EMPLOYMENT PRACTICES LIABILITY INSURANCE: CURRENT ISSUES FACING EMPLOYERS, INSURERS AND LITIGATORS INTRODUCTION Employment Practices Liability Insurance gained prominence during the early 1990s following the passage of the Civil Rights Act of 1991. With the growth of employers liability for discrimination, retaliation, harassment, wrongful termination, and other, similar torts committed against employees (torts not involving physical injury and therefore not preempted by workers compensation), (not to mention the shaky ground the U.S.--and world--economy is on)demand has grown for Employment Practices Liability Insurance ( EPLI ). James B. Dolan Jr., The Growing Significance of Employment Practices Liability Insurance, GP Solo Magazine, Sept. 2005. Indeed, in 1991, only five (5) insurance carriers offered an EPLI product. Yet now, there are approximately fifty (50) active carriers in this market writing gross premiums totaling nearly 1.3 billion dollars. The demand for the EPLI product will likely continue to grow due to increasing case filings in many of the areas covered by EPLI insurance and the spiraling costs of defending such claims. EEOC charges for fiscal year 2007 increased in every category by double digits over 2006, and monetary relief obtained by the EEOC for 2007 was $345 million -- up twenty-six percent (26%) over 2006. Additionally, labor and employment disputes increasingly comprise a large percentage of new class action filings in federal and state courts. According to a recent Chubb survey, one (1) in three (3) employers experienced an EPLrelated event within the preceding five (5) years. During the same survey period, eighty percent (80%) of companies employing 500 or more employees had an EPL event. Despite that growing demand, there are only a handful of cases in which an appellate court has been asked to interpret such coverage. Many of the coverage disputes center on the exclusion for coverage of wage and hour and Fair Labor Standards Act ( FLSA ) disputes--a common exclusion in EPLI policies-- and the timing of the notice of a claim. NOTICE OF A CLAIM AND CLAIMS MADE POLICIES Many, if not all, EPLI policies are claims made policies. A typical policy will provide coverage for defense expenses and loss resulting from claims first made against the employer during the policy period for employment practices wrongful acts occurring subsequent to the retroactive date stated in the declaration and before the expiration of the policy period. If a
policy holder fails to provide the required notice of a claim, the insurer may deny coverage. For example, in JanJer Enterprises, Inc. v. Executive Risk Indemnity Inc., 97Fed.Appx.410(4th Cir. 2004), the Fourth Circuit Court of Appeals, applying Maryland law, affirmed summary judgment for the insurer based on the insured s failure to provide timely written notice of its receipt of a sexual harassment suit after the claim was first made. The Policy defined the term Claim to mean: any written notice received by [Janjer] from any current or former Employee... or from any person or entity acting on behalf of such a current or former Employee... including but not limited to the Equal Employment Opportunity Commission... that a current or former employee... intends to hold [Janjer] responsible for an Employment Practices Wrongful Act. The term Claim was also defined to include any judicial, administrative or other proceeding against [Janjer] by a current or former Employee... for an Employment Practices Wrongful Act. Id. at 157 (emphasis omitted). The term Employment Practices Wrongful Act was defined as any actual or alleged: (1) Wrongful Termination; (2) Discrimination; (3) Harassment; (4) Retaliation; or (5) Workplace Tort. Id. at 158 (emphasis omitted). The Fourth Circuit rejected the insured s argument that the insurer was required by Maryland law to show prejudice to deny coverage based on a late notice defense. Specifically, the JanJer Enterprises Court held that the policy expressly stated that compliance with the notification of claim provision was a strict condition precedent to coverage. Furthermore, the Court held that the insured s identification of the pending EEOC claim on a policy renewal application did not satisfy the policy s reporting requirement because it was submitted to an agent at the insurer--the policy specifically required the notice to be sent to the vice president of claims. Similarly, in St. Paul Reinsurance Co. v. Williams & Montgomery, Ltd., 2001 WL 1242891 (N.D.Ill. 2001), the insured argued that its EPLI insurers could not rely on a late notice defense to deny coverage unless it could demonstrate that it was prejudiced by the failure to comply with the policy s reporting requirements. The court rejected this argument, holding that compliance with the reporting requirements in a claims-made policy is a condition precedent to coverage. 2
So, what is a claim, and when does the insured have notice of a claim? In MedPointe Healthcare Inc. v. Axis Reinsurance Co., 2009 WL 901959 (D.N.J. 2009), the insured sought coverage for a suit alleging disability and race discrimination by a former employee. The policies at issue (the insured had two separate EPLI policies) provide that all claims must be reported as soon as practicable after any of the Policyholder's Executive Officers first becomes aware of such Claim, but in no event later than sixty (60) days after the expiration of the Policy Period. An Employment Practices Claim, was defined as (1) a written demand against any Insured for monetary damages or other relief, (2) a civil proceeding against any Insured commenced by the service of a complaint or similar pleading, (3) a formal, administrative, investigative or regulatory proceeding by or before the Equal Employment Opportunity Commission (EEOC) against any Insured commenced by a notice of charges, formal investigative order or similar document. In this case, the former employee sent the insured a letter for days after her termination. The letter provides: In conclusion, I find it greatly disturbing that my seventeen years of employment have ended