Ten Tips on Employment Practice Liability Insurance Coverage

1.       Employment Practice Liability Insurance Is the Dominant Pathway to Employment Dispute Coverage

Only EPL policies can reliably shield businesses from employment practice claims. Other common business insurance policies have been found to burden the policyholder with a duty to reimburse an insurer’s defense fees in employment-related disputes, including policies for Commercial General Liability (“CGL”), Employment Benefits Liability, Errors and Omissions, Directors and Officers (“D&O”), and Fiduciary Liability.

Media Liability Coverage (nested within a D&O or Cyber Policy, or freestanding) may be implicated by promotional claims directed at prospective employees where these pre-employment inducements to join an organization are independent “Wrongful Acts” that evidence a grounds for discrete liability once the prospect becomes an employee. Amendments to the Complaint can raise grounds for liability that implicate policies beyond those issued that trigger EPLI coverage where the conduct is not limited to an employment context but conjoined with employment claims.

2.       Employment Practices-Related Exclusions May Bar Any Potential Coverage Under CGL Policies

Widely-disseminated CGL policy language excludes employment practices-related suits from coverage, providing that such insurance “does not apply to [injury] arising out of any… employment related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination…”[1] Notably, this does not mean that all actions are excluded from coverage if they merely involve employees—the key is whether the action itself regards employment relationships.[2]

Some employment actions are not specifically delineated, so the exclusions may not bar all employee-related claims. The “fellow employee” exclusion is not commonly added to pertinent policies. It only excludes coverage for an employee’s “personal injury” that that was caused by another of the insured’s employees within the course and scope of employment.

CGL policies typically include “personal injury” coverage for “invasion of a person’s right of privacy” where it occurs in connection with “oral or written publication of material.” But the “Employment Related Practices” exclusion may not include privacy invasion within the excluded offenses. Such policy forms are subject to a construction that extends CGL coverage to what would otherwise be an excluded employment claim.

3.       Wage and Hour Claims May Be Covered By Sublimits Under Some EPLI Policies

While wage and hour claims are sometimes covered for large (4,000+ employee) companies, more often such claims are either excluded or unaddressed by the policy. There is some contention that damages may not arise from a successful wage-and-hour claim, because the claimant is simply receiving disgorgement of ill-gotten gain, which is not a “damage” remedy.

Express sublimits for wage and hour claims, or separate wage and hour coverage, are sometimes available for smaller companies, and would, at a minimum, cover defense fees. Sublimits are a two-edged sword: if there is coverage for discrimination (or another covered offense under a CGL policy) asserted in connection with a wage and hour claim, the sublimit may actually reduce coverage by barring defense fees that may be available absent that sublimit.

For many, the best option may be an EPLI policy that does not address wage and hour claims at all. Skillful analysis can help to determine when and how such a policy may be construed to allow for a claim.

4.       If the Complaint’s Allegations Do Not Clarify Whether a Defense Is Due, Focus on Facts That May Modify the Pleadings May Implicate a Defense

Amendments to pleadings may change the character of a suit to bring previously uninsurable actions within coverage. During a mediation, clarification on what coverage arises may help the claimant realize that as-yet unasserted claims may help to enlist the insurer.

                Skillfully crafted discovery may also elicit facts that implicate the policy and clarify a duty to defend. These fact allegations must be provided to the carrier, because many jurisdictions, including California, construe the standard of looking only to facts “available” narrowly to require those facts to be actually known by the insurer.

                Clarifying facts regarding coverage may, however, be deemed collusive, so as to bar coverage. Still, the insurer bears a heavy burden to prove collusion. Defense counsel is obligated to disclose coverage in discovery, especially in federal court. Coverage is deemed material, as it may enhance settlement prospects.

5.       EPLI Policies Require a Suit, But D&O Policies Do Not

However, minimize risk by promptly notifying an EPLI carrier of any claim, as delayed notice may bar coverage, especially where a “claims made” policy’s renewal coincides with a demand letter or other signs of an imminent claim. Coverage counsel should review EPLI policy language carefully to determine whether to provide such notice.

EPLI Insurers may argue that “Prior Acts” provisions which do not eliminate potential coverage under a renewing policy bar coverage under a subsequently issued policy. This could be where endorsements are conflicting regarding the impact of a failure to advise the insurer of a “Claim” that did not qualify as a “prior act” in the application for issuance of a subsequent policy. Where a contemporaneous but later-numbered endorsement favors coverage, it will support the policyholder’s legal position.[3]

6.       EPLI Policies Rarely Bar Coverage Based On When the Relevant Conduct Occurred

Policies typically either lack a retroactive date that is tied to the time of the challenged conduct, or include one too early to preclude coverage. Instead, many EPLI policies attempt to tie coverage to the date that the policyholder first got the policy (or an equivalent one). Insurers will thus bar coverage for potential liabilities that were known to insurer or were not reported in the application (which is deemed part of the policy).

