Ten Misconceptions Re Insurance Coverage for Employment-Related Claims

Ten Misconceptions Re Insurance Coverage for Employment-Related Claims

By David A. Gauntlett[*]

MISCONCEPTION 1.

No effective coverage for employment practice claims is available outside of employment practice liability insurance policies.

REALITY:

Commercial General Liability (“CGL”), Employee Benefits Liability, Errors and Omissions (“E&O”), Directors & Officers (“D&O”), as well as Fiduciary Liability policies have all been held to trigger a duty to reimburse defense fees in employment related disputes.

MISCONCEPTION 2.

Employment Practices–Related Exclusions bar any potential coverage under CGL policies

REALITY:

Employment Practices-Related Exclusions in Form CG21470798 still widely disseminated as part of CGL policies provide otherwise:

a. This insurance does not apply to bodily injury/personal injury/advertising injury to a person arising out of any:  (c) employment related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed to that person[.][2]

Wrongful actions commonly asserted in employment claims are not specifically delineated in this exclusion, so it may not bar all employee-related claims.  For example, “invasion of a person’s right of privacy” covered as offense (e) within a CGL policy’s personal and advertising liability coverage may arise in an employment setting, and is a covered “personal and advertising injury” offense but not expressly referenced in this exclusion. 

MISCONCEPTION 3.

“Wage and hour” claims are not recoverable.

REALITY:

Although there is some contention that damages may not arise because a successful “wage and hour” claimant is simply receiving disgorgement of ill-gotten gain and thus not a “damage” remedy.

Where sub limits for “wage and hour” claims or separate “wage and hour” coverage is extended it would typically only cover defense fees.  But sub limits are a two-edged sword.  If there is coverage for discrimination asserted in connection with a “wage and hour” claim under an EPLI policy, the sub limit may reduce coverage since defense fees beyond the sub limit (i.e., $250,000) will reduce the policy limits in a standard form “self-liquidating” EPLI policy.

MISCONCEPTION 4.

If the allegations of the Complaint do not clarify whether a defense is due, there is no need to monitor the underlying litigation.

REALITY:

First, amendments of pleadings may change the character of the suit to make what was uninsurable potentially fall within coverage.

Second, during a mediation, clarification of what coverage arises may help the claimant realize that other claims that have not yet been asserted would be helpful to enlist the insurer’s involvement.  Indeed, recitals in a settlement agreement may clarify why covered claims were included in the claims resolved.

Third, skillfully crafted discovery prepared with the assistance of coverage counsel to elicit facts responsive of the questions raised by the policy, may clarify a duty to defend.

Fourth, clarifying facts which reveal the presence or absence of coverage is an obligation which the defense counsel owes to the claimant under existing discovery rules, especially those applicable in federal court proceedings.

Fifth, in light of the distinctions raised by the policies, clarifying what fact assertions are part of the claims against the insured may expand available coverage.

MISCONCEPTION 5.

Absent a suit, there need not be provided an Employment Practices Liability Insurance (“EPLI”) carrier.

REALITY:

Nothing can be more dangerous than delay in notifying an EPLI insurer of a claim.  Where a “claims made” policy is renewed, reference to a demand letter or other facts that indicate a claim is being made, may evidence a “notice of circumstance” that should be reported to the EPLI insurer.

MISCONCEPTION 6.

The retroactive date for EPLI policies is rarely problematic for coverage.

REALITY:

Not so. 

Many EPLI policies use the date of policy inception as the retroactive date.  This provision may bar coverage where any prior circumstance known to the insured became the genesis of a claim or was not reported in the application.  This is especially the case as the policy application is a part of a policy and all facts and all the statements therein as deemed material.

A retroactive date that applies at policy inception may be unenforceable as providing only “illusory coverage” under the law of some states, such as New Jersey.[3]

MISCONCEPTION 7.

Coverage litigation for EPLI policies is typically more expensive than the underlying suit.

REALITY:

First, this is rarely the case.  Following a carrier denial, discovery is unlikely since no discovery is permitted based on an inquiry into the facts the carrier should have known at the time it denied a defense. 

It would be bad faith now for an insurer to seek facts which it deems material to deny a defense which it did not have at the time of its earlier decision to preclude coverage.

Second, as pure disputes of law, California cases susceptible to resolution by summary judgment based on undisputed facts should not await litigation until after the underlying case is resolved. 

