ISO ADDRESSES "PREVALENT PROBLEM"

An overview of ISO's new employment-related practices liability program

By Diana Kowatch CPCU, AU, AAM, CPIW dianak@in.net

Daily it seems, we hear of new cases or allegations by individuals who have suffered various types of financial loss or emotional injury because of the actions of an employer or a potential employer. The list of offenses causing these allegations and lawsuits is lengthy. It encompasses such injuries as wrongful termination, demoting an employee unfairly or without justification, failure to promote a worthy employee, unwarranted discipline, and even includes not hiring a qualified person. Most of these offenses are alleged to be the result of some type of discrimination (and lately, reverse discrimination) or violation of the individual's civil rights by way of discrimination on account of age, gender, religion, race, nationality, sexual orientation or any type of mental/physical limitation or disability. Sexual harassment by the employer, management/supervisory staff or by fellow employees is common and now includes same-sex abuses. In addition to sexual abuse, other injuries are now being brought to light and include physical, mental or emotional abuse.

Employers must now take great care to have firm, written policies and procedures in place to prevent such abuse and injury. Increasing numbers of employers are being held responsible for training and the implementation of programs to protect their employees.

But what about the employer who has made the commitment to eliminate abuse in the workplace but who still occasionally must face a situation where an employee causes an employment-related practices liability injury leading to a suit against that employer? Is there coverage in the employer's commercial general liability policy? Very little if any.

First of all, the type of injury protected against in the CGL is bodily injury or property damage. Most employment-related practices injuries are mental, emotional or financial/monetary. While some jurisdictions extend the definition of bodily injury to include mental or emotional injury, especially if there are physical manifestations (such as migraine headaches, vision problems, stomach problems--any physical manifestation that can be directly attributed to the offense), many do not. Financial and monetary damages are not considered to be property damage.

To limit even further any possible coverage in the CGL, there are exclusions. Workers compensation and employers liability injuries to employees are excluded. There is also an exclusion for expected and intended injury; and in many cases, mental, emotional or financial/monetary hurt can be expected when adverse employment-related practices exist.

Varying degrees of coverage have been available on the specialty market for some time now. But in response to the prevalence of the problem, the Insurance Services Office, Inc. (ISO), has developed a more standardized program to provide employment-related practices liability protection for employers. We will base the remainder of our discussion on the ISO version of employment-related practices liability program.

The new ISO program carries an April 1998 version date, and the first round of approvals has been received in some jurisdictions using an April 1, 1998 effective date.

The new coverage, Employment-Related Practices Liability Form EP 00 01, is on a claims-made basis and is not available in an occurrence version. The coverage form contains seven sections:

Section I Employment-Related Practices Liability Coverage

Section II Who Is An Insured

Section III Limit Of Insurance

Section IV Co-Payment

Section V Conditions

Section VI Extended Reporting Period

Section VII Definitions

Type of Loss Amount of Loss Co-Payment Insured

What follows is a brief overview of some of the main concepts contained in the Employment-Related Practices Liability Coverage Form EP 00 01. Not every provision is examined in this overview.

Section I--Employment-Related Practices Liability Coverage

A. Insuring Agreements

The insurer agrees to defend the insured and pay for the damages that the insured is legally obligated to pay for injury, as long as that injury is covered by the policy. Wording has been carefully chosen in an attempt to make it very clear that defense is for covered damages only, and the insurer does not have to pay or reimburse for any defense of the insured on injury or damages not covered by the policy.

The insurer has the option as to when it will investigate and/or settle (with the insured's written consent) any claim.

No other obligations or liabilities are covered. Civil and criminal fines imposed on the insured are not covered with the exception of some supplementary payments.

Important defense expense limitation

An important item to point out in the ISO policy is that defense is not unlimited as it may have been in other liability programs. In the ISO Employment-Related Practices Liability Program, the limit of insurance shown in the Declarations is the most that will be paid for the total of all damages including all defense expense. This is an extremely important limitation to be aware of when setting the limit for this coverage. A $1 million limit will not be adequate to protect an insured for a $1 million award against that employer. There would be nothing left to cover the legal costs. Legal expenses can be extensive, and there may be serious financial loss to the insured's organization if the limit is not high enough to cover the award and legal defense costs.

For example, the insured carries a $1 million limit of insurance on an employment-related practices liability policy. A claim is filed for $1 million in damage as a result of an age discrimination suit. The claimant is awarded $1 million and the legal expenses amounted to $500,000. The policy will cover only $1 million. The insured must bear the other $500,000 (subject to the co-payment that we will look at shortly). This may be a significant unprotected loss for many insureds.

Section II--Who is an Insured

When the insured is an individual, the insured and the insured's spouse are considered to be insureds.

For partnerships or joint ventures, the insured, partners or members are insureds.

If the insured is a limited liability company, then the insured, members and managers are insureds.

For all other types of organizations, the insured, executive officers and directors are insureds. An important note regarding officers and directors: There is no limitation in the policy or its definitions that an insured is limited to employed executive officers and directors only. So for nonprofit organizations, it would appear that any executive officer or director is covered.

