Employment law constitutes one of the fastest growing categoriesof civil litigation and has given rise to an increasing need foremployment practice liability insurance, which transfers the riskof these losses to insurers.

Employment practice lawsuits can be expensive for carriers inthis complicated line of business. From the insured's perspective,an EP loss is disruptive, leading to employee turnover and loss ofproductivity, and affecting goodwill. A best-case scenario arisesfor insurers and insureds when legal exposures are avoided orminimized, such as when the carrier provides policyholders withaccess to personnel management strategies at the start of thepolicy period.

The adjustment of EPL claims should be regarded as acomprehensive endeavor involving loss intervention and riskmanagement activities. Opportunities for risk minimization may berealized at the claim-reporting stage, particularly if the incidenthas not yet matured into a lawsuit or administrative charge.Suppose that the insurer has been put on notice of a harassmentcomplaint that has not been investigated by the insured. Riskminimization may be achieved when claim models direct insureds toinitiate timely, appropriate remedial action in response tocomplaints, because the law requires covered employers to promptlyredress harassment.

It makes good business sense for the EP claim manager to conducta quality assurance audit to evaluate whether the existing systemallows for the gathering and follow-up of essential informationduring the early stages of adjustment, as this also may result inthe achievement of cost-containment goals. The adjuster or defensecounsel will not be required to make numerous follow-up requestsfor information and records. Additionally, having much of the keydata in advance will help to develop a clearer understanding of thescope of liability.

Time is of the Essence

The EP claim manager should assess whether the current modelallows for prompt responses to claims, especially in cases thathave not progressed to litigation. Employee-relation grievancestend to grow exponentially over time. A single unresolved ormishandled complaint can spread quickly into a more severe problem,resulting in several claims encompassing retaliation,whistle-blower actions, multiple complaining parties, litigation,and, ultimately, liability. All of this could be avoided throughloss intervention.

The claim model should include a mechanism to direct insuredsimmediately to experts who can assist in mitigating losses. If theinsurer offers risk management consultive services, adjustersshould procure assistance on behalf of insureds. If the carrierdoes not offer this benefit, adjusters should ask whether insuredshave sought the advice of such company officials as directors ofhuman resources or general counsel. Adjusters never should assumethat insureds have done this. Managers, supervisors, and executivescan be territorial regarding departmental operations. When theiregos get in the way, they can resist seeking guidance fromcolleagues who possess EP expertise.

As a last resort, and when applicable, insureds should beadvised to take an EP crash course by consulting the web sites ofgovernment agencies that enforce the employment statutes.

If insureds have been served with complaints, defense counselshould be notified immediately to ensure that answers are filedwithin the time frame established by court rules of procedure. EPclaim managers should review policies to determine how defensecounsel is to be selected, including whether insureds are entitledto choose attorneys from carriers' authorized lists.

Because many employment statutes require employees to exhaustadministrative remedies before initiating lawsuits, adjustersshould ask whether insureds had received administrative inquiriespreviously. Insureds should be directed to provide copies of anyadministrative charges, as well as services of process. This willsave time later in clarifying whether employees had exhausted anyapplicable administrative remedies and whether insureds hadbreached any late-notice clauses of the policies.

If claims involve administrative charges, prompt and properresponse is needed. Suppose that an employee has filed a complaintof racial discrimination with the Equal Employment OpportunityCommission. The EEOC's investigation may include a written requestfor information, interviews with various employees, and an on-siteinspection of the workplace. The EEOC can dismiss a charge if itdetermines that further investigation will not establish aviolation of the law. If the matter ends up in suit, however, theremedies that are available include back pay, front pay, otheractions that will make the individual whole, attorney's fees,expert witness fees, court costs, and, in cases when intentionaldiscrimination is found, punitive and compensatory damages.Accordingly, insureds should seek the advice of experts who canadvocate for them during EEOC investigation processes.

Claims Under EP Policies

Policies may limit claims to actual lawsuits or administrativecharges, or they may be characterized more broadly to includeprospective claims by means of threatening letters from attorneysor written employee grievances. Even if incidents have not yetrisen to the level of claims required by the policies, adjustersshould thoroughly document occurrences and initiate lossintervention activities as indicated. Claim managers should ensurethat proper questions are asked during the reporting process.

Policies may include cooperation clauses that require insuredsto identify the names of those making claims. The claim-reportingmodel also should address complainants' employment status, lengthof service, job titles, and where they fall on the organizationalchart. Developing a thorough understanding of who has made claimswill illuminate the prospective scope of losses. A loss may beexcluded if, for instance, the policy only covers employeesretained on a full- or part-time basis, and the complainant happensto be an independent contractor. An employee also may be precludedfrom initiating litigation if the challenged EP is governed by astatute that limits remedies to certain eligible employees. If theincident relates to an alleged failure to grant parental leavepursuant to the federal Family and Medical Leave Act, this statutedefines eligible employees as those who have worked for theemployer for at least 12 months and for 1,250 hours during the 12months preceding the leave.

