(April 2019)
Coverage for employment-related practices is always a hot topic and gets hotter every day. Every employer, insurance agent, and insurance company must recognize, address, and resolve the large number of issues related to it.
The first step to analyze this issue is to identify employment-related practices and examine some of the issues to consider when evaluating this exposure. When an employer decides to hire a new employee, there is usually a written or unwritten procedure that applies to the interview and hiring process. This procedure includes activities such as who reviews and decides that the person is acceptable for employment and how to determine that acceptability. This is an example of an employment-related practice. If there is no actual policy or procedure with respect to interviewing and hiring, the lack of one is also an employment-related practice.
Another element involves the ongoing policies and procedures used during the course of normal daily business operations as they relate to employees and employment. These include the procedures (or lack thereof) that relate to evaluating, promoting, disciplining, demoting, reassigning, or terminating existing employees. Recent additions to this list include the employer’s tolerance and treatment of sexual, racial, gender, or religious discrimination, or harassment. These issues are all part of employment-related practices.
Modern society considers most of these issues to be an employer’s basic moral obligation to treat its employees fairly and equitably. There are also the legal obligations that federal, state, and local laws impose, in addition to various other related or similar regulations that specifically address the employer's conduct while engaged in these activities. These laws and regulations fall into two basic activities. One involves fairness in hiring, promoting, paying, and generally treating employees in a non-discriminatory way. This type of activity is the one most often associated with employment-related practices. The other activity involves maintaining a physically safe workplace and taking all reasonable and necessary steps to minimize or prevent injuries or disease from occurring.
Most public libraries have a variety of relevant and related material for those who seek in-depth information on federal and state laws with respect to employment.
This analysis begins by reviewing the definition of bodily injury in the Insurance Services Office (ISO) Commercial General Liability (CGL) Coverage Forms. Bodily injury means bodily injury, sickness, or disease a person sustains, including death that results from these at any time. This broad definition includes obvious physical illness, injury, or disease. It also includes physical manifestations of stress and mental anguish in some jurisdictions.
The ISO CGL Coverage Forms address exposures that relate to safe workplaces and bodily injuries an employee sustains while on the job. In addition to federal government regulation of workplace safety at all levels, state governments also mandate remedies through workers compensation, disability benefits, unemployment compensation, and similar laws. Both primary ISO CGL Coverage Forms address how physical injury to employees is treated under Section 1 Coverages, Coverage A Bodily Injury and Property Damage Liability, 2. Exclusion d. and Exclusion e.
d. Workers Compensation and Similar Laws
There is no coverage for any requirement or obligation of the insured
imposed by laws such as workers compensation, disability benefits, unemployment
compensation, and others.
The intent of this exclusion and the Employers Liability exclusion is to
eliminate the possibility of the insured being indemnified under this coverage
form for an injury that workers compensation or employer’s liability policies
cover.
e. Employers Liability
Bodily injury to an employee of the insured as a result of his or her
employment by the insured or while that employee is performing duties that are
in support of the insured’s business is excluded. Bodily injury to the spouse,
children, parents, brothers, or sisters of that employee as a consequence of
his or her bodily injury is also excluded.
This exclusion applies whether the insured is liable because it is the
employer or for any other reason.
The exclusion applies whether it must share damages with or repay
someone else who must pay damages because of the injury.
However, it does not apply to liability the insured assumes under an
insured contract.
This clarification is especially important because contractors,
subcontractors, independent contractors, or leased employees are being used to
an increasing extent and there is uncertainty about who is responsible for
their injuries.
The ISO CGL Coverage Forms clearly do not apply to losses or suits for bodily injury that an employee sustains. The Workers Compensation and Employers Liability Insurance Policy provides this coverage and protects against such losses.
The ISO CGL Coverage Forms use Exclusion a. Expected or Intended Injury to not cover intentional actions against employees. Coverage does not apply to bodily injury or property damage expected or intended by the insured. The intent of this exclusion is for insurance companies to avoid paying claims as a result of the insured's intentional acts. That includes discrimination and unfair treatment. This exclusion is in the public interest and ensures that the employer does not use the coverage provided to insure against the consequences of such illegal behavior.
In one court case, a woman sued her employer, the insured, alleging she was forced to engage in sexual acts with the employer in order to keep her job. The CGL carrier denied coverage. The insured claimed that the resulting injury was not expected or intended. Appeals were made and a decision was eventually handed down in favor of the insurance company and against the insured. The decision was that the employer intended the bodily injuries the employee sustained. (American Manufacturers Mutual Ins. Co. v. Wodarski et al., US Court of Appeals for the Tenth Circuit, October 18, 1995.)
Another issue is to determine what happens when the bodily injury to a person who is not an employee results directly from the insured employer's employment practices. A man may apply for a job that he qualifies for, but the prospective employer unfairly refuses to consider him based solely on race, sex, or religion. Do the ISO CGL Coverage Forms respond if the man sustains bodily injury in the form of stress-caused illness? Does the exclusion for expected or intended injury apply? While it may seem that coverage applies, this exclusion's language continues to be challenged and reviewed in court cases around the country because, while the act was intentional, the injury or damage that resulted was greater than expected or intended. For this reason, coverage could apply.