For any entity, insured includes "...employees who hold managerial or supervisory position..." This is important. An insured is not just the individual, partnership, joint venture, executive officers or directors who own a business, but also the managerial or supervisory employees.

No entity such as a past or current partnership or joint venture is covered unless it is listed as an insured in the Declarations.

Section III--Limit of Insurance

The key components of this section are discussed elsewhere in this overview.

Section IV--Co-Payment

Another significant item in the employment-related practices coverage is co-payment. In this program, the insured is responsible for a percentage co-payment of every loss. This co-payment applies to both damages and legal expenses.

A maximum amount of co-payment or a dollar amount cap may be applied to this co-payment.

For instance, if a 10% co-payment percentage were selected, the insured would pay 10% of all damages and 10% of all legal expenses. So if the insured is found liable for damages of $500,000 and the legal costs added up to $250,000, the insured would be responsible for $75,000 (10% of the damages plus 10% of the legal expenses).

B. Exclusions

Ten important exclusions apply to this coverage. Concerns surrounding defense of the insured for the excluded items have been addressed. The insurer will provide defense (in most cases) until such time as it has been determined through appropriate legal process, that the act is excluded. At that time, defense will cease.

1. Criminal, Fraudulent or Malicious Acts

Liability for criminal, fraudulent or malicious acts or omissions by an insured or such acts that the insured was aware of but failed to act on or may have approved of or allowed to happen are not covered.

This exclusion is a little confusing to some insureds because acts of discrimination, coercion, etc., are violations of federal and state law so the question is asked: What is covered? We will have to look at all of the exclusions and their exceptions to find the answer.

2. Contractual Liability

Liability or injury the insured has assumed in an agreement or contract is not covered unless the insured would have had that liability in spite of the contract or agreement.

3. Workers Compensation and Similar Laws

There is no coverage for any liability or obligations that are otherwise covered by workers compensation (or similar) laws.

4. Americans with Disabilities Act

There is no coverage under this policy for acts that fall under the Americans with Disabilities Act. There is no coverage for expenses, penalties or fines for required modifications to buildings, structures or property.

5. Violation of Law Applicable to Employers

This particular exclusion is probably a major component in understanding what is and is not covered by this policy, so we will look at it in a little more depth. Excluded is:

"A violation of your responsibilities or duties required by any other federal, state or local statutes, rules or regulations, and any rules or regulations promulgated therefrom or amendments thereto, except for the following: Title VII of the Civil Rights Act of 1964 and amendments thereto, the Age Discrimination in Employment Act, the Equal Pay Act, the Pregnancy Discrimination Act of 1978, the Immigration Reform Control Act of 1986 and the Family and Medical Leave Act of 1993 or any other similar state or local statutes, rules or regulations to the extent that they prescribe responsibilities or duties concerning the same acts or omissions."

Note that certain situations are excepted from the exclusion, so some acts are covered. We must explore one in particular: Title VII of the Civil Rights Act of 1964. Title VII of the Civil Rights Act is the section of the act dealing with equal employment opportunity. Looking specifically at subsection 703, it deals with discrimination because of race, color, religion, sex or national origin. This makes it unlawful to discriminate against a person during hiring or employment based upon the above factors.

Note also that ERISA is not included in this coverage, so things such as pension plan, health plan and other related problems are not covered. Specialty coverages for employee benefits liability may be available for these types of losses.

So while neither criminal acts nor violations of law are covered, certain ones are added back, such as discrimination based upon race, color, religion, sex or national origin, age, pregnancy, resident status and so forth.

6. Strikes and Lockouts

There is no coverage for injuries that may have occurred during strikes, lockouts or labor disputes or for any employee who may have been temporarily or permanently replaced as a result.

7. Sexual Harassment

All coverage for sexual harassment is excluded. We previously mentioned that the insurer would provide defense until such time as it has been determined through appropriate legal process that the act is excluded. At that time defense would cease. Sexual assault or battery is the exception to the exception. There is no defense of any kind for these types of acts from the time the allegation is first made.

8. Employment Termination or Relocation Due to Business Decisions

In cases where the insured has filed for bankruptcy, receivership, liquidation, has merged or been acquired by another entity, closed operations or a location, or has had a closure or reduction in size due to a disaster, and terminations, relocations or other reassignments have occurred, there is no coverage for any resultant injury.

9. Intentional Injury

This is another very important exclusion that we will consider in a little more detail. Excluded is any:

"Liability of that insured who commits an act of intentional 'discrimination' or coercion."

In order to fully understand this exclusion, we must look at the definition of discrimination provided in the policy. It states:

"Discrimination means violation of a person's civil rights with respect to such person's race, color, national origin, religion, gender, marital status, age, sexual orientation or preference, physical or mental condition, or any other protected class or characteristics established by any federal, state or local statues, rules or regulations."

