Insurance Coverage for Employment Discrimination

Most people commonly assume that employment claims are not covered by insurance. Since many employment claims arise out of intentional or willfully unlawful conduct, this is largely, but not totally, true. A more careful look at all of your policies, with an analysis of the claims in a demand letter or complaint, sometimes opens avenues for coverage.

COMPREHENSIVE GENERAL LIABILITY (CGL) POLICIES
Insurance coverage under a CGL policy is only for conduct that is an "occurrence." The typical policy defines occurrence as an accident or an accident which results in bodily injury or property damage neither expected nor intended from the insured's standpoint. Many intentional forms of discrimination, like disparate treatment or firing because of protected class membership, are not an occurrence. However, some common discrimination claims like unlawful disparate impact; sexually hostile environment; failure to investigate; negligent supervision, hiring and retention; and failing to provide reasonable accommodation have been ruled to be occurrences because no showing of intent by the employer is required to establish liability.

The Intentional Acts Exclusion
The standard CGL policy excludes coverage for bodily injury expected or intended from the insured's standpoint. This exclusion has been interpreted similar to the requirement of an occurrence. Generally, injuries resulting from reckless conduct do not fall into the category of expected or intended injuries, but are considered accidental and thus are covered under insurance policies.

This is significant for those employment claims that turn on, for example, a supervisor's hasty or reckless decision to fire a whistleblower employee; stubborn refusal to provide a legally required, reasonable accommodation to a disabled worker; or failure to respond when presented with evidence of a sexually hostile work environment. Though the act or failure to act is intentional, the exclusion will not apply where the supervisor acted only with reckless disregard as to the lawfulness of his or her conduct. On the other hand, allegations of clearly intentional conduct that are merely cloaked in the language of negligence will not cause coverage.

Coverage Typically Unavailable For Injuries Arising Out Of And During Employment By The Insured
Another standard exclusion precludes coverage for bodily injury to any employee of the insured arising out of and during employment by the insured. While a claim for firing or refusal to promote would likely fall in the scope of this exclusion, a variety of claims may not. Sexual harassment often involves conduct that occurred outside the formal workplace setting. Those allegations may cause a duty to defend.

Likewise, claims involving post-termination conduct also may be outside this exclusion. For example, a company who retaliates against a discrimination plaintiff by providing a negative reference after his departure would be liable under Title VII. Similarly, defamation claims often involve statements made after a contested firing may be covered. For an act or omission to be employment related, the relationship must be direct and proximate.

A business could argue that even sexual harassment that occurs during employment on company premises is outside the employment exclusion because the conduct does not involve the pursuit of any legitimate business objective.

Depending on the precise wording of the employment exclusion in a particular policy, even if claims against the company itself are outside coverage, claims against a supervisor may be covered. This may be true if the exclusion speaks to any employee of the insured instead of any employee of any insured. It is important always to distinguish among potential insureds in deciding whether employment claims coverage is available. This is more important in Massachusetts than other states because the Massachusetts antidiscrimination law specifically covers unlawful conduct by an individual who aids or abets a discriminatory practice of another.

Bodily Injury Requirement May Be Satisfied By Allegation Of Physical Effects Of Emotional Distress
Emotional distress alone is not bodily injury of the sort covered under the first coverage part of the standard CGL policy. However, plaintiffs typically describe in the complaint one or more forms of physical distress or injury suffered because of the challenged firing, harassment or other unlawful employment practice. These might include headaches, lost sleep, nausea, loss of appetite or loss of weight. Such allegations are often included to satisfy the "physical harm" requirement for a claim of negligent infliction of emotional distress. With allegations of physical manifestations of emotional distress, bodily injury coverage has been ruled available.