The following cases are interesting as they relate to the Expected or Intended Injury Exclusion.
One took place in Ohio (a monopolistic workers compensation state) and suit was brought under the employer’s CGL coverage. The insured employer was sandblasting a bridge and did not provide its employees with any fall protection, such as safety belts, lifelines, or nets. An employee fell and died from his injuries. The surviving spouse sued the employer. The insurance company denied coverage, contending that coverage did not apply because of the Expected or Intended Injury Exclusion. It argued that the employer intentionally neglected to provide safety equipment and should have expected such injuries to occur. The trial court found in favor of the employer and the insurance company appealed. The appellate court affirmed the lower court's decision in favor of the employer and coverage was found to apply because no proof was given to substantiate the allegation that the injury was expected and intended. (Beacon Ins. Co. of America v. Kleoudis, 652 N.E. 2d 1 (Ohio App. 8th Dist. 1995).
In another case, the insured
employer hired the son of a current employee to do janitorial work. The boy's
mother just happened to be in charge of the employer’s personnel records and
concealed the fact that her son had a criminal record and had previously
committed a violent crime. Based on its personnel policies and procedures, the
employer would not have hired the boy if it knew of his criminal record. During
the course of his employment, the boy raped and robbed a fellow employee. The
victim subsequently sued the employer for negligently hiring, managing, and
supervising the boy. The CGL carrier denied coverage based on the Expected or
Intended Injury Exclusion. It stated that the mother should have expected such
an injury since she was the employee in charge of personnel records. The
employer appealed the denial of coverage. The appellate court held that the
exclusion did not apply in this case and the insurance company was required to
defend and indemnify on the employer's behalf. (Sphere Drake Ins. Co. v. P.B.L. Entertainment, Inc. 30 F.3d 21 (2d Cir. 1994).
The previous sections of this analysis focused on bodily injury. The ISO CGL Coverage Forms exclude physical or bodily injury an employee sustains. On the other hand, coverage for physical or bodily injury to non-employees may apply, depending on whether or not the cause is expected or intended by the insured. A related question concerns what happens when an insured employer is sued or a claim is made against it for damages other than bodily injury, such as monetary damages, loss of income, or loss of potential financial resources. Claims like these could be from either an employee who feels he or she was not treated fairly or from a non-employee. It is important to note that only bodily injury to employees is excluded.
The definition of property damage in the ISO CGL Coverage Forms must be reviewed. Property damage means physical injury to tangible property, including all resulting loss of use of it. Loss of use is considered to occur at the time of the physical injury that caused it. It also means loss of use of tangible property not physically injured. In this case, loss of use is considered to have occurred at the time of the occurrence that caused it.
With this definition in mind, it is clear that any monetary damages that result from employment-related practices do not fall into this category because there was no actual damage or injury to tangible property. These kinds of claims usually fall under personal and advertising injury liability. Under Coverage B–Personal and Advertising Injury Liability, the insuring agreement states that the insurance company agrees to pay sums the insured is legally obligated to pay as damages because of personal and advertising injury that this insurance covers. The insurance company has the right and duty to defend the insured against any suit that seeks damages but only if the injury is covered.
Personal and advertising injury means injury, including consequential bodily injury, caused by, that results from, or that arises out of one or more of the following offenses:
Personal and advertising injury is injury other than bodily injury. This is interpreted to include monetary damages and mental anguish. As a result, personal and advertising injury is relevant and applies to employment-related practices claims and suits. The ISO CGL Coverage Forms may be required to provide defense and coverage in some cases based on the personal injury coverage provided.
In a suit that alleged
religious discrimination, an employee was not allowed to attend a religious
service during working hours. The employer fired the employee when he attended
the service without approval. In the resulting discrimination suit that alleged
personal injury, the employer's CGL carrier denied coverage and refused to
defend. The employer then hired independent counsel but lost the case. At that
point, the employer sued the insurance company. The employer won in the lower
court proceeding and the carrier appealed. The appellate court held that
personal injury (including discrimination) was covered as long as it was not
against the law or public policy. However, intentional discrimination is
excluded. The insurance company failed to prove that the discrimination was an
actual act of intentional religious discrimination. As a result, coverage applied,
and it was responsible for defense costs and the amount awarded to the
employee. (Ron Tonkin Chevrolet v.
Continental Ins. Co., 870
P. 2d 252 Or. App. 1994.
In a Rhode Island court
case, a former employee sued the insured employer for racial discrimination and
violation of human rights. The employee had legitimate grounds and was awarded
back pay and defense costs. The employer’s CGL carrier denied coverage and the
insured then sued it. The finding was that the insurance company was not liable
for two reasons. The first was that the complaint was based on intentional
racial discrimination that is specifically excluded. The second was that the
complaint did not allege either personal injury or bodily injury. Since only
monetary damages were involved, there was no coverage under the ISO CGL
Coverage Form. (Foxon Packaging
Corp. v. Aetna Casualty & Surety Co., 905 F. Supp. 1139 (D.R.I.1995).