Neither criminal acts nor violations of law are covered. But exceptions are made for discrimination based upon race, color, religion, sex or national origin, age, pregnancy, resident status and so forth, unless...the act was intentional discrimination. That's a little difficult to follow. Even though discrimination is illegal, and other illegal or criminal acts are excluded, certain acts, such as discrimination that results as a violation of the specifically named federal or other governmental acts, are not excluded. However, the insured (manager or supervisor) who actually intentionally commits such an act of discrimination would not be covered, but it appears that other insureds would. (There is coverage due to vicarious liability.) Employers would also be covered if the act were committed by a non-insured, i.e., employee. Let's look at examples:

* A vice president commits an act of sexual harassment (not assault and battery). S(h)e has coverage only as long as the act is not proven to be a "sexual harassment offense."

* A non-supervisor employee commits an act of sexual harassment (not assault and battery) and the company is sued. The company would be defended and covered unless or until it (the company) was proven also to be vicariously liable. The employee is given no defense coverage. If the company were never found criminally liable, defense and damages would be paid.

* If the situation were racial discrimination--for either the VP or the employee--the company would be covered, until the offense was found to be a criminal, fraudulent or malicious act or omission. Suppose either the VP or the employee refused to let individuals who were of specific racial origin eat at their table. Coverage would continue throughout the claim if the claim were a non-criminal, non-fraudulent, non-malicious act or omission as long as it is no more than a simple violation of responsibility or duties required by the covered act. (The situation then must be simple negligence and not fraud.) However, the employee would still not receive a defense.

10. Retaliatory Actions

An insured's retaliation against an employee for the following things is not covered:

* An employee refuses to perform an illegal or unethical act.

* Whistleblowing.

* An employee files a complaint with a governmental authority against the insured or another employee.

* An employee files a suit against the insured or another employee.

* An employee testifies against the insured or another employee in a legal proceeding.

* An employee has contacted a legal authority regarding an illegal aspect of an insured's business or operation.

Section V--Conditions

Most of the conditions found in this policy are very similar to those found in other standard claims-made commercial liability policies. We will concentrate on only the items that may be somewhat new or different.

B. Consent to Settle

Remember in the insuring agreements, the insured must consent to settlement. However, if the insurer recommends that the insured settle the claim but the insured does not wish to, then the most that the insurer is obligated to pay for is the amount that the insurer would have paid if the insured had agreed to settlement.

J. If You are Permitted to Retain Defense Counsel

The insured may be permitted to retain its own defense counsel. This happens either by mutual consent or by a court order. When it does happen, the insurer still retains the right to attempt to settle with the claimant, with the insured's consent.

If the insured has retained its own counsel and the insured's counsel recommends a settlement that is not agreed to by the insurer, the most that the insured is obligated to pay for its portion of the co-payment is the amount that the co-payment would have been if the insurer had originally agreed to the settlement. In other words, the insured will not be penalized (via the co-payment) if the insurer does not agree to a settlement arranged by the insured's counsel and later the award is higher than the settlement that would have been paid.

Section VI--Extended Reporting Period

This section provides more-or-less standard claims-made provisions regarding the extended reporting period provision.

Section VII--Definitions

Eleven definitions are provided for the Employment Related Practices Liability coverage form. The definitions of claim, coverage territory, employee, executive officer, leased worker and temporary worker are the same as those found in most commercial liability policies. We have already looked at discrimination, so we will focus on the remaining definitions unique to this coverage form.

Defense Expense includes the payments attributed to a specific claim which include the fees and salaries of employed attorneys and paralegals (but no other employees); fees and salaries of outside attorneys and paralegals that have been retained; all litigation and administrative hearing expenses, fees and expenses of expert witnesses; reasonable expenses of the insured that result from requests by the insurer to assist the insured including earnings (up to $250 per day); plus all costs taxed against the insured in the suit.

Injury results from any one or more of the following offenses to a person: refusal to employ, termination of employment, demotion or failure to promote, negative evaluation, reassignment, discipline, defamation or humiliation based on discrimination directed at that person; coercing the person to commit an unlawful act or omission (within the scope of employment); work-related sexual harassment; other work-related verbal, physical, mental or emotional abuse because of race, color, national origin, religion, gender, marital status, age, sexual orientation, physical or mental condition or any other protected class or characteristic.

Sexual Harassment includes unwelcome sexual advances, request for sexual favors, verbal, visual or physical conduct of a sexual nature if that conduct affects or interferes with an individual's employment or job performance; or creates an intimidating, hostile or offensive working environment.

Suit is similar to the civil proceedings included in other commercial general liability policies. Within the scope of the Employment-Related Practices Liability coverage form, it also includes administrative proceedings or hearings conducted by any governmental agency having authority to do so.*

The Technical and Educational Products Division of The Rough Notes Company has developed a packet of information on employment practices liability which we are making available for a nominal fee. The packet contains this article along with other relevant information and 10 copies of a customer questionnaire from our Commercial Risk Management Survey. Please contact our Sales Department at 1-800-428-4384 for information or to place an order.

MARCH 1998 X