INSURANCE COVERAGE FOR EMPLOYMENT CLAIMS UNDER CGL, WORKERS’ COMPENSATION, D&O AND EPLI POLICIES

By

JOHN H. DENTON

©2001 Connell Foley LLP

  1. Coverage Under CGL Policies

    1. Coverage Part: "Bodily Injury"; "Property Damage"; and "Personal Injury"

      2. Employment practices claims will be covered only if they seek damages "because of ‘bodily injury’ or ‘property damage’". Policies also may include "personal injury coverage".

      1. Bodily Injury: "Physical Manifestation" Required

        1. New Jersey requires "physical manifestation":

          2. SL Industries, Inc. v. American Motorists Ins. Co., 128 N.J. 188, 201, 607 A.2d 1266, 1273 (1992) (Court held that purely emotional distress sought in age discrimination case did not constitute bodily injury.)

        2. Majority of jurisdictions require "physical manifestation":

          3. The "overwhelming majority of courts" hold that bodily injury does not include purely nonphysical, emotional and mental harm without any physical manifestation. AIM Insurance Co. v. Culcasi, 229 Cal.App.3d 209, 224, 280 Cal.Rptr. 766, 774 (Ct.App. 1991); Presidential Hotel v. Canal Ins. Co., 188 Ga.App. 609, 611, 373 S.E. 2d 671, 673 (Ct.App. 1988) (Court held that complaint for sexual harassment, which sought "mental damages", did not seek damages because of bodily injury. "[Bodily injury] does not include non-physical, emotional or mental harm."); Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 823 (Tex. 1997) ("severe mental pain . . . humiliation, embarrassment, fear, frustration, mental anguish" held not to constitute "bodily injury". Bodily injury "implies a physical, and not purely mental, emotional, or spiritual harm."); West American Ins. Co. v. Bank of Isle of Wright, 673 F. Supp. 760, 765 (E.D. Va. 1987) (Wrongful termination action in which plaintiff sought damages for, inter alia, injury to reputation and emotional distress. The court held that bodily injury does not cover purely emotional injury, with the court terming this the "prevailing rule".); Mutual Service Cas. Ins. Co. v. Co-op Supply, Inc., 699 F.Supp. 1438, 1440 (D. Mont. 1988) (Claims of "humiliation, pain, and mental and distress" are not "bodily injury" and do not trigger a duty to defend. The court, however, found that there was a duty to defend based on the conclusory allegation in the complaint that the claimant suffered "bodily injury".); Garvis v. Employers Mut. Cas. Co., 497 N.W.2d 254, 257 (Minn. 1993) (Allegations in the complaint of infliction of emotional distress do not constitute bodily injury "so as to trigger the insured’s duty to defend and to indemnify."); Washington v. State Farm Fire & Casualty Co., 629 A.2d 24, 26-27 (D.C. 1993) (injury to reputation held not bodily injury); National Cas. Co. v. Great Southwest Fire Ins. Co., 833 P.2d 741, 746 (Colo. 1992) (In an insurance coverage action involving a wrongful termination claim, court held that "majority of courts . . . have determined that it covers physical injury and does not include claims for purely nonphysical or emotional harm."); Knapp v. Eagle Property Management Corp., 54 F.3d 1272, 1284 (7th Cir. 1995) (Under Wisconsin law, a housing discrimination claim held not covered because bodily injury covers "only injuries with some physical component," which the court characterized as the rule in a "majority of courts".); Mellow v. Medical Malpractice Joint Underwriting Ass'n. of Rhode Island, 567 A.2d 367, 368 (R.I. 1989) (Emotional rather than physical harm held not to constitute "bodily injury".); Citizens Ins. Co. of America v. Leiendecker, 962 S.W.2d 446 (Mo.Ct.App. 1998) (Court held that bodily injury "refers to physical conditions of the body and excludes mental suffering or emotional distress."); Lapeka, Inc. v. Security National Ins. Co., Inc., 814 F.Supp. 1540 (D.Kan. 1993) (Wrongful termination action seeking damages because of emotional distress not covered as bodily injury.); Greenman v. Michigan Mut. Ins. Co., 173 Mich.App. 88, 92, 433 N.W.2d 346, 349 (Ct.App. 1988) (In sexual harassment case, bodily injury requirement not satisfied by "emotional distress", "mental anguish", severe anxiety", and "painful humiliation".); E-Z Loader Boat Trailers, Inc. v. Travelers Indem. Co., 106 Wash.2d 901, 908, 726 P.2d 439, 443 (1986) (Sex and age discrimination complaint seeking humiliation, mental anguish and emotional distress held not to satisfy requirement of "bodily injury."); National Fruit Product Co. v. Fireman’s Fund Ins. Co., 178 F.3d 1285 (4th Cir. 1999) (in a case involving sexual assaults, the court noted that the bodily injury requirement "covers physical injury to the body and not purely nonphysical or emotional harm. Moreover, allegations of physical or bodily contact does not necessarily imply bodily injury.").

