Employment Practices Liability Insurance – New Appleman on Insurance Law Library Edition, Chapter 28

Employment Practices Liability Insurance – New Appleman on Insurance Law Library Edition, Chapter 28

By L.D. Simmons, II and Lowndes C. Quinlan, Attorneys, McGuireWoods LLP

This chapter begins by discussing the development and brief history of Employment Practices Liability (“EPL”) policies, as well as the law that has so far developed interpreting these policies.  Insurers have developed and marketed EPL policies to fill gaps in coverage left by commercial general liability policies and directors and officers liability policies.

Section 28.01 also reviews the structure common to most EPL policies, and special considerations when interpreting these policies.  EPL policies are a relatively new product in the insurance market.  Although a standardized policy exists, most insurers have used proprietary and distinct wording.  Based on these two factors, the courts have developed relatively little case law to guide counsel on the meaning of particular EPL policy terms.  Because the law is often specific to one insurer’s wording, cases may or may not prove persuasive when applied to disputes involving another insurer’s wording.  Basic principles of contract interpretation will sometimes prove to be the greatest value to coverage counsel.

Section 28.02 focuses on the insuring agreement of EPL policies and the risks insured.  Insurers typically specify the risks they agree to insure by listing various causes of action, such as wrongful termination, discrimination, harassment or other employment-related action.  Some insurers agree to insure against actions for breach of employment contracts.  The causes of actions insurers cover under their policies are often grouped under a common definition, such as “wrongful employment act.”

Insurers often write limitations into their insuring agreements.  These limitations are in addition to the policy’s exclusions and may take the form of definitions.  Insurers may limit who is an insured, as well as specify which type of claimants may bring a claim.  For example, EPL policies may insure claims brought by employees, former employees and applicants, but limit the coverage for claims brought by independent contractors.  Insurers frequently bar claims by persons that are strangers to the employment relationship, such as customers.  Insurers circumscribe the type of damages or loss they will indemnify by narrowly defining the policy’s definition of damages or loss.

Insurers usually write EPL policies on a claims-made basis.  Section 28.03 discusses issues arising from the claims-made nature of these policies.  Like their cousins, directors and officers (“D&O”) and errors and omissions (“E&O”) policies, EPL policies cover claims first made during a policy period.  Some EPL policies also require that the policyholder provide notice of the claim within a specified period.  These are referred to as “claims-made-and-reported policies.”

Courts have generally enforced claims-made provisions of EPL policies.  The most common issue to arise under EPL policies’ claims-made provisions is determining when a claim is first made.  The issue often arises when a policyholder has failed to provide prompt notice of a claim and then disputes when the claim was first made.

Employment practices claims often involve more than one claim.  A claimant may file an administrative action with the Equal Employment Opportunity Commission (“EEOC”), a lawsuit, and later assert an allegation of retaliation.  EPL policies, like many other claims-made policies, group similar claims, or claims arising from the same wrongful acts, into a single claim.  Determining whether a series of claims is a single claim or multiple separate claims is an area of frequent dispute.

Section 28.04 addresses the various exclusions found in most EPL policies.  We have classified these exclusions into three general categories.  The first category consists of those exclusions that limit the type of employment claims covered under an EPL policy.  Insurers generally exclude from coverage claims based on various federal laws regulating pay and labor relations, such as the Fair Labor Standards Act (except the Equal Pay Act), the National Labor Relations Act, and the Worker Adjustment and Retraining Notification Act.  Most states have enacted laws that parallel the federal employment legislation.  Many insurers include clauses that also bar coverage for claims made under similar state or local laws.  Most of the disputes under these exclusions have centered on whether a state or local law was in fact similar to a federal law.  Other exclusions within this first category include claims under the Americans with Disabilities Act and actions arising out of strikes and lockouts.

The second category of exclusions enforces the claims-made nature of EPL policies, as well as the concept of fortuity.  Such provisions include exclusions for prior knowledge/prior notice of a potential claim, exclusions for dishonest, criminal, or fraudulent acts and exclusions for illicit profits.

The third category of exclusions limits coverage for risks insured under other types of policies.  For example, exclusions for bodily injury and property bar coverage for risks insured under commercial general liability policies.  Other excluded risks include losses due to pollution, losses covered under workers' compensation, losses covered under unemployment insurance, and losses covered under social security and/or disability benefits programs.

The only broad generalization to make about cases considering EPL exclusions is that courts usually have relied upon state canons of construction to resolve disputes over the meaning of a particular exclusion.  Given the absence of uniformity among EPL policies and the lack of prior precedent, this is a trend that will likely continue for the foreseeable future.

Section 28.05 discusses the duty to defend under EPL policies.  For the most part, the duty to defend under EPL policies is no different than the duty to defend under other coverages.  The duty to defend usually starts with a comparison of the allegations in the complaint with the coverage afforded under the policy.  If any of the allegations arguably fall within the policy’s coverage, then the insurer has a duty to defend.  If the insurer’s duty cannot be determined from the allegations in the complaint, some states require the insurer to consider information outside the complaint.

Once an insurer’s duty to defend it triggered, the duty extends to all counts in a complaint, whether or not the counts fall within the policy’s coverage.  Some courts, however, have permitted insurers who defend their insured to recoup defense costs incurred for noncovered claims upon the conclusion of a case.  Section 28.05 also covers the consequences that may occur when an insurer fails to meet its duty to defend.

Some EPL policies do not require an insurer to defend, but to advance defense costs instead.  Under these circumstances, disputes often arise whether an insurer can refuse to pay defense costs associated with claims not covered under the policy.

Section 28.06 considers common conditions under EPL policies, such as the duty to cooperate, consent to settlement clauses, arbitration and other alternative dispute resolution provisions, other insurance clauses, and no action clauses.

Finally, Section 28.07 reviews problems arising following policyholder misrepresentations in a policy application.  As with other types of insurance, the majority of courts provide that a material misrepresentation in a policy application affords grounds for an insurer to rescind a policy.

Cross References: For practice guidance with respect to EPL insurance coverage issues, see New Appleman Insurance Law Practice Guide Chapter 41.

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L.D. Simmons, II is a partner with McGuireWoods LLP.  Lowndes C. Quinlan is Counsel with McGuireWoods LLP.  Both work in the firm’s Charlotte, North Carolina office and handle complex insurance coverage disputes regionally and nationally, with an emphasis on claims involving commercial disputes, professional liability, directors’ and officers’ liability, employment practices liability and technology errors and omissions.  Mr. Simmons has been named as one of The Best Lawyers in America in the area of insurance law, and is a regular speaker and writer on insurance issues, including recent presentations for the American Bar Association, Mealey’s, the CPCU Society of the United States, the Defense Research Institute, RIMS, and the North Carolina Association of Defense Attorneys.  The views expressed in this chapter are those of the authors only and do not necessarily represent the views of their law firm or clients. 

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