In this second of his two-part guest post, attorney Brit Weimer continues to help us uncloak the mystery that surrounds Employment Practices Liability [“EPL”] insurance and what triggers an employer’s obligation to report a claim to its carrier.  You can read the first of his postings on EPL insurance by clicking here.

As a general matter, EPL coverage protects employers from liability for wrongful employment practices and most EPL policies cover claims for sexual harassment, discrimination, and wrongful termination.  EPL policies became popular in the mid-1990s after the surge in lawsuits that followed the passage of the Civil Rights Act of 1991, which gave employees the option of trying their claims to a jury instead of a judge, and which provided for both compensatory and punitive damages for certain employment practices violations.

Brit is an attorney with over 25 years of commercial litigation experience and the co-author of Employment Practices Liability (National Underwriter, Second Edition 2012).  He is also a founding partner in the law firm of Jones Satre & Weimer PLLC in Bloomington, Minnesota.  I’ve included a link to his bio at the end of his blog and also a link to the book he wrote.

EPL Insurance (Part 2):  Practical Claims-Reporting Issues

By Britton D. Weimer, Esq.

“The insurer really expected all that claims information?”

Employers who are new to the Employment Practices Liability (“EPL”) policy are often surprised by the claims information the insurer requires – and how promptly it must be reported.  This sensitivity to timely claims reporting flows from the fact that most EPL insurance is written as “claims made” (or “claims made and reported”) insurance.

“Claims made” insurance triggers coverage when the claim is made against the insured and reported to the insurer.  This is in contrast with the more traditional “occurrence” coverage (contained in most CGL policies, for example).  Occurrence coverage triggers coverage at the time of the occurrence … which can years or even decades before the claim is asserted against the insured.

Claims-made insurance is common with professional coverages, such as errors and omissions (E&O) and directors and officers (D&O) policies.  It makes those coverages more affordable, because the insurer’s exposure is limited to a fixed period of time.  However, it does require the insured to be more attentive to promptly reporting actual and prospective claims.

Employers often get tripped up in three areas of reporting:  (1) disclosing potential claims on applications, (2) reporting informal claims, and (3) reporting claims within the policy period.  These three issues are discussed below:

Potential Claims on Applications

Most EPL applications ask you to identify any facts that may lead to an employment practices claim, or words to that effect.  This “potential claims” question is common with claims-made policies.  But it can be a trap for unwary employers, who are not used to seeing such a probing question in occurrence applications.  Failure to disclose may result in the denial of coverage if a claim is actually made.

Depending upon the specific application language and the law of the state, these questions may be limited to potential claims actually known to the employer (a subjective test), or they may include potential claims a careful employer “should” know about (an objective test).  Because the subjective vs. objective issue is often not resolved until litigation, it is safer for the employer to assume that the broader (objective) standard will be applied.  Ideally this means the employer should have all upper management (including the CEO, HR VP and Corporate Counsel) review the application to ensure that all potential employment claims are disclosed.

Informal Claims

Most EPL policies define a claim as a “suit” or “demand” made by a current, former or prospective employee.  Often “suit” is defined broadly to include both a traditional lawsuit and an administrative claim (such as a charge filed with the EEOC).  Often “demand” is defined to include any written request for monetary or nonmonetary relief.  Thus, “claim” can include a lawsuit, an administrative proceeding, or a demand letter prior to any legal proceedings.  (As always, examine the particular policy language.)

Many employers do not realize that a demand letter or e-mail can be a “claim” that must be timely reported to preserve coverage.  And sometimes employers are unsure if an informal communication from an employee is really a “demand” or just a general complaint about working conditions.

When is an e-mail complaint a “claim”?  The key elements of an informal claim are (a) an allegation of discrimination or another wrongful act, and (b) a request for some relief.  For example, under most EPL policies, there is a claim if an e-mail states “I was fired for refusing my supervisor’s advances, and I need compensation.”  (Sexual harassment and requested relief)  Conversely, under most policies, there is no claim if an e-mail states “My supervisor is too demanding, and is making life miserable for everyone.”  (No discrimination or other wrongful act, and no request for relief)

What about a borderline case, such as an e-mail that states “This is a racist workplace,” but requests no action or relief?  When in doubt, forward it to the insurer!

Reporting During Policy Period

Most EPL policies require the employer to report claims to the insurer during the policy period.  (For an additional premium, most allow claims to be reported during a fixed extended-reporting period after the policy term expires.)

Often employers wait to report employment claims, hoping to resolve them inexpensively and informally by negotiating directly with the employee.  And employers sometimes delay in reporting a claim because they are evaluating if the claim would be covered by the policy.  However, delay is risky with EPL insurance.

In most EPL policies, the timely reporting of a claim is a condition precedent to coverage.  This means it is an absolute requirement – a threshold that must be crossed before the potential of coverage emerges.  (This is in contrast with occurrence policies, where in most cases coverage is denied only if the insurer can demonstrate prejudice from the delay.)

Thus, when in doubt, the employer should submit the claim promptly to the EPL insurer.  The ball is then in the insurer’s court.

Conclusion

EPL insurers insist on the timely reporting of claims.  And courts will usually deny coverage if an employer failed to timely report a claim.  Thus, it important for employers to have a responsible person assigned to report claims – a person who knows the requirements of the particular EPL policy, and who does not procrastinate!

If you are uncertain whether a true “claim” has been made, it is prudent to report it to the insurer.  Good EPL insurers do not penalize employers, through increased premiums or cancellation, if there is no actual claim.  So work with your broker to find a good insurer!

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You can learn more about Brit by checking out his bio by clicking here.

You can get a more detailed analysis of EPLI coverages and exclusions in Chapter 1  Brit’s book Employment Practices Liability:  Guide to Risk Exposures and Coverage (National Underwriter, Second Edition 2012).  Here is a link to where you can buy the book.

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