January 1, 1900

by Gerard H. Hanson

One need not be a lawyer to recognize the impact that disputes between employers and their employees has had on the world of litigation. Rarely does a week pass where either a national or local newspaper is not reporting on an employment discrimination claim filed by an employee against his or her employer- be it at the highest levels of corporate America, federal, state or local government, or charitable organization. In response to the increased volume of employment litigation, employers have developed policies prohibiting harassment and discrimination, as well as training programs to sensitize their employees to avoid conduct that may create hostile work environments for other employees. Notwithstanding these efforts by employers, lawsuits have arisen, and will continue to do so into the future. When the lawsuit does come, the most compelling question for the employer is whether or not the specific claim is covered by insurance. This article is intended to briefly identify what coverages may be available.

Employment Practices Liability Insurance

As a response to the increased volume of employment-related litigation, the insurance industry commenced underwriting and issuing Employment Practices Liability (EPL) policies in the early 1990’s. Since EPL coverages are not regulated by federal or state statute, each policy issued by each carrier may be different from the other. Thus, buying an EPL policy does not guarantee that any claim brought by an employee will be covered. Notwithstanding this caveat, EPL insurance will typically cover employers against claims of wrongful discharge and employment discrimination, which would include the most talked about offense of sexual harassment. EPL policies may also typically cover claims for retaliation, demotion, and failure to promote. Also typically covered are ancillary causes of action that accompany an employment discrimination suit such as defamation and/or invasion of privacy. While I have stated above that the aforementioned claims are "typically" covered, the issue for the reader is whether your policy covers these claims.

A secondary analysis to be conducted by policyholders procuring EPL coverage is "who" is covered. Once again, there are no statutory mandates. However, as a general rule, EPL insurers will typically cover the corporate entity, its directors and officers, as well as senior management. Most policies will also cover the individual employees who may be the target defendants. In other words, the individual engaging in acts of employment discrimination, whether it be with or without knowledge of the senior management of the company, is probably entitled to insurance coverage under an EPL policy.

With respect to the insurer’s "duty to defend," EPL policies may differ from Commercial General Liability (CGL) policies. With CGL insurance, the carrier will almost always assign its own attorneys to defend and thereby control the litigation. However, with EPL policies, the policyholder may have the right to select their own attorney, which law firm’s fees may be reimbursed by the insurer. However, the payment of defense fees to the insured’s attorneys may deplete the limits of the EPL coverage.

EPL policies also have exclusions. For example, punitive damages will almost always be disclaimed by the insurance carrier. Certain intentional conduct may also be excluded, as well as conduct that may have occurred outside the course of the insured’s employment relationship. For example, alleged acts of sexual harassment that may occur at a gathering of employees at a Friday night Happy Hour may or may not be subject to exclusions in the policy.

Surprisingly, there has been very little case law interpreting Employment Practices Liability policies. Thus, to the extent that disputes may exist between policyholders and their insurers concerning the interpretation of the scope of coverage in an EPL policy, neither the carrier nor the insured will find any specific guidance on the issue.

Workers’ Compensation Insurance

In August 1998, the New Jersey Supreme Court handed down a landmark decision in Schmidt v. Smith, 155 N.J. 44 (1998). In the simplest of terms, the Supreme Court mandated that any insurer issuing Workers’ Compensation insurance in New Jersey must defend and indemnify its policyholders to the extent that a lawsuit has been filed asserting a claim for wrongful discharge/employment discrimination that seeks damages for "physical manifestations of emotional distress." Perhaps by way of oversimplification, to the extent that an employee suing his/her employer for employment discrimination seeks recovery for headaches, heart palpitations and/or diarrhea, the Workers’ Compensation insurer has a duty to defend and indemnify this suit. However, no duty exists to the extent that the emotional distress claim seeks recovery of emotional distress unaccompanied by physical manifestation, e.g., sleeplessness and humiliation.

Notwithstanding the landmark decision in Schmidt v. Smith, there are limits to the Workers’ Compensation’s insurer’s duty to cover employment discrimination. For example, the carrier has no obligation to cover economic loss, including back pay and front pay. Nor is there a duty to cover punitive damages. As also noted above, there is no duty on the part of the carrier to cover claims for "pure" emotional distress. Most carriers will also seek to limit their duty to defend suits by allocating defense costs between covered and non-covered claims. For example, if a plaintiff seeks both economic loss and emotional distress accompanied by physical manifestations, the insurer may pay only a percentage of the insured’s counsel fees.

To the extent that an insured has both Employment Practice Liability insurance and Workers’ Compensation insurance, disputes will frequently result between the EPL insurer and the workers’ compensation insurer as to each carrier’s respective obligation to defend and/or indemnify the policyholder. By way of example, the EPL carrier may have a duty to defend all claims; whereas the Workers’ Compensation carrier’s duty is limited to physical manifestations of emotional distress. While the EPL carrier will defend the entirety of the suit, the EPL insurer may litigate with the workers’ compensation insurer for reimbursement with respect to the physical manifestations of emotional distress claim.

Due to the lack of case law, issues addressing what coverage may exist for employers sued for wrongful discharge and/or employment discrimination is a particularly difficult area of the law to predict. The best way for an employer/ policyholder to avoid the traps of coverage litigation is to purchase the best EPL coverage available in the marketplace. Thus, when shopping for EPL coverage, an analysis of the terms, conditions and exclusions of the policy is essential. If one shops EPL coverage by premium alone, you may get what you pay for. Be careful-you want to know you are covered if the lawsuit arrives on your desk!

Gerard H. Hanson is a partner of Hill Wallack and partner-in-charge of the Trial & Insurance Practice Group. He has a practice concentration representing insurance companies in defense of diverse claims.