with such abruptness and so out of my control. Please reconsider your position. I request reinstatement to my original position and territory. The former employee filed an EEOC charge, which was dismissed, and later filed suit against her employer in federal district court. The insurer denied coverage for the claim because the insured did not provide notice of the claim until after it received the former employees federal complaint. It argued that the insured should have provided notice after it received the former employee s letter, and certainly after it received notice of the EEOC charge. The United States District Court for the District of New Jersey denied the insurer s motion for summary judgment. The district court pointed out that the letter outlined the work the former employee had most recently performed and tried to justify her significant absence. It is only in the last two lines of her letter that the former employee requested that the insured reconsider her termination. According to the district court, [t]he letter does not request damages or insinuate that a claim for discrimination is being made. Furthermore, nowhere in the letter does the former employee allege that her termination was wrongful, only that it be reconsidered. The insured argued that because the letter was faxed to the insured by a lawyer, the letter is adversarial in nature and should be seen as a written demand under the policies. The lawyer, however, was the former employee s husband. Given 3
the relationship between Ms. Smith and her attorney/husband, genuine issues of material fact exist as to both the nature of the letter and if Ms. Smith actually obtained legal counsel, and summary judgment was inappropriate. As to the EEOC charge, the insured first became aware of a claim on or around August 16, 2004 by letter that informed it of an EEOC Charge, and the letter provided that [n]o action is required by you at this time. Soon after, by letter dated September 24, 2004, the EEOC again contacted the insured, this time to inform it that the former employee s charge was dismissed and that the EEOC was closing its file on the charge. According to the district court: [f]rom these facts, a reasonable executive may surmise that [the former employee s] claim had been decided against her. There is a genuine dispute as to whether Medpointe was obligated to report this claim in light of its dismissal. The brevity of the EEOC investigation combined with the language used to communicate the existence of the EEOC Charge and its quick dismissal create a question of fact as to whether MedPointe failed to satisfy a duty to report. Thus, the district court denied the insurer s motion for summary judgment. In similar fashion, the court in SNL Financial, LC v. Philadelphia Indem. Ins. Co., 2009 WL 3150870 (W.D.Va. 2009) denied the insurer s motion for summary judgment in a dispute between it and the insured regarding coverage for a discrimination lawsuit under its EPLI policy. The dispute centered around the insurer s notice of the claim. The Defendant issued an insurance policy (the policy ) to the Plaintiff for the period from August 1, 2008 to August 1, 2009. This policy was a renewal of a policy with substantially identical insuring provisions for the previous year. The policy covers losses (including damages and defense costs) from claims made against the Insured during the Policy Period... and reported to the Underwriter pursuant to the terms of this Policy, for an Employment Practice Act. An Employment Practice Act includes, inter alia, violations of employment discrimination laws. The policy defines a claim, in applicable part, as: (1) a written demand for monetary or non-monetary relief; (2) a judicial or civil proceeding commenced by the service of a complaint or similar pleading; (3) an EEOC Charge. The policy provides that a claim is made when an Insured first received notice of the 4
Claim. The policy further provides that in the event a claim is made against the Insured, it must provide notice of the claim to the Defendant as soon as practicable. The president of the insured received a letter dated January 18, 2008 from an attorney on behalf of on of its former employees. The letter stated Schwartz s desire to meet with insured to discuss certain discriminatory conduct that occurred during the course of the former employee s employment and his termination. The insured s Chief Talent Officer, Michael Latsko, sent an e- mail on January 23, 2008 to Sean Gibbons, an attorney who specializes in labor and employment law at the firm of Williams Mullen in Richmond, attaching the January 18, 2008 letter. The e- mail was titled Stephen Greenberg Legal Action. Mr. Gibbons also sent an email titled Litigation Hold, instructing the insured to preserve all evidence which might be relevant to Greenberg's potential claims. Furthermore, the insured received another letter from Greenberg s counsel dated January 25, 2008, which reiterated the desire for a meeting to pursue a possible amicable resolution of the issues. The United States District Court for the Western District of Virginia nevertheless held that the letters were not notice of a claim under the policy. The district court specifically stated that [t]he nature of the correspondence between Schwartz and SNL does not constitute a written demand for monetary or non-monetary relief. Indeed, the district court specifically pointed out that the former employee s unwillingness to provide a written copy of the draft complaint, or to even relay by local counsel a demand to the insured, demonstrates that the insured had in fact not received any written demand for relief. Moreover, the letters lacked specificity. And, for whatever unknown reason, the former employee seemed to go out of his way to prevent insured from obtaining knowledge of what his potential claims might be. The district court further held that [a]lthough [the insured] did receive an oral settlement demand, that oral demand is not a written demand as defined by the policy. WAGE AND HOUR CLAIMS EPLI policies routinely exclude claims under the FLSA or similar wage and hour claims. This is a relatively important issue for employers with EPLI policies because wage and hour claims are on the rise across the country and can end up being big dollar class actions or (or collective actions under the FLSA). And with the requirement of many wage and hour laws that the statues be construed liberally in favor of employees, such suits can result in large losses for employers. This has lead to legal battles between employers and their EPLI providers. 5
