Employment Practices Liability insurance demystified

By Britton D. Weimer    
bweimer@weimerweeding.com

Employment Practices Liability (EPL) insurance funds most judgments and settlements in employee suits against small and mid-sized employers. Thus, it is crucial for both plaintiff’s attorneys and defense counsel to understand the scope of the typical EPL insurance policy.

EPL policies with limited coverages have been in existence since the 1980s. However, the demand for EPL coverage increased significantly in the early 1990s. The Americans with Disability Act (ADA) passed in 1990. The Civil Rights Act was amended in 1991 to include substantial damages. The Clarence Thomas confirmation hearing in 1991 increased public awareness of sexual harassment issues. And the Family and Medical Leave Act (FMLA) passed in 1993.

Commercial General Liability (CGL) insurance is the most common business liability policy, and some business attorneys hoped they would cover employment lawsuits. But CGL policies have excluded bodily-injury claims “arising out of and in the course of” employment since 1966, and courts have broadly construed this employment exclusion. Since its language focuses on the place of the injury, not the place of the negligent conduct, the exclusion extends to off-hours conduct between employees that creates a hostile work environment.¹ 

CGL coverage for employment claims became even scarcer in 1993, with the commonly used Employment-Related Practices (ERP) exclusion endorsement. This exclusion bars coverage for bodily injury and personal injury arising out of a wide range of employment-related “practices, policies, acts or omissions,” including harassment, discrimination, demotion, and wrongful discharge. The ERP exclusion extends to post-employment defamation claims that arise out of the employment relationship.² 

There have been “standard” Insurance Services Office (ISO) EPL policies since 1998, but few insurers have used them. Most insurers continue to use their own custom language. Thus, it is essential to analyze the specific provisions in the employer’s particular EPL policy. 

Some “common law” coverage principles apply in EPL cases, especially on claims-made issues and language common to other liability insurance policies. But most courts ignore common-law principles when contrary to policy’s plain language.³ The analysis set forth below should be seen in this light—as a guide to common EPL coverage triggers and exclusions that can be overridden by contrary policy language.

Coverage triggers

Most EPL policies cover a finite number of “wrongful acts.” This coverage for specific torts is similar to CGL Coverage B for Advertising and Personal Injury.⁴ 

Most EPL insurers have their own custom lists of “wrongful act” triggers. Common wrongful acts include (1) discrimination, (2) harassment, (3) wrongful termination, (4) failure to hire and promote, (5) defamation, (6) invasion of privacy and confidentiality, (7) negligent hiring and supervision, and (8) retaliation and reprisal. Other policies cover variations like wrongful denial of training, wrongful breach of career opportunity, or breach of employment contract.⁵ 

Insurers sometimes use specially defined terms, which can complicate the analysis. For example, one Chubb EPL policy covered “workplace torts,” which was defined to include negligent training and failure to enforce corporate policies and procedures.⁶ 

Thus, some employment-related claims can fall through the cracks. For example, in Woo v. Fireman’s Fund Ins. Co.,⁷ a dental assistant sued a dentist for negligent infliction of emotional distress, for embarrassing her with an unflattering picture taken under anesthesia. The EPL policy covered “wrongful termination” that inflicted emotional distress. But it had no separate coverage for employment-based emotional distress. Thus, there was no EPL coverage for the claim.

Some EPL policies limit coverage for wrongful acts to an individual insured acting “solely in an insured capacity.” This will preclude coverage for an insured principal acting for a separate business, engaging in self-dealing, or acting in a dual capacity. But such an inquiry can be “fact-intensive and inappropriate to resolve on a motion to dismiss.”⁸ 

“Loss”

Most EPL policies require a covered “loss” or “damage.” The term “loss” is generally defined in monetary terms such as compensatory damages, punitive damages, attorney’s fees, settlements, and judgments. This seldom includes equitable relief.⁹ In a frequently cited Texas case, the court explained why restitution is conceptually distinct from damages: “An insured… does not sustain a covered loss by restoring to its rightful owners that which the insured, having no right therein, has inadvertently acquired.”¹⁰ 

More recently, the Seventh Circuit applied this principle to D&O insurance. In Level 3 Communications Inc. v. Fed. Ins. Co.,¹¹ the court found a claim for restitution is not the same as loss or damage: “An insured incurs no loss within the meaning of the insurance contract by being compelled to return property that it had stolen, even if a more polite word than ‘stolen’ is used to characterize the claim for the property’s return.”

In U.S. Bank Nat. Ass’n v. Indian Harbor Ins. Co.,¹² Judge Magnuson cited with approval the Level 3 rule that restitution claims are generally uninsurable. “An insured incurs no loss when it unlawfully takes money or property and is forced to return it. Asking the insurance company to pick up the tab would only bestow an unjustified windfall on the insured.” However, the court distinguished Level 3 because the particular policy had a “final adjudication” clause, and there had only been a settlement.

