability (EPL) insurance. EPL policies provide specific coverage for employment-related lawsuits.

Traditional business insurance policies (such as commercial general liability policies, directors and officers policies, as well as workers' compensation policies) typically exclude employment claims from coverage. To meet the need for protection against employment lawsuits, more insurance companies are offering EPL polices. The increased interest in coverage for employment claims has resulted in intense competition in the insurance industry, and the number of insurers offering EPL coverage has grown from 3 in 1994 to about 70 carriers at present. About 10 to 15% of U.S. employers currently have EPL coverage, including approximately 50% of Fortune 500 companies. Annual premiums depend upon the size of the employer and various risk factors, which may include the employer's claims history and its written employment policies and practices.

Employers comparing EPL policies should pay close attention to their definitions and exclusions. Because EPL policies are relatively new, they vary widely in their coverage scopes. Currently, most EPL policies provide express coverage for discrimination claims, sexual harassment claims, state-law wrongful discharge claims, and claims based on employee handbooks. However, many of the policies either exclude or do not address coverage for retaliatory discharge, FMLA, WARN Act, NLRA, ERISA, and COBRA claims, or lawsuits based on breaches of written employment contracts. Some policies exclude coverage for punitive damages, which are often far greater than the compensatory or actual damages the policies usually cover. Other policies include defense costs in the policy limit, thus reducing the amount available for indemnity or settlement by the defense costs incurred.

EPL policies provide coverage on a claims-made basis. Coverage exists only for claims made against the employer and reported to the insurer within the policy period. Some policies define "claim" very broadly, and employers are forced to report almost every possible employee complaint to insure coverage. Other policies define "claim" narrowly to exclude coverage for administrative proceedings before the Equal Employment Opportunity Commission or similar governmental agencies, which can be expensive to defend. The most favorable policies define a "claim" somewhere in the middle, providing coverage for administrative charges without placing impossible administrative burdens on the employer.

Further, some policies still contain exclusions for "intentional acts." To win discrimination claims, employees normally have to prove that the employer's discrimination was intentional. Increased competition among insurers, as well as employers' increasing sophistication, generally has eliminated these "intentional acts" exclusions.

In addition to these potential drawbacks, it is unclear how courts in the Carolinas would resolve coverage for alleged intentional acts. Federal and state courts in both Carolinas have ruled, in other contexts, that it is against public policy to allow a person or a business to insure against its own intentional acts. In light of this recognized public policy, any ambiguities about coverage for intentional acts of discrimination or harassment might be resolved in the insurer's favor. However, if an EPL policy clearly covers intentional acts, it might be difficult for a court to ignore the express language of the policy to relieve an insurer of the duty to indemnify or defend an employer who negotiated favorable coverage. Nonetheless, until courts in the Carolinas resolve this public policy issue, employers risk difficulty enforcing EPL policies when intentional acts are alleged.

Although most any employer currently or recently involved in defending a lawsuit with the potential for a seven-figure verdict would agree that EPL insurance seems like a good idea, employers in the Carolinas should approach EPL policies with caution. Before purchasing EPL insurance, businesses should confer with employment counsel to review the terms of a prospective policy to make sure that the obvious benefits of EPL insurance outweigh the legal uncertainties that currently accompany some coverage issues that may arise under these policies.