        3. Minority of jurisdictions do not require physical manifestations:

        In a minority of jurisdictions, purely emotional injuries satisfy the requirement of "bodily injury." Lavanant v. General Acc. Ins. Co. of America, 79 N.Y.2d 623, 595 N.E.2d 819, 820-22, 584 N.Y.2d 744, (1992) (Court found that term "bodily injury" is ambiguous because it is defined to include "sickness and disease," which "to the average reader, may include mental as well as physical sickness and disease." As a result, court held that "mental injury alone is covered."); Leiendecker, 962 S.W.2d at 452 (Court opined that Levanant, supra, was "in the minority."); Loewenthal v. Security Ins. Co. of Hartford, 50 Md.App. 112, 436 A.2d 493 (Ct.Spec.App. 1981), cert. denied, 292 Md. 596 (1982) (Bodily injury includes "pain, suffering and mental anguish").

      2. Property Damage

        1. Employment Claims Not Property Damage:

        "Property damage" generally equates with "tangible property." Employment practices claims will not constitute "property damage" because the employment contract, and loss of salary and benefits due under the employment contract, are not considered "tangible property." Lapeka, Inc., 814 F.Supp. 1540 (Employment discrimination case held not to allege property damage.) Jefferson-Pilot Fire & Cas. Co., 839 F.Supp. 376 (Loss of earnings, loss of benefits, loss of earning capacity in a racial discrimination action held not to constitute property damage.).

      3. Personal Injury: Coverage Depends On Definition Of Personal Injury

        1. "Personal Injury" includes enumerated torts: "Personal injury" is typically defined to include certain torts.

        2. Employment Torts Are Often Not Included:

          3. Under some policies, the definition of personal injury does not specifically include, and would not provide coverage for, employment related torts. For instance, in Foxon Packaging Corp. v. Aetna Cas. and Sur. Co., 905 F.Supp. 1139 (D.R.I. 1995), a case involving racial discrimination, the court in Foxon Packaging Corp. rejected the insured’s effort to characterize the cause of action for racial discrimination as personal injury under the policy, noting that this "would require this court to jam a square peg into a round whole." Id. at 1144.

        3. Definition Of Personal Injury May Include Employment Claims:

          1. Discrimination: Liability policies, however, sometimes contain a definition of personal injury that includes employment related claims. Town of South Whitley v. Cincinnati Ins. Co., 921 F.2d 104 (7th Cir. 1990) (Definition of personal injury in the policy included "discrimination or humiliation."); City of Muncie v. United Nat. Ins. Co., 564 N.E.2d 979 (Ind.Ct.App. 1991) (Policy contained definition of personal injury that included "discrimination."); Clark-Peterson Co., Inc. v. Independent Ins. Associates, Ltd., 492 N.W.2d 675 (Iowa 1992) (Personal injury defined to include "discrimination."); North Bank v. Cincinnati Ins. Co., 125 F.3d 983 (6th Cir. 1997) (decided under Michigan law, the liability policy contained a definition of personal injury that specifically included "discrimination," and was held to cover an employment discrimination claim); Missouri Property and Cas. Ins. Guar. Ass'n. v. Petrolite Corp., 918 S.W.2d 869 (Ct.App. 1996) (the definition of personal injury included "racial, religious, sex or age discrimination.").

          2. Claims In Addition To Discrimination. Some liability policies include a definition of personal injury that includes employment claims in addition to discrimination. For example, the definition of personal injury in Melugin v. Zurich Canada covered "discrimination, racial or religious discrimination and/or violation of civil rights, humiliation, sexual discrimination. . . ." 50 Cal.App.4th 658, 663, 57 Cal.Rptr.2d 781, 783 (Ct.App. 1996).

    2. Exclusions

      1. Occurrence and Intentional Acts Exclusion

        1. Intentional Acts Exclusion:

          2. Some policies contain a specific exclusion for intentional acts that provides that the policy "does not apply to . . . . ‘[b]odily injury’ or ‘property damage’ expected or intended from the standpoint of the insured."

        2. Requirement of an Occurrence:

          3. Even if a liability policy does not contain an intentional acts exclusions, most liability policies cover an "occurrence," which requires that the bodily injury, property damage, or personal injury be "neither expected nor intended from the standpoint of the insured." E-Z Loader Boat Trailers, Inc. v. Travelers Indem. Co., 106 Wash.2d 901, 904, 726 P.2d 439, 441 (1986).

        3. Focus on subjective intent of the actor.

          4. Vorhees v. Preferred Mut. Ins. Co., 128 N.J. 165 (1992). When a person acts intentionally but does not intend for his actions to cause injury, the act will still be considered accidental under the terms of a liability policy.

          SL Industries v. American Motorists Ins. Co., 128 N.J. 188 (1992). Focus for intent to cause damage is on the subjective intent of the actor.

        4. Need not show intention to cause specific injury:

          5. Prudential Prop. & Cas. Ins. Co. v. Karlinski, 251 N.J. Super. 457 (App. Div. 1990). Once showing is made that actor intended to cause some injury, a factual inquiry into actual intent of the actor to cause the specific injury sustained is necessary only if the intentional act does not have the "inherent probability" of causing the injuries suffered. Id.