7.       Cost-Effective Litigation of EPLI Policies Must Be Prompt and Decisive

However, it is rarely more expensive than the underlying suit. Carrier denial is unlikely to be followed by discovery, since facts the carrier should have known at the time of denial are not discoverable. Indeed, for a carrier to seek such facts in discovery would be bad faith.

These cases are therefore pure disputes of law and summary judgment is appropriate. They should not wait until underlying litigation is resolved. In California, benefits of this approach include:

·         Reasonable fees constitute the applicable standard, not those limited by Civil Code Section 2860 (except in Alaska, which adopted a statute modeled on that adopted in California)

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

·         No allocation is permitted between potentially covered and uncovered claims;

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

·         The insurer bears the burden to prove that fees incurred were unreasonable

8.       EEOC Claims Should Be Tendered to EPLI Insurers to Avoid Prior Acts Exclusions

Case law establishes that, for instance, where notice is delayed after an EEOC charge, a policy’s requirement for timely notice may go unsatisfied, even when notice is given shortly after the suit itself.[4] In another case, a suit arising two weeks before submission of the policy application did not fall within coverage because rescission was permitted, where a postdated application evidenced a misstatement about the insured’s awareness of a claim.[5]

9.       California Coverage Law Is Not the Most Favorable for EPLI Disputes

A majority of insurers are not headquartered in California and issue policies from elsewhere, especially Illinois, New Jersey, Connecticut, and New York. Case law, however, applies California law where California is the place of performance, i.e., where the attorneys appear of record to render legal services.[6] But corporate clients may have their headquarters outside of California and policies may be issued out of state. Still, coverage law outside of California may be preferable for several reasons:

·         Twenty other jurisdictions permit recovery of coverage fees by the prevailing party;

·         Few limit rates for attorney fee reimbursement as by Cal. Civil Code Section 2860;

·         Many disallow any allocation between covered and uncovered claims;

·         Some permit settlement recovery where there is any potential coverage at the time of settlement, rather than when the case would have gone to trial; and

·         A number have stronger rules on the right to independent counsel.[7]

·         The majority of forums outside of California do not permit recoupment of defense fees where the insurer’s agreement to defend is reevaluated in its favor.[8]

10.   Employee Benefit Liability May Cover Employer/Employee Disputes

Such policies may be implicated where the employee’s disgruntlement extends to the employee benefits he or she received. Dissatisfaction with the determination of benefits due complicates employer-employee disputes, particularly with 401ks, profit sharing, changes in employee status from union plan to management, and more.

It is rare that an employee faces termination and does not also wonder about the scope of benefits due upon termination. Given the likelihood of disagreements between employee and employer in this context, it is not unlikely that many wrongful termination suits will include claims that employee benefits were improperly determined.

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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 dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1]Form CG21470798.

[2] See Peterborough Oil Co. v. Great Am. Ins. Co., 397 F.Supp. 2d 230, 238-39 (D. Mass. 2005).

[3] Mgmt. Support Assocs. v. Union Indem. Ins. Co., 129 Ill App. 3d 1089, 1090 (1984) (where clauses conflict, “the clause which affords the greater or more inclusive benefit for the insured will govern.”); 3 New Appleman on Insurance Law Section 21.03 (Library Edition) (2020).

[4] Munsch Hardt Kopf & Harr P.C. v. Exec Risk Specialty Ins. Co., 2007 U.S. Dist LEXIS 16647 at *8 (N.D. Tex. 2007).

[5] Sigue Cor. v. Farmer’s Ins. Co., 2007 Cal. App. Unpub. LEXIS 1594 at *19 (Cal. Ct. App. Feb. 2007).

[6] See Frontier Oil Corp. v. RLI Ins. Co., 153 Cal. App. 4th 1436, 1442-43 (2007).

[7] See Photomedex, Inc. v. St. Paul Fire & Marine Ins. Co., 2008 U.S. Dist. LEXIS 8526 at *26 (E.D. Pa. 2008).

[8] See David A. Gauntlett, The Implied Right to Recoupment: A Tale of Smoke and Mirrors (June 16, 2021), https://www.linkedin.com/posts/davidgauntlett_the-implied-right-to-recoupment-activity-6811341200604442626-NULT/.