Note: This
analysis is of the 12 07 edition. Changes from the previous edition are in
bold print.
ISO developed CG 21 47–Employment Related Practices Exclusion to exclude many of the employment-related practices coverages in the CGL Coverage Forms. However, it does not eliminate all of them. Many insurance companies consider this a mandatory endorsement, but ISO considers it mandatory only whenever an Employment-related Practices policy is written in order to prevent conflicts.
This portion of the exclusion is added to Paragraph 2. Exclusions of Section
I Coverage A Bodily Injury and Property Damage Liability. Coverage does not
apply to bodily injury to:
This exclusion applies under all of the following circumstances:
·
Whether
the event that caused the injury described above occurs before, during, or after that person's
employment
·
Whether
the insured may be liable as an employer or in any other capacity
·
To any
obligation to share damages with or repay another party that must pay damages
because of the injury
Note: This exclusion is not limited to either employees or non-employees. It covers any bodily injury and applies to both groups. Consider refusal to employ. There is no coverage if the insured employer decides to not hire a person for any reason, whether the reason is sound and valid, is simply due to standard company procedure, or results from an unfair practice. It is clear that coverage does not apply to refusal to employ an individual based on race, sex, or religious practices. On a related matter, a company that had a written policy to not hire relatives of current employees faced a lawsuit from one employee's sister. She was eminently qualified and had outstanding credentials and qualifications but was denied employment because she was related to a current employee. There is no coverage when this endorsement is attached to the ISO CGL Coverage Forms, regardless of whether or not the insured was found liable for damages in the suit.
Unfair or discriminatory termination of employment is clearly excluded. There is no coverage, even in cases where the termination is valid, such as when a company must downsize and reduce staff in order to survive, or if the employee did not meet performance standards and was terminated for cause.
Coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination, malicious prosecution, or other employment-related practices, policies, acts, or omissions are excluded. The intent of this endorsement is to exclude coverage for the insured employer's unfair, inappropriate, and illegal acts, including those of its management and supervisory employees. Coverage does not apply because practices like the ones listed above should not be tolerated under any circumstances.
Notes: The 12 07 edition added malicious prosecution because the court in Peterborough Oil Company, Inc. v. Great American Insurance refused to exclude malicious prosecution as an employment-related practice. The court reasoned that the insurance company should have specifically listed malicious prosecution if it intended to exclude it. The court's interpretation was that this exclusion must be read narrowly to the extent that even with the term "such as" preceding the listing, only the practices actually listed are excluded.
The employment-related practices exclusion applies even if the injury
occurred before the individual was employed or after his or her employment
ended. This paragraph was added to the 12 07 edition in response to Owners
Insurance Company v. Clayton, where the insurance company was required to
pay for damages to a terminated employee who was slandered after she was no
longer employed.
Related Court Case: Slander After Employment Not Subject To The Employment-Related Exclusion
Unfair and discriminatory employment practices are excluded as well as lawsuits
filed against the insured employer as a result of its legitimate and sound
procedures. A disgruntled current or former employee may attempt to make the
employer pay by filing a frivolous or inappropriate lawsuit. For example, an
employee demoted for cause may attempt to sue the employer anyway and see how
far it can go. There is no coverage or obligation to defend the suit when this
endorsement is attached to the coverage form.
This portion of the exclusion is added to Paragraph 2. Exclusions of
Section I Coverage B Personal and Advertising Injury Liability. Coverage does
not apply to personal and advertising injury to:
This exclusion applies:
·
Whether
the event that caused the injury described above occurs before, during, or after that person's
employment
·
Whether
the insured may be liable as an employer or in any other capacity
·
To any
obligation to share damages with or repay another party that must pay damages
because of the injury
To summarize, there is no coverage for either bodily injury or personal and advertising injury for the causes and reasons listed for any employee or non-employee. Coverage does not apply for many of the exposures that result from most employment-related practices.
The impetus for this coverage began with public interest in the confirmation hearings of Supreme Court Justice Clarence Thomas and his alleged relationship with a female co-worker. Other changes in federal and state laws, including the Americans with Disabilities Act and the Civil Rights Act of 1991, along with new consumer awareness of the practice of sexual harassment and discrimination in business, all contributed to the attention this case received. Coverage was previously available for only the legal costs to defend claims against sexual harassment, wrongful termination, and discrimination. Policies and coverage forms have since been developed that actually insure the insured's legal liability for such acts.
The coverage form or policy covers the insured employer's legal liability for certain employment practices that lead to allegations of wrongful termination, discrimination, or sexual harassment. The standard ISO Commercial General Liability Coverage Forms, Excess Liability, Employers’ Liability, and Directors & Officers Liability policies exclude these events. Limits are available that range form as little as $25,000 per claim to as much as $10,000,000 in the aggregate. Some policies include and cover employees as additional insureds.
Related Article: Employment-related Practices Liability Insurance Coverage Form Analysis