        5. "Exceptional Circumstances": A Presumption of Intent:

Atlantic Employers Ins. Co. v. Tots & Toddlers, 239 N.J. Super 276 (App. Div. 1990), certif. denied, 122 N.J. 147 (1990) (Intent to injure presumed and coverage barred in child molestation case).

      1. Specific factual circumstances:

        1. Harassing telephone calls/unsolicited sexual advances: No Coverage.

          2. No coverage for insured who makes harassing telephone calls and unsolicited sexual advances because activities were intended or expected to from the standpoint of the insured. Mroz v. Smith, 261 N.J. Super. 133 (App. Div. 1992).

        2. Spousal abuse.

          1. No coverage.

            2. Merrimack Mut. Fire v. Coppola, 299 N.J. Super. 219 (App. Div. 1997). Physical and verbal spousal abuse constitutes subjective intent to injury as a matter of law so as to preclude coverage. Spousal abuse so reprehensible that both public policy and logic require a presumption that the actor intended injury. Spousal abuse in any form is ‘so inherently injurious, that it can never be an accident,’ and therefore, ‘[a]s a matter of public policy and logic … the better rule warrants application of the objective approach ,’ to the end that the intent to injure is presumed from the performance of the act."

            Bittner v. Harleysville Ins. Co., 338 N.J. Super. 447 (App . Div. 2001) Notwithstanding insured’s allegation that domestic violence assault reckless, no coverage because (1) complainant only alleged intentional conduct; and (2) strong public policy considerations militate against coverage of proceedings under Prevention of Domestic Violence Act (PDVA).

          2. Potential coverage (where factual question whether spousal abuse).

          Cumberland Mutual Fire Ins. Co. v. Beeby, 327 N.J. Super. 394 (App. Div. 2000). Isolated incident underlying alleged assault, without any prior history of domestic violence or abuse, with claim by insured that assault resulted from his asserted concern for her safety. Long time girlfriend was apparently drunk and insured alleged that act of pulling her hair and carrying her to her car was an effort to prevent her from running out into the road. Court found that a favorable inference was that defendant’s actions were protective rather than assaultive. Before court applies Merrimack and precludes consideration of intent, judge must make the threshold determination of whether defendant’s conduct falls within the realm of conduct warranting application of such a policy.

        3. Child Molestation.

          4. Atlantic Employers Ins. Co. v. Tots & Toddlers, 239 N.J. Super 276 (App. Div. 1990), certif. denied, 122 N.J. 147 (1990) (Intent to injure presumed and coverage barred in child molestation case).

        4. Employment Related Claims: Other Jurisdictions

Greenman v. Michigan Mut. Ins. Co., (Court held that coverage for sexual harassment and discrimination was excluded from coverage by the intentional acts exclusion, which excluded bodily injury "’expected or intended’ from the standpoint of the insured."); Presidential Hotel v. Canal Ins. Co., 188 Ga.App. 609, 373 S.E.2d 671 (Ct.App. 1988) (Sexual harassment does not constitute an "occurrence." "Intentional acts are not covered under the policy."); St. Paul Fire & Marine Ins. Co. v. Superior Court, 161 Cal.App.3d 1199, 208 Cal.Rptr. 5 (Ct.App. 1984) (Wrongful termination claim not covered because policy covered an "accidental event," which was defined as "something [the insured] didn’t expect or intend to happen."); Rose West v. Harleysville Mutual Ins., 1998 WL 972255 (Va.Ct.App. Jun. 24, 1998) (Definition of occurrence precludes coverage for sexual harassment.); Rideout v. Crum & Forster Commercial Ins., 417 Mass. 757, 633 N.E.2d 376 (1994) (Sex discrimination not covered because held not to constitute an occurrence.); Falkenstein’s Meat Co. v. Maryland Cas. Co., 91 Or.App. 276, 754 P.2d 621 (Ct.App.1988) (Retaliation claim not covered because conduct not "accidental" and the resulting harm was not "unexpected or unforeseen."); Compupay, Inc. v. State Farm Fire & Cas. Co., 654 So.2d 944 (Dist.Ct.App.), review denied, 662 So. 2d 341 (Fla. 1995) (Sexual harassment and discrimination not occurrence and not covered.); Providence Washington Ins. Group v. Albarello, 784 F.Supp. 950 (D.Conn. 1992) (Intentional discharge of employee not an occurrence.); National Fruit Product Co. v. Fireman’s Fund Ins. Co., 178 F.3d 1285 (4th Cir. 1999) (Sexual harassment including assaults held not an occurrence and thus not covered under CGL policies.).

      1. "Public Policy" as a bar to coverage

        2. In addition to the language of the policy, coverage may be precluded for intentional acts based on public policy.

        1. New Jersey

          2. Bittner v. Harleysville Ins. Co., 338 N.J. Super. 447 (App . Div. 2001) Strong public policy considerations militates against coverage of proceedings under Prevention of Domestic Violence Act (PDVA).

