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.