“Claim”

Most EPL policies are written as claims-made policies. Thus, a “claim” made during the policy or its retroactive date is a basic coverage trigger. Most claims-made policies set a retroactive date as the insured’s first policy period with the insurer. “This renewal retroactivity explains the unfortunate reality that claims-made insureds cannot change insurers except at significant risk.”¹³ 

The challenge for insureds is that no coverage exists if the claim was first made before current policy period or the retro date. “Claim” is often broadly defined to include pre-litigation demands or administrative proceedings. Such a broad definition of “claim” can create coverage problems if the initial demand or administrative claim occurred before the relevant policy periods.

In most claims-made policies, a “claim” simply requires a third party’s assertion of a legal right. It does not require litigation, a formal legal demand for monetary relief, or even a threat of litigation.¹⁴ In analyzing whether a “claim” was made, the court looks to the substance of the communications, not semantics. Even friendly negotiations may suffice.¹⁵ 

Most EPL policies broadly define “claim” to include administrative charges, even though charges do not seek monetary damages.¹⁶ Depending upon policy language, a subsequent lawsuit based upon the same facts may be a separate “claim.”¹⁷ 

A broad definition of “claim” in a claims-made policy protects the insured by permitting the “reporting of acts not yet in litigation.”¹⁸ “This provides additional protection for the insured, because coverage could extend to a suit not brought until long after the policy has expired, as long as the insured provides notice to the insurer of potential claims.”¹⁹ 

Coverage under most claims-made policies is triggered for policy in effect when the claim is made against the insured and reported to the insurer. By contrast, traditional “occurrence” coverage is triggered for policy in effect at the time of the underlying accident. The timing of the report/notice to an occurrence insurer is generally irrelevant, unless delayed notice prejudices the insurer.²⁰ 

With most claims-made policies, the timely reporting of claims is a condition precedent to coverage. It is an absolute requirement—a threshold that must be crossed before coverage can exist. So any delay in reporting claims is risky with EPL insurance.²¹ 

The issue of prejudice or absence of prejudice to the insurer is “not relevant to the determination of coverage under a claims-made policy.”²² 

While prejudice is only eliminated if notice is a condition precedent to coverage, the term “condition precedent” need not be used. The requirement is met if prompt notice is a condition for coverage. “No special terms are necessary to create a condition precedent, but there must be some language that indicates the agreement… [is] conditioned upon some event.”²³  

While Minnesota is strict about requiring timely notice of claims with claims-made policies, it is flexible about the content of the notice. As long as the insured provides “notice of facts that would raise a likelihood of a claim,” the insured is deemed to have provided sufficient notice.²⁴

Exclusions

The most common EPL exclusions are for (1) fraudulent, malicious, and criminal acts; (2) contractual liability; (3) workers compensation; (4) ERISA; (5) bodily injury; (6) property damage; and (7) FLSA (wage and hour).

Less-common EPL exclusions include (1) strikes and walkouts; (2) prior or pending litigation; (3) WARN Act; (4) OSHA; (5) COBRA; (6) FMLA; (7) nonpecuniary and injunctive relief; and (8) punitive damages.

As with the EPL coverage triggers, it is essential to read the individual EPL policy to verify the particular exclusions involved.

Wage-and-hour claims

Wage-and-hour claims against employers have become increasingly common. But most EPL policies do not cover wage-and-hour claims because (1) they are not covered “wrongful acts,” (2) they are a form of restitution that do not satisfy the “loss” or “damage” coverage trigger, and (3) most EPL policies expressly exclude them.  

The lack of wage-and-hour coverage is consistent with the moral-hazard doctrine, which limits coverage when insureds could knowingly precipitate the insured event. “Insurance against a violation of an overtime law, whether federal or state, would enable the employer to refuse to pay overtime and then invoke coverage so that the cost of the overtime would come to rest on to the insurance company.”²⁵

Many EPL insurers now offer wage-and-hour endorsements for an additional premium. Normally such endorsements are limited in scope:

• They generally have lower sublimits than the remainder of the policy. (For example, a $1,000,000 EPL policy may have a $100,000 wage-and-hour sublimit.) 
• Many endorsements provide defense-costs-only coverage, with no indemnity for judgments or settlements.

Thus, even when EPL wage-and-hour endorsements are available, they generally do not provide significant indemnity protection. 

Conclusion

EPL insurance provides essential coverage for most employment lawsuits. However, counsel needs to review the employer’s particular policy to confirm the specific coverages and exclusions.