The May 1, 2015 edition of Coverage Counselor discussed Employment Practices Liability Insurance (“EPLI”) – what it is and what types of claims are covered. While policies vary, typically EPLI covers employers and its employees against claims of discrimination and harassment based upon protected class status; retaliation and wrongful termination based upon protected class status; other common law claims arising out of the employment relationship, including defamation, false imprisonment and negligent supervision.
Let’s expand on the importance of timely reporting of claims and the consequences of failing to do so.
The sensitivity to timely claims reporting flows from the fact that most EPLI is written as “claims made” insurance. “Claims made” insurance triggers coverage when the claim is made against the insured and reported to the insurer. This is in contrast with the more traditional “occurrence” coverage found in most CGL policies. Occurrence coverage triggers coverage at the time of the occurrence, which may be years before the claim is asserted against the insured. Claims made insurance is more affordable because the insurer’s exposure is limited to a fixed period of time. However, it does require the insured to be more attentive to promptly reporting actual and prospective claims.
While it is important to read the policy to determine what constitutes a “claim”, most EPLI policies define a claim as a “suit” or “demand” made by a current, former or prospective employee. A “suit” may be defined narrowly as a traditional lawsuit or more broadly to include traditional lawsuits as well as administrative claims, i.e., an EEOC charge. A “demand” is defined to include any written request for monetary or non-monetary relief. So, depending upon the policy language, a “claim” can include a lawsuit, an administrative proceeding, or a demand letter (or even an email) prior to any legal proceedings.
For a variety of reasons, it is not uncommon for an employer to handle an administrative charge of discrimination or harassment filed with a governmental agency or a demand letter without notifying their carrier of the claim. It may be the that employer incorrectly believes that a claim doesn’t include an administrative charge or demand letter or it may be that the employer is reluctant to notify the carrier of a potential employment claim, thinking that doing so will lead to increased premium when the policy is renewed.
The following common fact pattern illustrates the pitfall of failing to timely report an employment claim to the insurer under an EPLI policy.
XYZ Company purchased an EPLI rider to it CGL policy, effective July 1, 2013 to July 1, 2014. The EPLI policy provided coverage for losses incurred in connection with claims first made during the policy period and reported within 30 days after the expiration of the policy. Under the policy a claim was defined under the insurance policy as:
- A written demand for civil damages or other relief commenced by the insured’s receipt of such demand;
- A civil proceeding commenced by the service of a complaint or similar pleading;
- A formal administrative or regulatory proceeding commenced by the filing of a notice of charges, a formal investigated order or similar document; or
- A criminal proceeding commenced by the insured’s receipt of notice of a grand jury investigation.
Suzy Smith, a former employee of XYZ, Inc. filed a complaint with the EEOC and received a right-to-sue letter during the policy period. Prior to the expiration of the policy period, Smith’s lawyer sent EXY, Inc. a letter stating that Smith was subjected to discriminatory and demeaning treatment by male supervisors based upon her sex. The letter then described alleged incidents of discrimination; reminded XYZ, Inc. that Smith had received a right-to-sue letter; and asked if XYZ, Inc. preferred to attempt to resolve the dispute informally or if it would be necessary to file a lawsuit. XYZ, Inc. failed to notify its insurer of the administrative filing or the demand letter within 30 days after the expiration of the policy and ignored the demand letter altogether.
Smith subsequently filed suit in December, 2014 at which time XYZ, Inc. notified its carrier, tendered its defense, and requested indemnity. The insurer refused to defend or indemnify, asserting that either the administrative charge filed with the EEOC or the demand letter, or both, constituted a claim as defined under the policy and that XYZ, Inc. had waived its coverage by failing to provide timely notice of the claim. Both the trial court and appellate court agreed with the insurance company’s position and rejected XYZ, Inc.’s argument that neither the administrative charge nor the demand letter were claims within the policy and that, even if they were, the lawsuit was a separate claim under the policy.
This common fact pattern illustrates the care that should be taken by all employers who have EPLI policies whenever an employee claim is made that might possibly be covered under the insurance policies. The lesson to be learned is that if you have an EPLI policy and you receive an administrative charge or demand letter, take steps to put your insurer on notice of the potential claim. Otherwise you may pay the premiums and ultimately be denied coverage.