        2. Other jurisdictions

Coit Drapery Cleaners, Inc. v. Sequoia Ins. Co., 14 Cal.App.4th 1595, 18 Cal.Rptr.2d 692 (Ct.App.1993) (California Insurance Code § 533 barred coverage for claims of sex harassment and wrongful termination); Groshong v. Mutual of Enumclaw Ins. Co., 143 Or.App. 450, 923 P.2d 1280 (Ct.App. 1996), aff'd, 329 Or.303, _____ P.2d. _____ (1999)(Public policy precluded coverage for intentional housing discrimination); Foxon Packaging Corp. v. Aetna Cas. and Surety Co., 905 F.Supp. 1139 (D.R.I. 1995) (Coverage for intentional racial discrimination barred by Rhode Island public policy); Boston Housing Auth. v. Atlanta Int’l Ins. Co., 781 F.Supp. 80 (D.Mass. 1992) (Coverage for intentional housing discrimination precluded under Massachusetts law that prohibited "an insurance company from insuring ‘any person against legal liability for causing injury, other than bodily injury, by his deliberate or intentional crime or wrongdoing.’"); American Management Ass'n v. Atlantic Mut. Ins. Co., 168 Misc.2d 971, 641 N.Y.S.2d 802 (Sup.Ct.), aff'd, 234 A.D.2d 112, 651 N.Y.S.2d 301 (App.Div. 1996) (citing September 26, 1963 opinion of the New York Superintendent of Insurance that precludes insurance coverage for "acts of discrimination on the basis of race, creed, color or national origin.").

      1. Coverage may exist where intent by insured not required

        1. ADA Claims/Recklessness

          2. Andover Newton Theological School, Inc. v. Continental Cas. Co., the public policy of Massachusetts did not bar coverage of a claim under the ADEA because the conduct "may have been undertaken with reckless disregard as to whether it was unlawful." 409 Mass. 350, 566 N.E.2d 1117 (1991).

        2. Disparate Impact Claims.

Courts have also held that claims of disparate impact discrimination are not precluded from coverage since such claims involve unintentional discrimination. Save Mart Supermarkets v. Underwriters at Lloyd’s London, 843 F.Supp. 597 (N.D.Cal. 1994) (Disparate impact claims not barred by California statutory prohibition against coverage for "loss caused by the willful act of the insured. . . ."); Solo Cup Co. v. Federal Ins. Co., 619 F.2d 1178, 1186 (7th Cir.), cert. denied, 449 U.S. 1033, 101 S. Ct. 608, 66 L. Ed.2d 495 (1980) ("Proof of discriminatory motive is critical in a disparate treatment action.". On the other hand, a disparate impact claim involves employment practices that are "fair and neutral in form, but discriminatory in operation. . . . Proof of motive is not required."); Lapeka, Inc. v. Security National Ins. Co., 814 F.Supp. 1540 (D.Kan. 1993) ("In light of Kansas case law, this court concludes that a disparate impact claim could qualify as an ‘occurrence’ within the definition of the policy."); Village Management, Inc. v. Hartford Acc. and Indem. Co., 662 F.Supp. 1366, 1372 (N.D.Ill. 1987) (Allegation of disparate impact claim alleges unintentional discrimination covered by the Hartford policy.); American Management Ass'n., 168 Misc.2d 971, 641 N.Y.S.2d 802 (Duty to defend disparate impact age discrimination claims notwithstanding exclusions for intentional acts and New York public policy bar against insurance coverage for discrimination.); Castle & Cooke, Inc. v. Great American Ins. Co., 42 Wash.App. 508, 711 P.2d 1108 (Ct.App. 1986) (Disparate impact claim is an "occurrence.").

    1. Business Pursuits Exclusion

      2. Coverage for employment related claims also may be excluded under homeowners’ policies by a business pursuits exclusion that excludes from coverage bodily injury or property damage arising out of business pursuits of the insured.

      1. New Jersey Upholds Exclusion:

        2. Miller v. McClure, 326 N.J. Super. 558 (App. Div. 1998) (Excludes claims that are actionable because of employment relationship. Although court held that the exclusion did not bar certain claims "not dependent on the employment relationship", but those claims excluded by intentional acts exclusion and exclusion for sexual molestation and mental abuse)

      2. Other jurisdictions Uphold Exclusion

      Greenman v. Michigan Mut. Ins. Co., 173 Mich.App. 88, 93 433 N.W.2d 346, 349 (Ct.App.1988) (the business pursuits exclusion precluded coverage under a homeowner’s policy for sexual harassment and discrimination at the insured’s law firm); Rose West v. Harleysville Mut. Ins. Co., 1998 WL 972255, at *3 (Va.Ct.App. Jun. 24, 1998) (coverage was excluded under a homeowner’s policy for sexual harassment and discrimination notwithstanding allegations that insured’s "abusive behavior extended beyond the workplace to social settings" because the allegations all arose out of the employer-employee relationship); Armed Forces Ins. Exchange v. Transamerica Ins. Co., 88 Hawaii 373, 966 P.2d 1029 (Ct.App. 1998) (Business pursuits exclusion in homeowner’s policy excludes coverage for claims arising out of sexual harassment and assault.).

    2. Employee Exclusion

      3. Excludes coverage for "’bodily injury’ to ‘[a]n employee of the insured arising out of and in the course of employment by the insured. . . .’" American Motorists Ins. Co. v. L-C-A Sales Co., 155 N.J. 29, 34, 713 A.2d 1007, 1009 (1998); Miller v. McClure, 326 N.J. Super. 558 (App. Div. 1998). A similar exclusion would bar coverage for "personal injuries" to employees "injured in the course of their employment." Save Mart Supermarkets v. Underwriters at Lloyd’s London, 843 F.Supp. 597, 604 (N.D.Cal. 1994).