Third, there are five primary benefits to pursuing coverage after the underlying action if California coverage law applies:

·         The applicable standard is reasonable fees, not those limited by Civil Code §2860;

·         The rates paid commonly by carriers to their appointed counsel;

·         No allocation is permitted pursuant to Buss v. Superior Court between potentially covered and uncovered claims;

·         Reasonableness is the standard for recovery of both fees and rates; and

·         The insurer bearing the burden to prove that the fees incurred were unreasonable and were paid by the insured, those payments are their market value.

 MISCONCEPTION 8.

No notice of an Equal Employment Opportunity Commission (“EEOC”) claim must be provided to the EPLI insurer.

REALITY:

Many courts, including those in Texas[4] and California,[5] have ruled that failure to provide notice to the EPLI insurer can be grounds for denying coverage.

MISCONCEPTION 9.

California coverage law is always broader for EPLI claims.

REALITY:

First, the majority of insurers are not headquartered in California.  They issue policies out of their regional offices or, in some instances, their principal place of business.  Key insurer states include Illinois, New Jersey, Connecticut and New York, and to a lesser extent, Massachusetts, Minnesota and Wisconsin. Corporate clients may have their headquarters outside of California and policies may be issued out of state.

Second, under California law, the applicable law—the place of performance, i.e., where the attorneys appear of record to render legal services—is determinative in choice of law analysis as the test for what law applies.[6]

Third, coverage law outside of California may preferable.

·         Twenty jurisdictions permit recovery of coverage fees to the prevailing party.

·         Few limit rates for attorney fee reimbursement to those governed by Civil Code § 2860.

·         Many do not permit allocation under any circumstances between covered and uncovered claims.

·         Some permit settlement recovery where there is even a potential of coverage of any claim at the time of settlement, rather than inquiring as to whether the liability would have been covered had the case proceeded to trial.

·         A number have stronger rules on the right to independent counsel or other pertinent coverage principals than does California.[7]

MISCONCEPTION 10.

Employee benefit liability policies are rarely implicated by employer-employee disputes.

REALITY:

Employee benefit liability policies may be implicated where the employee’s disgruntlement extends to the employee benefits he or she received.

Employee dissatisfaction with the determination of benefits due them either on their alleged wrongful termination, retirement or any period when calculation of such benefits is pertinent complicates employer-employee disputes.  The particular problem areas include 401k’s, profit sharing plans, changes in employee status from a union plan to management, failures to consider as compensation bonuses over time and commissions, formulas that look to the five last years worked instead of the five highest earning years in calculation of pension, consideration of part-time work in calculation of benefits.

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[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[2] Peterborough Oil Co. v. Great American Ins. Co., 397 F.Supp.2d 230, 238-39 (D.Mass. 2005) (“[This provision] is intended to refer to matters that directly concern the employment relationship itself, such as the demotion, promotion, or discipline of employees by employers, and tortious acts that may accompany such personnel decisions, such as discrimination, harassment, or defamation.  Conversely, it is not intended to refer to all matters that concern or relate to employees.”) (emphasis added)

[3] Sparks v. St. Paul Ins. Co., 100 N.J. 325, 340 (1985).

[4] Munsch Hardt Kopf & Harr P.C. v. Exec. Risk Specialty Ins. Co., No. 3:06-CV-01099, 2007 U.S. Dist. LEXIS 16647 (N.D. Tex. Mar. 8, 2007) (Notice followed filing of the suit but was not timely because it was not forwarded within 60 days of an EEOC charge of discrimination, but delayed under the employee received the right to sue letter.)

[5] Sigue Corp. v. Farmers Ins. Grp., No. B189959, 2007 Cal. App. Unpub. LEXIS 1594 (Feb. 27, 2007) (A suit arising two weeks before submission of the policy application supported rescission as it is both a remedy to misstatement in the policy application and a defense to a claim.)

[6] Frontier Oil Corp. v. RLI Ins. Co., 153 Cal. App. 4th 1436. 1143 (2007).

[7] Photomedex, Inc. v. St. Paul Fire & Marine Ins. Co., Civil Action No. 07-0025, 2008 WL 324025 at *18 (E.D. Pa., Feb. 6, 2008) (California insured pursuing coverage lawsuit in Pennsylvania, received benefit of Pennsylvania law permitting indemnification for judgment in malicious prosecution lawsuit otherwise barred by Cal. Ins. Code §533).