Don’t Lose Your Employment Practices Liability Insurance.
Coverage May Depend on Disclosure of Prior Claims in the Policy Application, and Timely Notice of Claims During the Policy Period.
Employment practices liability (EPL) insurance may provide coverage for claims of sexual misconduct in the workplace, the potential for which may be on the minds of employers in light of the #metoo movement, as well as claims of employment discrimination and wrongful termination. However, as two recent cases demonstrate, coverage may depend both on the employer disclosing prior claims and circumstances in the application and on timely notice to the insurer of claims made during the policy period.
In Summers v. Scottsdale Indem. Co., 2016 WL 1268295 (W.D. Ky. 2016), an employee who had sued her employer for sexual harassment learned that the employer’s EPL insurer, after initially providing the employer with a defense, had rescinded the policy in exchange for a return of premiums paid. The rescission of the policy was the result of the settlement of a separate coverage action filed by the insurer after it learned that the employer had failed to disclose in its policy application two prior lawsuits against it involving sexual misconduct. The employee sued the insurer seeking a declaration that the policy covered her claim. The court concluded that, under Kentucky law, the employee had no standing to sue the insurer in the absence of a judgment against the policyholder. The court went on to observe that, even if the employee had standing, her argument, that the insurer had waived its right to rescind the policy by failing to reserve its right to rescind when it undertook the insured’s defense, was incorrect. Under Kentucky law, the insurer had no duty to investigate the employer’s claims history in the absence of actual knowledge of irregularities in the application, and did not waive its right to rescind by failing to conduct such an investigation before undertaking the policyholder’s defense.
In John Hiester Chrysler Jeep, LLC v. Greenwich Ins. Co., 2017 WL 6210897 (E.D. N.C. 2017), the policyholder failed to timely report two Equal Employment Opportunity Commission charges. The court concluded that because the EEOC charges were made during the policy period of the plaintiff’s EPL policy, but not reported to the insurer within the policy period or sixty days thereafter as required by the policy, the claims were barred from coverage. The court held that because the policy provided “claims made and reported” coverage, the insurer was not required to show prejudice from the late notice in order to deny coverage. The policyholder argued that, because the insurer did not immediately appoint counsel for a third EEOC charge that was timely reported, notice of the other two charges would have been futile, or was waived by the insurer. The court disagreed, noting that, although the policy required the insurer to defend administrative proceedings as well as suits, the insurer’s failure to immediately appoint counsel for the third charge happened after the time for notice of the two claims at issue in the case already had expired, and did not affect the obligation to give notice of the earlier claims.
Businesses purchasing EPL coverage should be aware that non-disclosure of prior claims may result in rescission of the policy or the absence of coverage. In addition to prior claims or suits, an application for EPL coverage will typically ask for disclosure of any facts or circumstances that reasonably could give rise to an EPL claim. Rescission on this basis, or application of a prior knowledge condition or exclusion to bar coverage, may, depending on the jurisdiction, have a subjective component that makes these coverage defenses less straightforward than the failure to disclose a prior claim or suit.
Disclosure of prior claims and incidents will not necessarily result in the rejection of an application for coverage, although it will likely increase premiums, and known claims and incidents will be excluded from coverage. Because many claims of sexual misconduct include allegations of a hostile work environment, prior claims and incidents are likely to be the subject of discovery when a new claim is litigated, so a failure to be thorough in completing the application is likely to come to light if there is a new claim.
For businesses with EPL coverage in place, it is important to keep in mind that “claims made and reported” notice requirements, which are typical for EPL policies, are strictly enforced in most jurisdictions. Involving the human resources department in the application process, and making sure it is aware of the need for timely reporting of both suits and administrative charges (in the EEOC and state civil rights agencies) may lower the risk of coverage problems.