      1. Majority Rule: Bars Coverage for Employment Claims

        2. Majority of jurisdictions hold that the exclusion bars coverage for employment related claims.

        West American Ins. Co. v. Bank of Isle of Wright, 673 F.Supp. 760, 766 (E.D.Va. 1987) (Claim for emotional distress for intentional and wrongful termination did not constitute bodily injury, and even if it did, the court held that the claim would be barred by the employee exclusion.); Bd. of Educ. of East Syracuse-Minoa Central School Dist. v. Continental Ins. Co., 198 A.D.2d 816, 604 N.Y.S.2d 399 (App.Div. 1993) (Sexual harassment and retaliatory discharge action excluded by the employee exclusion); Compupay, Inc. v. State Farm Fire & Cas. Co., 654 So.2d 944 (Dist.Ct.App.), review denied, 662 So. 2d 341 (Fla. 1995) (Sex harassment and sex discrimination suit barred by what the court called the "cross-employee" exclusion.); Fieldcrest Cannon, Inc. v. Fireman’s Fund Ins. Co., 124 N.C.App. 232, 477 S.E.2d 59 (Ct.App.1996) (Various employment claims including sex discrimination and sex harassment barred by employee exclusion.); Meadowbrook, Inc. v. Tower Ins. Co., Inc., 559 N.W.2d 411 (Minn. 1997) (Employee exclusion barred sex harassment claims of a hostile work environment under Minnesota Human Rights Act even though some of the instances of harassment occurred outside the scope employment.); McLeod v. Tecorp Int’l Ltd., 318 Or. 208, 865 P.2d 1283 (1993) (Employee exclusion barred claims for wrongful discharge and intentional infliction of emotional distress.); Jefferson-Pilot Fire & Cas. Co. v. Sunbelt Beer Distributor, Inc., 839 F.Supp. 376 (D.S.C. 1993) (Court held that even if racial discrimination claims constituted bodily injury claims, claims were otherwise excluded by what the court called the "course of employment exclusion."); Watson v. Town of Arcadia, 542 So.2d 1168 (La.Ct.App. 1989), writ denied, 548 So. 2d 1234 (1989) (Wrongful discharge claim barred by employee exclusion.);

      2. New Jersey Follows Majority Rule

        3. American Motorists Ins. Co. v. L-C-A Sales, 155 N.J. 29, 713 A.2d 1007 (1998) (Court rejected the insured’s argument that the exclusion did not apply because the claim arose from the employee’s termination and not his employment, and because the suit was filed after the dismissal. The court interpreted the phrase "arising out of" broadly to encompass claims having a "substantial nexus," and that even conduct that "took place outside the workplace" would have been held to "have arisen out of the employment relationship.")

      3. Cases not upholding the exclusion

      Melugin v. Zurich Canada, 50 Cal.App.4th 658, 57 Cal.Rptr.2d 781 (Ct.App. 1996) (Court refused to enforce the exclusion so as to exclude a specific grant of coverage for claims of discrimination. In that case the CGL policy at issue specifically provided coverage for "discrimination, . . .  violation of civil rights, [and] sexual discrimination") Save Mart Supermarkets v. Underwriters at Lloyd’s of London, 843 F.Supp. 597 (N.D.Cal. 1994) (Court held that the exclusion was ambiguous and could be read "to bar only those claims which would otherwise arise under Worker’s Compensation Laws.").

    3. Employment practices exclusion

      4. Policies often contain an employment-related practices exclusion that would bar coverage for personal injury arising out of an "employment-related practice."

      1. New Jersey: Bars coverage

        2. Miller v. McClure, 326 N.J. Super. 558 (App. Div. 1998). Employment related Practices Exclusion bars coverage for intentional employment related practices claims.

      2. Other jurisdictions upholding exclusion

      Berman v. General Acc. Ins. Co. of America, 176 Misc.2d 13, 671 N.Y.S.2d 619 (Sup.Ct. 1998) (Indemnification for defamation claim held excluded by exclusion for personal injury, including defamation, arising out of "employment-related practice."); Frank and Freedus v. Allstate Ins. Co., 45 Cal.App.4th 461, 52 Cal.Rptr.2d 678 (Ct.App.1996) (Court held that defamation action commenced by former employee barred by exclusion for employment-related practices exclusion.); Parish of Christ Church v. Church Ins. Co., 166 F.3d 419 (1st Cir. 1999) (Defamation action brought by former employee excluded by exclusion for offense related to employment.); Weinstein Supply Corp. v. Home Ins. Co., 1999 WL 310590 (E.D.Pa. May 10, 1999) (Defamation action excluded by "Personal Practices Exclusion" which excludes "bodily injury" and "personal injury" arising out of "employment-related practices, policies, acts or omissions"); but see Zurich Ins. Co. v. Smart & Final, Inc., 996 F.Supp. 979 (C.D. Cal. 1998) (Employment Related Practices Exclusion held not applicable to false arrest and imprisonment claim asserted by employee arising out of interrogation of employee by employer. Phrase in the exclusion, "other employment-related practices, policies, acts or omissions" held to be ambiguous.).

