A federal court in Tennessee recently ruled that an employer’s employment practices liability insurance (EPLI) did not cover a $2.7 million settlement of a lawsuit brought by the EEOC. After 10 Cracker Barrel Old Country Store employees filed charges of race and/or sex discrimination with the EEOC, the EEOC sued Cracker Barrel under Title VII. Cracker Barrel eventually settled the underlying EEOC lawsuit, entering into a consent decree obligating it to place $2 million into a settlement fund. In addition, Cracker Barrel incurred more than $700,000 in defense costs.

Although Cracker Barrel gave proper written notice of the EEOC lawsuit to its carrier, the Court ruled that Cracker Barrel was not entitled to recover any of the $2.7 million under its EPLI policy. The Court held that the language in the EPLI policy did not extend to the EEOC lawsuit because the policy limited “claims” to proceedings brought by employees, and the EEOC was not Cracker Barrel’s employee. The specific language in the policy defined a “claim” as “a civil, administrative or arbitration proceeding commenced by the service of a complaint or charge, which is brought by any past, present or prospective ‘employee(s)’ of the ‘insured entity’ against any ‘insured.’” Based on this language, the Court found that the definition of claim under the policy has a clear meaning that a covered proceeding must be brought by an employee. The Court rejected Cracker Barrel’s argument that the underlying charges upon which the EEOC lawsuit was based were brought by employees. As such, Cracker Barrel was not entitled to collect any of the $2 million settlement funds under its EPLI policy. The Court also found that the insurance carrier had no duty to defend Cracker Barrel in the EEOC lawsuit, and thus, Cracker Barrel was not entitled to recover its $700,000 in defense costs either.

Employers should review the definition of “claim” before entering into an EPLI policy to ensure that certain proceedings, such as lawsuits brought by the EEOC or other administrative agencies like the Department of Labor, are not excluded from coverage under the policy.