EPL claims reporting requirements
Failure to report on a timely basis can result in the denial of a claim
By Donald S. Malecki, CPCU
With claims being alleged in both the private and public sectors for damages because of sexual harassment, discrimination and wrongful termination/demotion, and other offenses, employment practices liability (EPL) insurance has become an increasingly sought-after form of protection.
During its infancy, there was not much choice of coverage and limited availability. Currently, however, the three popular ways this coverage can be obtained are by way of: (1) a stand-alone policy, (2) a self-contained policy with multiple coverages, and (3) coverage accompanying a directors and officers liability policy.
Considering that the coverage needs vary and the priorities of entities differ, what might be a good coverage approach for one entity may not necessarily be as advantageous for another. This is perhaps the reason why there is no one popular coverage approach.
Having said this, however, one of the advantages of a stand-alone EPL policy is that it is relatively easy to determine the scope of coverage because all of the provisions relate to that single form of coverage. When EPL coverage is intertwined with other coverages, it sometimes is difficult or at least more time-consuming to determine what provisions apply to what coverages.
This means that a self-contained policy that includes multiple coverages for EPL, D&O and fiduciary liability, for example, may be complex in light of the coverage combinations. Those insureds who do not want to place all of their coverages with the same insurer may not like this format.
Because EPL coverage resembles D&O liability coverage, the two coverages are available in one policy. One thing to watch out for with this approach is whether the EPL limits will erode the limits of D&O coverage and vice versa, and how defense coverage is provided.
Chances are that this coverage combination of EPL and D&O liability may be less expensive than if the coverages were to be purchased separately, because separate limits generally are not provided. This means that insureds who purchase insurance on price alone need to be cautioned about this single-limit approach.
EPL policies provide coverage for discrimination, wrongful termination and sexual harassment. Some policies also include coverage for retaliation by the employer. Obviously, the extent of the coverage will vary because, as has been mentioned, these coverage concepts are not standard.
Much will depend on an employer’s needs, but reviewing EPL coverage under the different formats may reveal some additional forms of protection that an employer might welcome, such as coverage for breach of an employment contract, defamation, employment-related mental injury, and wrongful failure to grant tenure.
Some EPL policies will even provide coverage for libel, slander, defamation, invasion of privacy, infliction of emotional distress, loss of consortium, breach of contract, and assault and battery. The point that should not be overlooked is what the trade-off might be in order to obtain desirable coverage for employment-related offenses, which will likely be excluded by a CGL policy.
While defense may be within limits, not all insurers will necessarily follow this approach and, instead, will offer separate limits for defense. Whether this approach is an advantageous one, however, should be pondered carefully. The reason is that with defense costs often being more than the indemnity payout, the defense coverage could turn out to be inadequate.
The big problem
Both EPL and D&O liability policies have one thing in common that presents a big problem for insureds: the requirement to give prompt notice of a claim or claim potential. With both policies written on a claims-made basis, insureds are likely to think that a claim does not have to be reported until there is a demand for damages. This is not true.
It is not the purpose here to compare and contrast EPL with D&O liability coverage, but one of the leading reasons claims are denied under both forms of coverages is late notice. The D&O policy often requires notice of a circumstance likely to give rise to a claim. Such a circumstance may never materialize into a claim or if a claim arises, it may be years later. Notice nonetheless is required early on.
The misunderstanding with EPL coverage is that notice also is required long before an employee files a civil suit for damages against his or her employer. A case in point is Munsch Hardt Kopf & Harr, P.C. v. Executive Risk Specialty Insurance Company, No. 3:06-CV-01099 (U.S. Dist. Ct. N. Dist. Tex. 2007). The EPL policy in this case had a $75,000 self-insured retention for both damages and defense costs and was written on a claims-made basis.
This EPL policy defined “claim” as “any judicial, administrative or other proceeding against any Insured for any Employment Practices Wrongful Act.” It also defined “related claims” as “all claims based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions, or Employment Practices Wrongful Acts.”
A condition of this policy included a “strict” notice provision that required the named insured to notify the insurer in writing of any claims made against it “as soon as practicable and in no event later than sixty (60) days after such Claim was first made as determined pursuant to Condition (C ) (1).”
On July 13, 2001, an employee filed a “Charge of Discrimination” with the Equal Employment Opportunity Commission (EEOC). The EEOC contacted the employer (named insured) about this charge on that same date. The employer responded to the EEOC on August 22, 2001.
Having been notified by the EEOC on April 23, 2002, of her right to sue the employer, this employee filed a suit on July 19, 2002, based on the same facts contained in her EEOC charge. On July 24, 2002, the employer notified the insurer of its EPL policy of this suit. The insurer, however, denied the claim on August 21, 2002, because the employer (named insured) failed to notify the insurer within 60 days of receiving the EEOC charge.
Because the employer was required to defend itself in this matter, it was not until June 2006 that the employer filed suit against its EPL insurer to recoup legal costs in defending this suit brought by an employee.
In this action between the insurer and the named insured (employer), the insurer maintained that the employer’s notice was not timely because it was given more than 60 days (July 24, 2002) after the employer received notice of the employee’s EEOC charge (July 13, 2001).
The employer (named insured) maintained that its notice was timely because its notice (July 24, 2002) was within 60 days of receiving notice of the employee’s complaint (July 19, 2002). The employer maintained that if the insurer’s interpretation of the notice requirement were adopted, it would lead to the absurd result of some insureds being denied coverage for failing to report a claim of which they had no knowledge when notice was required.
The court disagreed with the employer (named insured), stating that the employee’s EEOC charge and the complaint she filed in state court were both claims under the policy because they initiated an administrative and judicial proceeding. The policy requires this result, the court added.
A number of other cases have arrived at the same conclusion. In Specialty Food Systems, Inc. v. Reliance Insurance Company of Illinois, 45 F.Supp 2d 541, the court held that, under a liability policy with a similar definition of claim and a similar notice requirement, an EEOC charge was a claim for the purpose of coverage.
The policy in this case required, as a condition precedent to coverage, that a claim first made against the insured during the policy period must be reported no later than 60 days after the policy expired. The named insured received a former employee’s EEOC charge during the policy period but failed to notify the insurer within that time period.
As in the Munsch case, the insured argued, to no avail, that the EEOC charge was not a claim for the purpose of coverage. The court, however, disagreed, holding that the EEOC charge was a claim and that the named insured therefore was not entitled to coverage, as a matter of law, because of its failure to provide notice as the policy required.
Perhaps the misunderstanding here over the EEOC charge being the notice trigger is that the EEOC charge is just that, a charge or allegation. Suppose the charge does not materialize into a situation where the EEOC believes the allegation is a legitimate claim. It would appear that what might be a better trigger date is when the EEOC responds and says that an employee has a case against the employer.
However, the consensus of the courts in the preceding cases, and many more that could be cited, has made clear that the claim (to be reported to the insurer) is at the time of the EEOC charge, and not at the time the employee files a civil suit. Employers and their legal counsel need to keep this mind. Producers also may be instrumental in getting the message out on the importance of this notice condition, which has the same effect as an exclusion.
Donald S. Malecki, CPCU, has spent 49 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C., an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.