Insureds should report whether claims involve coworkers,supervisors and subordinates, or third parties, such as vendors orcustomers. If a complaint has been lodged against an individual whohas been conferred the authority to make employment decisions onbehalf of the insured, the exposure will be greater than if theclaim involves coworkers. The higher up in the organization anindividual's job title falls, the greater the prospectiveliability. If that individual's management style includes adisregard for the law and his job title is positioned near the topof the organizational ladder, the complaint may be just the tip ofthe iceberg.

Furthermore, insureds' applications for EP coverage may haveinquired about insureds' loss histories and any supplemental EPclaims that they may have had in the past. If claims involvesupervisors, managers, or executives, adjusters should ask whetherthese people have been targeted previously. It may be wise toevaluate whether insureds' management teams require training onlegally compliant employment practices.

Types of Claims

Next, managers should focus on whether the claim-reportingprocess allows for proper analysis of substantive aspects of theincidents. Ample questions relating to what has occurred can helpto identify whether a challenged EP is covered, such as wheninsureds' liability arising out of fraudulent, criminal, ormalicious acts or omissions are excluded from coverage.

Suppose that a claim deals with an allegation of sexualharassment, a category of liability that generally is covered andone that has been the focus of much litigation. The insuranceapplication may have included questions regarding whether theinsured had an established formal written policy and grievanceprocedure. The EP policy may even require that insureds have thesesorts of preventive measures in place, because of the SupremeCourt's 1998 rulings in the landmark cases Faragher v. City of BocaRaton and Burlington Industries, Inc. v. Ellerth. In those cases,the court found that employers defending against certain types ofsexual harassment lawsuits can raise affirmative defenses toliability.

Employers are strictly liable for harassment resulting intangible employment actions, including when supervisors demotesubordinates for refusing to engage in sexual conduct. If theconduct does not result in tangible employment actions, employerscan raise affirmative defenses to liability based on theFaragher/Ellerth rubric as follows: i) the defendant/employerexercised reasonable care to prevent and correct promptly thediscrimination, and ii) the plaintiff/employee unreasonably failedto take advantage of these preventive or corrective opportunitiesto avoid harm.

The following questions should be asked regarding these claims:Were there written policies prohibiting sexual harassment? If so,were they communicated to the complaining employees and allegedharassers? Did the companies conduct anti-harassment trainingsessions? Did the involved parties attend? Do the companies haveestablished grievance procedures? Were investigations conductedinto the employees' complaints? Were any violations of the policiesfound? Were appropriate remedial measures taken to address theconduct giving rise to the complaints?

Insureds should provide complete copies of all personnel recordson all involved parties. Not all employee records are contained inpersonnel jackets. If record keeping procedures are lax, employmentdocuments may be found in various locations, including filing bins,supervisors' desk drawers, and payroll departments. Adjusters alsoshould ask for copies of anti-harassment policies and grievanceprocedures. If it turns out that insureds lack these programs,despite representing on applications that they did, such inaccurateinformation may have caused carriers to accept risks they might nototherwise have insured or, alternatively, to have chargedinsufficient premiums. Many jurisdictions allow for the rescissionof insurance contracts based on material misstatements orconcealment of known facts in the procurement of insurance.Obtaining this information early in the claim-investigation processmay have far-reaching implications.

Insureds should provide details regarding whether the incidentsoccurred in the workplaces, at company-sponsored events, orelsewhere to determine whether incidents truly are related toemployment practices or, conversely, involved private actionsbetween two adults who happen to be employed by the insured.

Another important location-related inquiry is the identificationof entities that were employers of record with respect tocomplaining parties. Corporate takeovers and mergers have becomecommon. EP policies may not provide coverage for new organizationsthat are formed or acquired by named insureds during policyperiods.

Quality assurance audits should ensure that sufficientinformation is obtained concerning the time frames of incidents. EPpolicies tend to be claim-made, requiring that notice be given toinsurers during policy periods. The insurance contracts may statethat claims must be made within fixed periods after the expirationof policy periods. In certain instances, insureds may be requiredto purchase additional extended reporting coverage. Accordingly,information concerning when claims occurred is crucial indetermining whether occurrences are covered.

Kathleen M. Bonczyk is a litigation associate with PowersMcNalis & Torres in West Palm Beach, Fla.