    4. Coverage barred if wrongful acts not within scope of employment.

Employee may not be considered as an insured for acts of harassment that occur outside the context of employment. Miller v. McClure, 326 N.J. Super. 558 (App. Div. 1998) (Employee not insured to extent not acting within the scope of his employment).

  1. Workers’ Compensation Policies

    1. New Jersey: Schmidt v. Smith, 155 N.J. 44, 713 A.2d 1014 (1997)

      1. Can’t exclude sexual harassment claims alleging bodily injury

        2. New Jersey Supreme Court held that a company’s workers' compensation insurance policy provided coverage for a sexual harassment claim notwithstanding an exclusion for damages arising out of harassment. The court held that enforcement of the exclusion to exclude coverage for bodily injury caused by harassment would conflict with the statutory requirement under the New Jersey Workers' Compensation statute of coverage for all occupational injuries.

      2. Schmidt only applies to bodily injury.

        3. Exclusion is valid, however, as long as the liability arising from those discomforts in not related to bodily injury.

      3. Employee not covered

      Only employer (and partners if a partnership) covered. Miller v. McClure, 326 N.J. Super. 558 (App. Div. 1998) (Employee not entitled to coverage under New Jersey Re-Insurance Co. policy for sexual harassment).

    2. Other jurisdictions reject Schmidt

    Other courts, however, have refused to find coverage for employment practices causes of action under a workers' compensation insurance policy. HDH Corp. v. Atlantic Charter Insurance Co., 425 Mass. 433, 681 N.E.2d 847 (1997); La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co., 9 Cal.4th 27, 36 Cal.Rptr.2d 100, 884 P.2d 1048 (1995); Billstein Corp. of America v. Federal Ins. Co., 168 F.3d 497, 1999 WL 96438 (9th Cir. 1999) (Table, text in Westlaw); Springdale Donuts, Inc. v. Aetna Cas. and Sur. Co. of Ill., 247 Conn. 801, 724 A.2d 1117 (1999).

  2. Directors and Officers ("D&O") Liability Policies

    1. Exclusions:

      2. D&O policies may contain some of the exclusions previously discussed in this chapter.

    2. Coverage for Company?

      3. D&O policies typically provide coverage for the directors and officers, and may not provide any coverage to the corporation itself.

    3. May Exclude bodily injury/emotional distress:

    D&O policies may exclude coverage for bodily injury and emotional distress, a significant part of the damages associated with employment practices claims.

  3. EPLI Policies

    1. Tailored to Provide Coverage For Employment Practices Claims

      2. The early 1990s saw the emergence of a new kind of insurance policy, the Employment Practices Liability Insurance (EPLI) policy, which was written to provide coverage for certain employment practices claims that might otherwise have been excluded by traditional insurance policies.

    2. Offered by many insurers.

      3. Although initially only a few companies offered EPLI policies, such policies are now offered by many insurers.

    3. Manuscript forms

      4. It is difficult to generalize about EPLI policies, since each company that writes EPLI policies has its own policy, and there is no one standard form.

    4. No reported cases

      5. While one can find many cases involving the application of standard form language in other policies in the context of employment practices claims, there are no reported cases interpreting EPLI policies. Therefore, it is especially important that one carefully read an EPLI policy before attempting to reach any conclusions about the coverage provided under that policy.

    5. Stand alone policy or endorsement

      6. EPLI coverage can either be purchased as a "stand alone" policy, or as an endorsement to another liability insurance policy such as a D&O policy.

    6. Not tied to "bodily injury" or "property damage"

      7. While liability policies generally cover, inter alia, damages resulting from bodily injury or property damage, EPLI coverage may be – like personal injury coverage – tied to specific causes of action.

    7. Specific enumerated employment claims

      8. The insuring agreement in some of the early EPLI policies covered damages resulting from specific employment related causes of action such as discrimination, sexual harassment, wrongful discharge and other employment related torts.

    8. Omnibus coverage language

      9. EPLI policies, however, have evolved to contain more omnibus language and cover "wrongful employment practices" or "wrongful employment acts" which includes causes of action such as discrimination, sexual harassment, and wrongful discharge, as well as a "catch-all" that would include other employment related causes of action.

    9. Coverage For Non-Employment Claims Under EPLI Policies

      1. Non-employment causes of action

        2. Coverage under EPLI policies also may extend to causes of action that are not commonly thought of as employment claims, such as libel and slander, as long as the claims are employment related. This could be important since employment practices suits often contain causes of action for defamation and other torts that might otherwise be excluded under the "bodily injury" or "personal injury" coverage portion of an archetypal liability insurance policy.

