Connecticut Employment Law Blog : Connecticut Employment Lawyer & Attorney : Daniel Schwartz : Stamford, Hartford New Haven, CT

Employment Practices Liability Insurance (EPLI) is, at times, viewed by some employers as a way to control costs.  (For a primer on EPLI, check out my prior posts here and here.) Why? Because employers believe that these policies will cover all of their wrongful discharge claims and the insurer will not read its policy narrowly to exclude such claims. 

But after a case by the Connecticut Supreme Court that will be officially released next Tuesday, employers should understand that EPLI policies have real and identifiable limits and that not all claims will be covered. Indeed, understanding what is and is not covered should be at the forefront of employer's discussions with an insurance agent when discussing a policy. Moreover, employers ought to discuss prior claims with the insurer so as not to be surprised if they resurface.

Indeed, in National Waste Assoc. v. Travelers Casualty & Surety Co. (download here), the Court found that an insurer was not responsible for covering a new wrongful discharge lawsuit filed in the coverage period because there had already been unemployment benefits hearing regarding that same employee before the coverage period began.  The court found that this prior claim for unemployment benefits was a prior "administrative" hearing and fell within one of the policies exclusions.

The basic facts of the case are straightforward: 

• Employer purchased EPLI for the period of 2/15/07 to 2/15/09 that included a "claims-made" provision (which provides liability coverage for any claim first made during the coverage period). 
• On 5/12/07, former employee filed wrongful discharge claim.
• Insurer denied coverage relying on a standard provision in such agreement that precluded prior litigation:

This [l]iability [c]overage shall not apply to, and the [defendant] shall have no duty to defend or to pay, advance or reimburse [d]efense [e]xpenses for, any [c]laim . . . based upon, alleging, arising out of, or in any way relating to, directly or indirectly, any fact, circumstance, situation, transaction, event or [w]rongful [a]ct underlying or alleged in any prior or pending civil, criminal, administrative or regulatory proceeding, ... against any [i]nsured as of or prior to the applicable [p]rior and [p]ending [p]roceeding [d]ate set forth in [the policy declarations].

• As it turns out, the former employee and the employer had been involved in a Department of Labor proceeding in 2005 regarding a claim for unemployment benefits by the individual.

The employer here argued that it did not believe that the prior unemployment proceeding should count as an administrative hearing. The Supreme Court disagreed saying that unemployment benefit hearings are squarely adminsitrative hearings. Case closed.

So, what's the takeaway for employers? If you do have EPLI, understand your policy limits. And if you're considering EPLI, understand that having a policy is not a panacea.  And never presume that a claim will be covered just because the lawsuit occurs during the coverage period. 

Insurance companies are like any other business; they look for ways to control costs. Thus, the fine print that you may otherwise glance over before signing the policy agreement? Read it; that fine print just may dictate whether you have coverage or not.

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To Be (Insured) or Not To Be (Insured)?

That is the question that employers face each day in Connecticut and across the nation when it comes to Employment Practice Liability Insurance (EPLI, for short).  The problem with such a question is that the answer is a classic "it depends".  For some employers, the answer may be an easy yes. For others, perhaps an easy no. But for the vast majority in the middle, it will depend on a variety of circumstances.

Michael Moore, of the Pennsylvania Employment Law Blog took a very solid start at looking at some of the issues employers should look at and what employers should know.  He lists the following five things that every HR generalist should know about EPLI.  There are other issues as well so I've incorporated Mike's great list with a few thoughts of my own.

• Coverage: Mike notes that "EPLI policies typically cover claims of wrongful discharge, workplace harassment and discrimination." Some may offer more coverage. 

Knowing what will, and will not be covered is important at the outset. After all, what good is insurance if it won't cover many of the common claims that an employer faces. 

• Exclusions. Mike notes EPLI policies "exclude many claims based on the statute that creates the legal right or the activity that gives rise to the claim" including FLSA, NLRA, WARN, COBRA, OSHA and ERISA. 

As with the coverage item, knowing what will be automatically excluded from coverage is important. Some employers believe EPLI is an umbrella type coverage that catches anything that relates to employment law. The truth is that most policies are written much more narrowly. 

• Policy Limits and Deductibles: As with any type of insurance, there will be policy limits and deductibles that usually apply on a per claim and aggregate basis.

In my view, this is an extremely important consideration for employers. Setting a high deductible may keep your costs down, but if the deductible is on a per claim basis, EPLI will do little to help a situation or control costs where an employer is faced with five separate employment law actions at once. 

