The First Wave of Decisions Interpreting Employment Practices Liability Policies By Barbara A. O’Donnell ou are in-house counsel for a manufacturing company with a national sales and distribution force aided by more than 150 employees and independent contractors. Over the past 20 years, the Y company has grown from a small operation, manufacturing only one product, to a midsize company offering a wide range of cus- tomized widgets. Today, Susan Brown, the vice president of sales, submitted a letter of resignation. In it, Susan claims that she has been forced to leave because the recently hired CFO has been “edging her out” by shifting several of her key responsibilities to Joe, the regional sales director who accompanied the CFO when he joined the company, and by excluding her from strategic decisions and important client meetings. Susan insists that the CFO embarked on his efforts to force her out after she complained about his imple- mentation of what she views as questionable accounting practices. Susan also claims that the new bonus structure, implemented about a year ago, violates the incentive compen- sation terms contained in the employment contract she signed in 1991, when she first joined the company. The president of the company is concerned that Susan will sue. He wants you to investigate and line up supporting witnesses. He also wants to know if the company has insurance coverage for her suit. What do you tell him? Variants on this situation have heightened risks that small and quate when applied against the become increasingly prevalent over large companies now face. Before broad range of claims and damages recent years. An explosion of the arrival of EPL, employers sought in employment practices employment practices liability sought coverage under their exist- claims. Designed to fill the gaps claims—presenting some combina- ing general liability insurance, left by other types of coverage, EPL tion of the constructive discharge, directors and officers liability policies provide employers with a whistle-blower, retaliation, dis- insurance (D&O), workers’ com- broad range of defense and indem- crimination, contract, and statu- pensation, and employer’s liability nification coverage for the most tory claims alluded to above—led policies for protection against prevalent types of discrimination, the insurance industry to develop employee suits. More often than retaliation, and wrongful discharge employment practices liability not, these traditional sources of claims brought under common-law insurance (EPL) to meet the insurance coverage proved inade- and statutory theories, subject to Volume 35 • Number 1 • Fall 2005 • American Bar Association • The Brief “The First Wave of Decisions Interpreting Employment Practices Liability Policies” by Barbara A. O’Donnell, published in The Brief, Volume 35, No. 1, Fall 2005 © 2005 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion 1 thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. potential exclusions for certain the company delayed in providing comprehensive protections or an types of relief, such as punitive notice of Susan’s claim, perhaps endorsement to D&O or other pol- damages, fines, or penalties. because it wanted to negotiate a sep- icy forms that may offer more Over the past decade, more and aration agreement with her? What if restricted coverages. Businesses more employers have added EPL to the company knew of the potential whose employees frequently deal their insurance portfolio. The exposure to claims arising out of its with third parties, including cus- increasing reliance on EPL appears accounting practices when it tomers or vendors, outside of the justified. The Equal Employment and applied for EPL but replied “none” workplace can purchase third-party Opportunity Commission (EEOC) when asked in the insurance appli- endorsements that extend EPL reports that it received 79,432 new cation to disclose any circumstances coverages to harassment or other Title VII, Americans with that might be reasonably expected claims arising out of the employees’ Disabilities Act, Age Discrimination to give rise to claims. As with any interactions with these third par- in Employment Act, and Equal Pay other form of insurance, disputes ties. Companies that depend on Act charges in fiscal year 20041 and over the scope and meaning of EPL nontraditional workers, such as awarded monetary benefits totaling policy provisions and exclusions are independent contractors or con- $168.1 million during that year.2 inevitable. Because EPL insurance sultants, need to make sure their Even though EPL has gained wide- remains relatively new, however, policy encompasses claims by and spread use, the policy forms continue courts and practitioners have had to against these persons. to vary in important respects with rely on decisions concerning other Given these variations, it is not the result that employers and their types of policy forms when address- surprising that several EPL deci- advisors must carefully review the ing disputes under EPL policies. sions concern disputes over the EPL policy in conjunction with any With EPL insurance now gain- scope of the basic coverage grant other sources of insurance to ensure ing widespread use by companies of or insuring clause in the applicable that coverage for the specific types of all sizes across a host of industries, policy form. The dispute in Peoples risks faced by that business is as com- courts are starting to adjudicate Mortgage Corp. v. Kansas Bankers prehensive as possible. disputes under these types of poli- Surety Co.3 concerned an EPL pol- In the scenario above, for exam- cies. By reviewing these decisions, icy purchased in 1999 that covered ple, the company’s EPL policy would employers, their counsel, and risk related banking entities in Kansas, probably provide defense and managers can gain useful insights Colorado, and New Mexico. The indemnification coverage for any into important ways to avoid sig- policy’s liability limit was $250,000 retaliation, constructive discharge, nificant coverage gaps and maxi- for all loss, including defense costs. whistle-blowing, and gender dis- mize the protections offered by Using novel language drafted by crimination claims but might not EPL policies. While there may be the insurance company president cover the contract claim, depending no surprises in the emerging body and vice president, the policy on whether the EPL policy contains of EPL decisions for those familiar stated that the insurer would a common exclusion for breach of with coverage doctrines developed defend and indemnify the bank contract claims. Even if coverage through judicial interpretation of “for up to a maximum of one year was available for the range of claims D&O or other types of wrongful of claimant’s salary which the posed by this scenario, the policy act or errors and omissions policies, Bank is legally obligated to pay by might contain limitations on the it is useful to examine how courts reason of any actual or alleged type of relief covered and might apply these concepts when inter- Wrongful Act arising out of the exclude (or provide sublimits for) an preting EPL policy terms, condi- Employment Claim first filed award of punitive damages. What if tions, and exclusions. against the Bank during the Policy Susan sought to recover the value of Period.”4 The policy defined stock options? How would coverage Basic EPL Insuring “employment claim” to include vary if the claims were brought by, Clause Disputes civil or arbitration proceedings or against, an independent contrac- Insurers offer a wide range of EPL brought by past or present employ- tor rather than an employee? What products, with options to purchase ees for any wrongful act, as obligations would the insurer have if a stand-alone policy offering more defined, in connection with an Volume 35 • Number 1 • Fall 2005 • American Bar Association • The Brief “The First Wave of Decisions Interpreting Employment Practices Liability Policies” by Barbara A. O’Donnell, published in The Brief, Volume 2 35, No. 1, Fall 2005 © 2005 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. actual or alleged wrongful dis- salary.6 In reaching this conclusion, implied covenant of good faith and missal, breach of a verbal or writ- the court noted that the policy also fair dealing, as well as for breach of ten employment contract, afforded coverage for claims the contract; and (2) the award workplace harassment, failure to brought by former employees and included damages for stock options promote, or wrongful discipline. applicants, and explained that granted to the employee in a para- The bank sought coverage for damages awarded to those graph of his employment agree- $175,000 paid to settle a lawsuit claimants could never be “compen- ment that was separate from the brought by a former employee, sation for services rendered,” provisions addressing his annual Gomez, who sought to recover which was what the bank con- salary. Affirming summary judg- approximately $329,000 owed tended was meant by salary.7 The ment for the insurer, the Ninth under an alleged employment court also rejected the insurer’s Circuit Court of Appeals held that agreement that allowed him to contention that the policy at most the policy unambiguously excluded recover 150 percent of his taxable covered the payment of Gomez’s coverage for the arbitrator’s award income for the preceding year. $40,000 base salary and not the because it awarded damages proxi- While employed, Gomez had additional amounts paid in the set- mately caused by breach of the received a $40,000 annual salary tlement for commission income.