      2. Coverage for third-party (non-employee) claimants

      Some EPLI policies may even provide coverage for certain causes of action (e.g., discrimination) asserted by third parties even where the causes of action are not employment related. Such expanded EPLI policies, for example, might cover a complaint alleging discrimination by a restaurant by one of its guests, or the failure to provide accessibility required by the Americans with Disabilities Act. 42 U.S.C.§§ 12101-13. One insurance coverage publication referred to this coverage as EPL coverage with "an interesting twist: The ‘E’ was . . . optional" (i.e., there was no requirement that the cause of action be employment related). In the absence of such coverage, EPLI policies typically would not cover such third party claims because they cover only employment related claims.

    10. Coverage for Emotional Distress

      11. Although an EPLI policy typically excludes damages for bodily injury, it does provide coverage for emotional distress damages. This avoids the recurring dispute in employment coverage cases under liability insurance policies as to whether a claim involving emotional distress constitutes bodily injury.

    11. Coverage for Equitable and Injunctive Relief (under EPLI policies)

      1. May exclude coverage for equitable and injunctive relief.

      2. Equitable and injunctive relief can be significant in employment cases.

      Backpay: Equitable relief in employment cases may be interpreted to include reinstatement, backpay. Deffenbaugh-Williams V. Wal-Mart Stores, Inc., 156 F.3d 581 (5th Cir. 1998) (an award of back pay is an equitable remedy); 42 U.S.C.A. § 2000e-5(g)(1) (In action under Title VII of the Civil Rights Act of 1964, court can award reinstatement and back pay "or any other equitable relief."); Mizrany V. Texas Rehabilitation Commission, 522 F.Supp. 611 (S.D. Tex. 1981), aff’d, 685 F.2d 1384 (5th Cir. 1982) (Court has the authority to order equitable remedies of back pay and reinstatement under the provisions of the Age Discrimination in Employment Act of 1967 ("ADEA"), 29 U.S.C.A. §626(b).

      Frontpay: Equitable relief may include frontpay. Banks v. The Travelers Companies, 180 F.3d 358 (2nd Cir. 1999) (Court held that front pay under the ADEA is an equitable remedy.); Ramos v. Davis & Geck, Inc., 167 F.3d 727 (1st Cir. 1999) (In case under ADEA, court held that "front pay is considered an equitable remedy. . . ."); Excel Corp. v. Bosley, 165 F.3d 635, 639 (8th Cir. 1998) (In sexual harassment case, court opined that "front pay . . . is a form of equitable relief. . . ."); Yousuf v. UHS of De La Ronde, Inc., 1999 WL 301701, at * 2 (E.D. La. 1999) (In discrimination action, court stated that "front pay is a form of equitable relief which the court has discretion to order.").

    12. Selection of Counsel and Right to Control Settlement

      13. Insurer retains right. The insurer usually retains the right to select counsel under EPLI policies. The insurer may also have the right to settle. Some EPLI carriers may be willing to permit the insured some control over the decision to settle, but that may involve the payment of additional premium, a higher deductible, and/or the obligation to pay at least a portion of the difference between the amount of any ultimate settlement or judgment and the amount of the initial settlement proposal.

    13. Claims Made Policies

      14. Unlike a CGL policy, which is an "occurrence" policy, EPLI policies are written on a claims made basis, only applying to claims first made during the policy period and reported as soon as practicable thereafter.

    14. Reporting period.

      15. EPLI policies require that the claims be reported to the insurer before the end of the "Reporting Period," usually 10 to 60 days after the end of the policy period.

    15. Extended Reporting Period.

      16. EPLI carriers, however, offer an Extended Reporting Period (ERP) of at least 1 to 3 years. Claims made policies may also limit coverage to claims arising out of acts occurring during the policy period.

    16. Prior Acts Coverage.

      17. Many EPLI carriers, however, may include prior Acts coverage that would provide coverage for acts occurring prior to the inception of the policy.

    17. Definition of insured includes the company and officers and directors

      18. The EPLI policies on the market provide a fairly broad definition of who is covered under the policy, including the company and its officers and directors and insured.

    18. Coverage for Intentional Acts

      1. No exclusion for intentional acts.

        2. Most EPLI policies are not written on an "occurrence" basis, and do not contain an exclusion for intentional acts.

        Therefore, under EPLI policies, the fact that the insured intended the act or the resulting injury will usually be insufficient to exclude coverage. Western Cas. & Sur. Co. v. Western World Ins. Co., Inc., 769 F.2d 381 (7th Cir. 1985) (citations omitted) (In case involving coverage for housing discrimination, court stated that a "person may intend the acts and desire the consequences, making the conduct intentional, without knowing that this violates the law. . . ."); Bensalem Tp. v. Western World Ins. Co., 609 F.Supp. 1343 (E.D. Pa. 1985) (In case involving coverage for an age discrimination complaint, court noted that while the insured intended to cause the injury, there "was no evidence on this record, however, which would require a finding that plaintiff acted maliciously or in reckless disregard of its legal obligations."); Andover Newton Theological School, Inc. v. Continental Casualty Co., 409 Mass. 350, 566 N.E.2d 1117 (1991) (Although insured acted in "reckless disregard" of the ADEA, Massachusetts public policy did not bar coverage).

      2. Public policy might still bar coverage for intentional acts.

        3. Nonetheless, some jurisdictions will still have a public policy against insurance for intentional acts. Notwithstanding the public policy against insurance for intentional acts, an EPLI policy still would cover non-intentional employment practices torts such as disparate impact discrimination, and assertions of liability against a company for sexual harassment of one of its employees based on negligent supervision.

