Many prudent employers - knowing that employment discrimination claims can be filed against them by applicants, employees, and former employees, and administrative agencies suing on their behalf - buy employment practices liability ("EPL") insurance.  By doing so, they expect to reduce the risks of such claims and the expense of defending against them.  A recent decision from a Tennessee federal district court, however, entirely denying an employer's claims for indemnity and defense costs because a lawsuit was filed by the Equal Employment Opportunity Commission (rather than an individual plaintiff), reminds employers to be cautious when purchasing EPL insurance.  Cracker Barrel Old Country Store, Inc. v. Cincinnati Ins. Co., Case No. 3:07-cv-00303 (M.D. Tenn. Sept. 21, 2011).

In Cracker Barrel, the EPL insurance policy provided that the insurer would indemnify the employer on any "claim," and would have the "duty to defend [the employer] against any such ‘claim.'"  A "claim" under the policies was defined 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"

for any of twelve enumerated "causes," including "violation of any federal, state or local law that concerns employment discrimination."

Ten Cracker Barrel employees filed charges of racial or sexual discrimination with the EEOC and the Illinois Department of Human Rights.  Based on those charges, the EEOC commenced a lawsuit against the employer.  Eventually, after the employer incurred attorney fees and costs of over $700,000, the suit was settled for $2 million.

The insurer declined both indemnification and defense costs, on the grounds that the civil proceeding had not been brought "by any past, present or prospective" employee of the employer.  The Court agreed, "reasoning" that the suit had been filed by the EEOC.  The fact that the policies covered "administrative proceedings" was an insufficient basis for coverage of a lawsuit based on administrative charges.  The Court attached great significance to the placement of a comma before the phrase, "which is brought by any past, present or prospective "employee(s)," concluding that the above-quoted phrase therefore modified only the word "charge," not "complaint."

Any employer buying EPL insurance needs to examine the full extent of coverage before buying the policy.  In this case, a $2.7 million loss and a debate over the significance of the placement of a comma after the word "which," could have been avoided with more careful study of the policy language before purchase.