Personal Injury Coverage Section Of CGL Policies Is Often Overlooked
Bodily injury is not the only part of a CGL policy. The personal injury section may also trigger coverage. Unlike bodily injury coverage, personal injury coverage typically does not require an occurrence. This means that coverage may be available even if the injury was due to intentional conduct. Tortuous conduct like defamation, false imprisonment and invasion of an individual's right of privacy (all of which require intent) are covered by the standard policy's personal injury section.

The personal injury section of the typical CGL policy has no intentional acts exclusion. The exclusion here is limited to injuries arising out of the willful violation of a penal statute or ordinance committed by or with the knowledge or consent of the insured. This coverage also typically lacks an exclusion for injuries that arise out of the employment relationship.

Some personal injury coverage forms are broader and specifically include mental anguish, mental injury and humiliation. These sorts of injuries are often found in claims of discriminatory firing or sexual or racial harassment. Coverage for discrimination may also be available under policy language indemnifying against damages incurred by a breach of duty or wrongful act.

COVERAGE FOR EMPLOYMENT CLAIMS MAY BE AVAILABLE UNDER POLICIES OTHER THAN A GENERAL LIABILITY POLICY

Directors' and Officers' Policies
Directors' and officers' ("D&O") policies often have coverage language that includes a variety of employment claims. Without a modification to the standard policy, however, a D&O policy probably does not cover claims against the company directly. Because of the aiding and abetting liability under Massachusetts Law and the asserted tort claims against individual managers, coverage under a D&O policy for individual defendants is often worth pursuing. D&O policies may also contain an exclusion for claims among insureds, and exclusions for emotional distress or discrimination claims more broadly.

Many D&O policies and analogous organization or association liability policies for nonprofit agencies, have endorsements covering employment practices. With that endorsement, a D&O policy can be as good an avenue for coverage as the new Employment Practices Liability (EPLI) policies now on the market. The EPLI policies are, of course, specifically designed to indemnify employers for discrimination, wrongful discharge, harassment and related claims. They typically provide coverage for officers and individual employees and for the company itself.

Umbrella Policies
Business and personal umbrella policies often include broad forms of personal injury coverage. The language may include a list of tort claims in the personal injury coverage section of CGL policies, or it may cover an even broader scope of negligence claims. Umbrella policies also sometimes contain a drop down clause that may require the carrier to defend in any action covered by the umbrella policy, even if the claims are excluded from the underlying policy.

Homeowner Insurance
Homeowner policies typically exclude coverage for injuries from business pursuits. Sometimes the conduct in an employment case may fall outside this exclusion. For example, sexual conduct or talk that grows out of a workplace relationship but occurs off-site may fall outside the scope of this exclusion.

MANY EMPLOYMENT CLAIMS MAY BE COVERED BECAUSE THEY DO NOT REQUIRE INTENT

Sexual Harassment
Claims of hostile environment sexual harassment do not require intent. Unlawful harassment of this sort can occur even when the harassers do not realize their conduct creates a hostile working environment. Title VII is aimed at the consequences or effects of an employment practice and not at the motivation of co-workers or employers. A longstanding locker room or old boys atmosphere, for example, may not have been created with the objective of disadvantaging female workers, but may have that effect. An "intentional acts" exclusion would not bar coverage for that claim.

A business might argue that even forms of sexual harassment (or other discrimination) that require a showing of intent by individuals, may create agency liability for the company which does not require intent or any conduct by the company. As a result, coverage may be available for the company even if not for the individual actors.

Inadequate Investigation Or Response
A common claim in a sexual harassment case is that the employer conducted an inadequate investigation of the complaints under Title VII or failed to set up appropriate, reasonable or effective action in response to notice of a hostile environment. The standard for liability for an employer's action or inaction in this context is like a negligence standard.

Breach of the duty to investigate sexual harassment is often negligent, rather than intentional, conduct. A claim of inadequate investigation is generally based on a sloppy, incomplete or hasty investigation; not a malicious or deliberately inadequate investigation. When an employer learns of harassment, it has a duty to respond adequately. Failing to take appropriate steps can trigger coverage.