      3. Less likely to apply public policy to bar coverage under EPLI policy.

      Further, courts are hesitant to enforce a the definition of occurrence, the intentional acts exclusion, or the public policy against coverage for intentional acts, where the policy, like the EPLI policy, provides coverage for intentional employment claims. Melugin v. Zurich Canada, 50 Cal.App.4th 658, 57 Cal.Rptr.2d 781 (Ct.App. 1997) (Court rejected an insurer’s interpretation of policy language, noting that "[t]his interpretation by Zurich of its policy would result in an entirely fictional grant of coverage, by which the express grant of coverage for claims of discrimination would be empty and idle because such claims in all cases would be barred by section 533 or by inapplicable policy exclusions."); Missouri Prop. and Cas. Ins. Guar. Ass'n. v. Petrolite, 918 S.W.2d 869 (Mo.Ct.App. 1996) (Court held that claim for discrimination covered by policy that covered discrimination notwithstanding requirement of an occurrence, noting that "the policy definition of ‘personal injury’ included a number of intentional torts, including discrimination, while the definition of ‘occurrence’ limited coverage to unintentional acts. . . .  It is implausible that any business would pay for such illusory coverage."); Clark-Peterson Co., Inc. v. Independent Ins. Associates, Ltd., 492 N.W.2d 675 (Iowa 1992) (Court found coverage for intentional discrimination under the personal injury coverage part, which specifically included discrimination. Even though the court found that the discrimination was not an occurrence, it found coverage nonetheless based on the doctrine of "reasonable expectations." "To deny discrimination in the present case would be to withdraw with the policy’s left hand what is given with its right."); North Bank v. Cincinnati Ins. Co., 125 F.3d 983 (6th Cir. 1997) (Notwithstanding requirement of an occurrence, court held coverage for employment discrimination claim under "personal injury" coverage part, which specifically covered "discrimination," based on the "doctrine of reasonable expectations.").

    19. Coverage for Punitive Damages

      1. Punitive Damages Not Excluded.

        2. Many EPLI policies do not exclude, and some policies provide affirmative coverage for punitive damages, which are a significant concern with respect to employment practices claims.

      2. New Jersey: Punitive Damages Not Insurable.

        3. New Jersey is one of a minority of states in which punitive damages are not insurable. Johnson & Johnson v. Aetna Ca. and Sur. Co., 667 A.2d 1087, 1092, 285 N.J. Super. 575, 584 (App. Div. 1995) (Public policy proscribes coverage for punitive damages); PPG Industries, Inc. v. Transamerica Ins. Co., 84 Cal. Rptr. 2d 455, 20 Cal. 4th 310, 975 P.2d 652 (1999) (public policy precludes indemnification for punitive damages); Lira v. Shelter Ins. Co., 913 P2d 514 (Colo. 1996) (Colorado public policy prohibits insurers from providing insurance coverage for punitive damages); North Western Nat. Cas. Co. v. McNulty, 307 F.2d 432, 433-34 (5th Cir. 1962) (Florida public policy prohibits insurance against liability for punitive damages); St. Paul Surplus Lines Ins. Co. v. In'l Playtex, Inc., 245 Kan. 258, 777 P.2d 1259 (1989), cert. denied, 493 U.S. 1036 (1990); Crull v. Gleb, 382 S.W. 2d 17 (Mo. Ct. App. 1964); Stevenson v. Hamilton Mut. Ins. Co., 672 N.E. 2d 467, 474 (Ind. Ct. App. 1996) (Against public policy to cover punitive damages imposed where corporation itself found to have acted maliciously or oppressively.)

      3. Other Jurisdictions: Punitive Damages Insurable.

Many states permit punitive damages to be covered, at least where punitive damages not based on the insured's own wrongful misconduct. Magnum Foods, Inc. v. Continental Cas. Co., 36 F.3d 1491, 1498 (10th 1994) (Court noted coverage for punitive damages imposed vicariously on insured does not contravene public policy, but held that punitives were not covered in this case because insured's liability not vicarious.); United Services Auto. Ass'n v. Webb, 369 S.E. 2d 196 (Va. 1988) (Pursuant to Virginia Statute, it is not against public policy to provide coverage for punitive damage as a result of negligence, including willful and wanton negligence, but excluding intentional act.); U.S. Fidelity & Guar. Co. v. Open Sesame Child Care Center, 819 F. Supp. 756 (N.D. Ill. 1993) (Illinois only prohibits insurance against punitive damages that arises out of insured's own misconduct; does not prohibit coverage for punitive damage arising out of vicarious liability.); Stevenson, 672 N.E. 2d at 474 (Not against public policy to cover punitive damages imposed vicariously.); Pennbank v. St. Paul Fire and Marine Ins. Co., 669 F. Supp. 122, (W.D. Pa. 1987) (Public policy does not permit tortfeasor personally guilty of wanton conduct to shift burden of punitive damages to insurer, but public policy does not conflict with coverage for punitive damages where insured only vicariously liable for punitive damages.).

 

 

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