In Payless Shoesource, Inc. v. Travelers Companies, Inc., 569 F.Supp.2d 1189 (D.Kan. 2008), the insured sought coverage for a wage and hour class action filed under the California Labor Code by current and former employees who alleged that they were improperly required and/or allowed to work off the clock, without compensation. Subject to its terms, conditions, limitations and exclusions, the policy at issue provided the following coverage: The Insurer shall pay on behalf of the Insureds Loss for which the Insureds become legally obligated to pay on account of any Claim first made against them, individually or otherwise, during the Policy Period or, if exercised, the Discovery Period, for a Wrongful Employment Practice taking place before or during the Policy Period. The policy also contained the following exclusion: The Insurer shall not be liable for Loss on account of any Claim made against any Insured...foranactualorallegedviolationof the Fair Labor Standards Act (except the Equal Pay Act), the National Labor Relations Act, the Worker Adjustment and Retraining Notification Act, the Consolidated Omnibus Budget Reconciliation Act of 1985, the Occupational Safety and Health Act, the Employee Retirement Income Security Act of 1974, any workers compensation, unemployment insurance, social security, or disability benefits law, other similar provisions of any federal, state, or local statutory or common law or any amendments, rules or regulations promulgated under any of the foregoing; provided, however, this exclusion shall not apply to any Claim for any actual or alleged retaliatory treatment on account of the exercise of rights pursuant to any such law, rule or regulation. The United States District Court for the District of Kansas granted the insurer s motion for summary judgment. It ruled that the above exclusion was unambiguous, and excluded coverage for the claims alleged on its face. Specifically, the district court found that the 6
exclusion excludes from coverage actual or alleged violations of a number of specific laws. The language of the exclusion first lists six specific federal laws and then a seventh item-a category of laws, any workers compensation, unemployment insurance, social security, or disability benefits law. Plaintiff argued that the qualifying language at the end of this series, other similar provisions of any federal, state, or local statutory or common law or any amendments, rules or regulations promulgated under any of the foregoing, refers only to the seventh item of the series. The district court held, however, that the provision applied to all seven items. The modifier follows the list of items in the series, which strongly suggests that it applies to all items and not just the immediately preceding item. Furthermore, and most importantly, the modifier contains the language, any of the foregoing. According to the district court, [t]he plain meaning of this language, which would be apparent to any reasonably prudent insured, is that the modifier applies to each item in the preceding series listed in Exclusion No. 3. Hard news for the insured, as the members of the class approached 300 individuals. Andagain, innoxubee County School District v. United National Insurance Co., 883 So.2d 1159, 1161 (Miss. 2004), the Supreme Court of Mississippi affirmed the trial court s grant of summary judgment in favor of the insurer holding that the EPLI policy did not cover claims under the FLSA because an employer s deliberate decision not to compensate its employees for overtime pay did not qualify as a wrongful act or wrongful employment act under the relevant EPLI policy. The policy defined wrongful act as follows: [A]ny actual or alleged errors, misstatements, misleading statements, acts or omissions, neglect or breach of duty, individually or collectively including actual or alleged violations of civil rights protected under 42 U.S.C. 1981 et. seq., or any similar federal, state or local laws, or any matter claimed against an INSURED solely by reason of their being or having been INSUREDS which were committed solely in the performance of duties for the EDUCATIONAL ENTITY. The Noxubee County Court held in unequivocal terms that the insured s deliberate decision not to compensate its employees for overtime pay is neither a wrongful act nor a wrongful 7
employment act within the definitions under this policy... such a deliberate decision would certainly not give rise to coverage under these facts before this Court. This not being enough, the Court also held that even if the plaintiffs FLSA claims were deemed to assert wrongful acts or wrongful employment acts, the EPLI policy s unambiguous exclusion for claims seeking back wages, overtime or future wages defeated coverage. This could create an interesting conundrum for employers. EPLI policies arose in part because of the gap left by Director s and Officer s Liability Policies ( D &O Policy ). In most situations, neither directors or officers are sued in your typical discrimination, harassment or wrongful termination suit. That is not always the case in wage and hour suits. For example, the West Virginia Wage Payment and Collection Act, W. Va. Code 21-5-1 et., seq., provides for personal liability for partners, shareholders, officers and directors in suits to recover unpaid wages. The same is true for many wage and hour laws, including the FLSA. As such, were the EPLI policy was meant as a gap-stop for the rising prevalence of anti-discrimination suits in the early 1990 s, the contra may be true (depending on the policy) for D & O Policies in the current era of wage and hour lawsuits. 8