Negligent Supervision, Retention, Hiring Or Training
Coverage is often available for claims of negligence in a company's hiring or supervision of an employee who unlawfully discriminates. A claim for negligent supervision, for example, does not require intent and can be an accident entitled to coverage. This type of claim may come up in any employment case where it is alleged that more effective oversight of a supervisor, for instance, would have prevented the harm at hand; Whatever the illegal employment action alleged.

The most common claim in a sexual harassment case is not that the company wanted to harm the plaintiff, but that it did not monitor a supervisor closely enough or failed to act on information it had. Coverage for a claim of negligence may be available even where the underlying conduct is intentional.

Disparate Impact Claims
Employment discrimination plaintiffs have won many claims that do not involve intentional discrimination. Unlawful employment discrimination has been found, for example, in a requirement that applicants complete a physical agility test that disproportionately disqualifies female prospects but is unrelated to the job functions. Subjective selection procedures, like a supervisor's judgment, can create successful disparate impact claims.

Many courts have held that hiring procedures relying on old boy networks, personal contacts, word of mouth or nepotism have an illegal disparate impact. A selection procedure giving preference to applicants with influential references or other non-job related criteria may also be illegal if a racially disparate impact results. Likewise, no showing of intent is required to win a claim that a neutral job qualification has a disparate impact on disabled applicants. A similar claim in a pregnancy discrimination case might come from an employer's refusal to provide sick leave during the first year of employment.

The variety of disparate impact claims is endless. Each rests on the premise that without an intent to disadvantage, something about how a business elects or treats its workers unnecessarily disadvantages members of a protected class. An example is the successful challenge by African-American employees of Domino's Pizza to the Company's no beard policy. Although the rule was race-neutral, the policy was found illegal because it had a disparate impact on African-American men, many of whom suffer from a skin condition that precludes shaving.

Another sort of employment claim that does not require a showing of intentional discrimination is a violation of the Equal Pay Act under which there is no requirement of a finding of purposeful discrimination. An employer violates the statute if members of one sex receive lower wages than members of the opposite sex for work of like or comparable character. There is no requirement that the employer discriminate against one sex or the other, or that the decision to pay one sex less be based on considerations of gender. The statute on its face creates a form of strict liability.

Although unintentional discrimination may be inherently harmful because a plaintiff need not establish that the insured intended to conduct a wrongful action order to recover under such a theory, insurance coverage is often available.

Failure To Provide Reasonable Accommodation
In disability cases, the common claim that an employer failed to reasonably adapt to a worker's disability does not require intentional discrimination. The inquiry, instead, is whether the employer acted reasonably in light of many factors.

TORT CLAIMS SPECIFICALLY COVERED AS PERSONAL INJURY

Defamation claims are often included in discrimination complaints involving unlawful firing. The plaintiff may allege that the company circulated a false reason for firing, or a sexual harassment plaintiff may claim that the employer spread false rumors about his or her sex life. Coverage is often clear because many CGL policies include specific coverage for libel and slander within their definition of personal injury coverage.

Wrongful Imprisonment And Detention
Claims for wrongful imprisonment are typically covered in the definition of personal injury in CGL policies. These claims may come up in employment cases where a terminated employee is detained or forcefully escorted from the premises.

Invasion Of Privacy
Coverage for invasion of privacy is often clearly available. The personal injury coverage part in a CGL policy ordinarily specifically covers this tort. It is a claim that is often included in cases of sexual harassment or disability discrimination. For example, there may be an allegation that the alleged harasser circulated rumors regarding complainants' sex life, or a disabled employee may allege that a supervisor or company wrongfully circulated information concerning a sensitive medical condition.

CONCLUSION
Although insurers often quickly decline to provide a defense in employment cases, a patient review of your insurance policies and of the claims in a complaint can lead to promising avenues for invoking an insurer's duty to defend and the ultimate obligation to indemnify.