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Employment Practices Liability Insurance – Buyer Beware

Labor & Employment Alert Fred Gants, Craig J. O'Loughlin

An employer who purchases employment practices liability insurance ("EPLI") likely expects coverage for claims of unlawful employment practices. As one large employer recently found out the hard way, such coverage may be unavailable when it is most needed. A federal trial court recently held that Cracker Barrel is not entitled to coverage under its EPLI policy in a large lawsuit brought by the U.S. Equal Employment Opportunity Commission ("EEOC"), because the plaintiff technically was not an employee as provided in the policy. The Cracker Barrel decision highlights that EPLI is not a panacea, and there are important factors that should be considered by employers in considering whether to purchase this insurance.

The Cracker Barrel Decision

In Cracker Barrel Old Country Store, Inc. v. Cincinnati Ins. Co., M.D. Tenn., No. 3: 07-cv-00303, a federal trial court in Tennessee held that the company could not collect $2.7 million under its EPLI policies for the settlement of an EEOC discrimination lawsuit. The court ruled that because the restaurant chain's EPLI policies limited claims to proceedings brought by employees - and the EEOC, which sued the company, was not its employee - the claim was not covered.

The case arose after 10 Cracker Barrel employees filed charges of race and/or sex discrimination with the EEOC and the EEOC filed a complaint against the company under Title VII of the 1964 Civil Rights Act. The company notified its insurer of the charges and later sent in a written notice of the complaint. After spending what it estimated to be at least $700,000 defending itself, the company entered into a consent decree with the EEOC and settled the case. The consent decree required Cracker Barrel to place $2 million in a settlement fund. Cracker Barrel sought to recover the defense and settlement costs under its EPLI insurance policies.

The district court granted the insurer's motion for summary judgment. Quoting the policy language, the court observed that, "[a] claim under the policies is 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 certain listed causes. Cracker Barrel argued that this definition required only that the proceeding "evolved from" or be started "as a result of" a complaint or charge brought by the employee. However, the court ruled that the words "evolved from" or "as the result of" were not found in the definition. As a result, the court held that the insurers did not have a duty to indemnify Cracker Barrel for the settlement of the EEOC complaint.

The court recognized that the insurer still might have had a duty to defend this case. As the court observed, the duty to defend is broader than the duty to indemnify under the law. Nevertheless, the court reasoned that in this case, the issue is not one of the substance of the underlying allegations, but rather whether the form of the EEOC complaint fell within the policies' definition of a claim. Since the court found that the complaint did not fall within the policies' definition of a claim, the court ruled that the insurer had no duty to defend.

Should You Buy EPLI?

Most companies have insurance for comprehensive general liability ("CGL") and insure against fire, theft, floods and other catastrophes. These policies typically do not cover employment claims such as sexual harassment, age discrimination, wrongful termination, and defamation. Indeed, these policies often expressly exclude employment-related claims.

As a result, some employers have seriously considered and ultimately purchased EPLI policies. Should your company do so? The answer is, of course, "it depends." There are about 50 insurers offering EPLI policies, and there are significant differences among the coverage offered. This means that any employer - or its insurance broker - must shop carefully for the coverage desired at the right price.

Factors to Consider in Evaluating EPLI

Most EPLI insurers offer "claims-made" coverage. Under these policies, coverage occurs when the complaint or lawsuit is filed, not when the alleged wrongful action occurred. Thus, if you were to purchase a policy covering the 2011 policy period, coverage would be limited to complaints or lawsuits filed in 2011.

Most EPLI policies include defense costs (also known as legal fees) within the limit of liability for a covered loss. This is an important factor. For example, let's assume the limit is $100,000 per claim. If a former employee files an employment discrimination claim and the employer incurs $50,000 in defense costs, the insurer will only pay another $50,000 to settle the case or pay a judgment. After that, the employer in this example is on its own.

EPLI policies typically cover claims such as sexual harassment, discrimination, wrongful discharge, and retaliation and sometimes personal injury claims, such as defamation and invasion of privacy. However, EPLI policies often expressly exclude intentional wrongdoing. This is significant because many employment claims, especially discrimination claims, involve allegations of intentional misconduct. If a jury were to conclude that an employer intentionally discriminated against a former employee, the EPLI policy may not cover the employer for the loss. The good news is that many EPLI policies often pay defense costs until a jury makes that finding and sometimes during any appeal. In employment cases, defense costs can often exceed a plaintiff's actual damages. As a result, the duty to defend is highly valuable to the employer.

"Prior acts" (acts that occurred before the policy period or whether the claim was made during the policy period) are typically covered as long as the employer did not have prior knowledge of the alleged wrongful acts. In other words, just as you cannot buy fire insurance for a building while it is burning, you also cannot insure against a "known" employment loss.

In purchasing EPLI coverage, an employer also needs to consider how much control it will retain over the defense of a claim where the insurer has accepted coverage. Can the employer select its own defense counsel? If the employer has counsel it trusts and who knows its employment practices, it may not want the insurer to appoint its own chosen counsel.

In addition, the employer needs to consider how much control it will have over any settlement. The insurer's and employer's interests do not always coincide in this respect. While settlement may make economic sense in the context of a particular insurance claim, an employer may have business reasons that make settlement undesirable.

In short, employers have to assess whether EPLI coverage makes sense. As the Cracker Barrel decision demonstrates, EPLI policies are not a cure-all, but they can provide employers with some level of protection for some employment claims. Of course, the best protection of all is to have good policies and practices in place, stay familiar about employment matters, and consult with employment counsel early and often when potential issues arise. Here again, a proactive, preventive approach will go far in limiting costs, exposure and liability.

If you have questions about EPLI or factors to consider in purchasing EPLI, please contact Fred Gants at (608) 283.2618 /, Craig O'Loughlin at (602) 230-4613 / or your Quarles & Brady LLP attorney.