Your Employment Practices Liability Insurance (EPLI) may not give you the coverage you think for EEOC actions commenced on behalf of your employees. Up to now, most insurers have not denied coverage for these claims as long as the policy covers the alleged misconduct and you provided timely notice. But a decision last week by a Tennessee federal court in Cracker Barrel v. Cincinnati Insurance Company that denied coverage for these claims under a standard EPLI policy could call all that into question. The decision is a warning to companies everywhere to check their EPLI policies and confirm that they do in fact cover actions brought by the EEOC or other administrative agencies.

In Cracker Barrel v. Cincinnati Insurance Company, ten employees filed race and sexual discrimination charges with the state of Illinois and the EEOC against Cracker Barrel. The EEOC then brought suit on behalf of the employees against Cracker Barrel. Cracker Barrel filed a timely claim under its EPLI policy which, as do most EPLI policies, covered "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."

Cincinnati Insurance Company denied the claim because the lawsuit had been brought solely by the EEOC which was not an employee of Cracker Barrel. Cracker Barrel objected, arguing that the EEOC brought the claims on behalf of the employees and that, in any event, all the policy required was that the employees bring the original complaint or charge upon which the EEOC's lawsuit was based. The court, however, sided with the insurer:

The EEOC Lawsuit was not "commenced by the service of" a charge, according to the plain meaning of that language, even though it may have arisen because previous administrative charges brought potentially illegal activity to the EEOC's attention. Thus, that the EEOC Charges on which the EEOC partially based its decision to bring a lawsuit were brought by [Cracker Barrel's] employees is irrelevant. The complaint that commenced the EEOC Lawsuit was not brought by an employee, and, therefore, even under [Cracker Barrel's] interpretation . . . the lawsuit is not a 'claim' under the Policies.

Thus, the court concluded, as a matter of law, the insurer had no duty to defend or indemnify Cracker Barrel.

The court's reasoning in this case is wrong because the very purpose of the EPLI policy is to cover lawsuits like this that are brought by the EEOC or other administrative agencies on behalf of employees alleging that they were wronged. Unfortunately, however, the decision creates the potential for a gap in coverage that could unknowingly expose companies to significant defense and indemnity costs. Companies should therefore review their EPLI policies to understand exactly what is covered and, if necessary, move to fill this gap by getting confirmation from their insurer that these claims are covered.