• Defense Costs, Selection of Counsel and Settlement:  Mike's point here is a good one; he notes that because defense costs are usually included within EPLI this also "means that every dollar an employer spends defending a claim reduces the amount available for settlement or to pay a judgment. Since the existence of insurance coverage must be disclosed as part of discovery in most law suits, a plaintiff’s attorney will factor insurance coverage into his or her case evaluation."

However, often left out of a discussion is what happens when the insurer and the employer are at odds with a settlement. The employer may, for example, want to send a message to other employees that they will not settle out frivolous claims even for nuisance value. The insurer, however, may want to reduce the risk of exposure and want to settle the case. Employers often neglect to think about how EPLI will work with settlements and within its overall litigation strategy.

• Policy Types and Insurance Company Notification: Lastly, Mike notes that "EPLI policies are typically written on a “claims made” basis meaning that the claim must be incurred during the coverage period and reported to the insurer during an extended reporting period. Since employment actions may take years to turn into a claims, an employer may be left with no coverage if the policy is dropped or tail coverage isn’t purchased." I posted previously on the need to notify the insurer of such claims. 

With Congress considering changing various statutes of limitations on employment claims, this could have a further impact on EPLI claims as well.

There are other factors that an employer should consider as well. What will happen to a company's relationship with existing counsel? Will the insurer allow the employer to choose defense counsel? What is the insurer's "reputation" in the marketplace? What message will this send to employees? Will employees sue more knowing that they might receive a settlement? How will this work with an employer's arbitration provision?

EPLI is definitely not for every employer. Before you decide to go with such a policy, make sure to think through the issue to understand both the pros and the cons.  It may be that an arbitration provision (forcing the parties to go to arbitration) may be a viable alternative for some, while for others, maintaining the status quo will be best.

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In recent years, some employers have turned to EPLI (or employment practices liability insurance) to help control their costs. Some find it useful, others do not. But one important part of having the insurance is making sure it applies when you actually have a claim.

A recent federal court case highlights the importance of notifying the insurer of the claims at the time they are filed with an administrative agency such as the EEOC or CHRO -- not when those charges become a lawsuit.  As a colleague of mine once said, "Just pick up the phone and make the call." 

In American Ctr. for Int'l Labor Solidarity v. Federal Ins. Co., (D.D.C., Oct. 15, 2007), a federal district court held that, where the employer failed to notify the insurance company of the employment discrimination claim when it was filed at the EEOC, the employer cannot recover the costs of settlement an defense from the insurer. 

In doing so, the court concluded that a charge before the U.S. Equal Employment Opportunity Commission constituted a "formal" administrative proceeding requiring notice under the insurance policy. The court reviewed the policy's definition of a "claim" which was included a "formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order, or similar document."

The Background

In American Ctr., the employer (a non-profit) twice received Notices of Charges from the EEOC in August 2002 and November 2002.  While the first charge indicated that no action was required by the employer, the second notice contained a  "perfected" Charge of Discrimination outlining the allegations in greater detail. The EEOC requested that the employer either participate in mediation or submit a position statement. The employer rejected mediation and submitted a position statement instead.  The EEOC ultimately dismissed the charge.

In December 2003, a race discrimination lawsuit against the employer was filed by the employee.
In January 2004, the employer notified the insurer of the lawsuit for the first time. In March 2004, the insurance company declined to cover the claim because of the untimely notice. 

The employer argued that the EEOC proceedings were not "formal" administrative proceedings.  The District Court rejected that argument and reviewed the scope of EEOC administrative proceedings, which includes charges, position statements, evidence, mediation, investigation fact-finding, subpoena powers, settlements and determinations on the merits.  Moreover, statements made by parties at the EEOC can be deemed to be admissions in later court proceedings. 

Ultimately, the court rule that the most "natural reading" of the liability policy was that an EEOC proceeding constituted a "formal administrative proceeding."

What should employers take away from this decision?

• While each EPLI policy may differ, overall, insurance companies must be notified immediately whenever a charge or notice is received from an administrative agency, such as the EEOC and CHRO.  This should be done even if the employer is unsure the notice constitutes an actual "claim" under their liability policy.   While this case arises out of the District of Columbia, the facts presented in that case are likely to arise in many other jurisdictions, including Connecticut.
  
• Employers should also have internal procedures as to how to handle the receipt of such administrative complaints and designate a person who will be responsible for notifying the insurance company and determining how the claim should be processed internally.
  
• Lastly, management personnel should be notified that if they receive any notices from any governmental agencies, they should notify the appropriate company-designated personnel for handling the charges.

EEOC and CHRO charges typically have very short time frames for responding (30 days in many cases).  Ignoring them or shielding them from insurance companies will not make them go away and such actions will only compound issues later on.

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