Several years ago, I was the agent handling anemployment-related charge of sexual harassment that was filedagainst a high-ranking officer of a financial institution, who alsowas a prominent member of the community.

Although the claim was very tame in comparison with headlines of today, people who knew this man could not imaginethey were true. Fortunately for the defendant, his company carriedan employment practices liability (EPLI) policy that defended thecase. Had he been found to have committed a wrongful act, thepolicy would also have paid the damages.

Many companies, however, do not purchase EPLI coverage. When faced with a similar situation, the allegedharasser and/or the employer may be on the hook for defense and anydamages. But are there other insurance avenues that should beconsidered for defense costs when EPLI is not available?

According to Attorney Brit Weimer and his fellow authors of thesecond edition of The EPL Guide to Risk Exposures andCoverage, employers and their employees may be able to findcoverage through other policies when EPLI is not available. In somecases, the exclusive remedy aspects of the workers' compensationsystem may actually preclude separate lawsuits against employersfor alleged harassment or discrimination.

The Workers' Comp Remedy?
There are anumber of hurdles to cross in determining whether workers'compensation is the exclusive remedy in certain employment-relatedclaims, including questions of whether the harassing injuryqualifies as bodily injury under the workers' compensation policy,how closely the discrimination or harassment is connected to theworkplace, and whether the action and injury are intentional orunintentional.

Workers' compensation cases that involve emotional or mentalinjury typically can be divided into three groups:

• Mental stimulus resulting in physicalinjury.
• Physical trauma resulting in mentalinjury.
• Physical injury that results in mentalinjury.

When physical injury is evident, as in the first two situations,workers' compensation likely will apply. But when only mentalinjury is evident—such as the case may be in sexual harassment anddiscrimination claims—the question of compensability and exclusiveremedy is not so clear. Some jurisdictions that require physicalinjury use the argument that mental injury is too difficult tosubstantiate, leading to a greater possibility of fraud.

Emotional Injuries
Most states haveadopted the interpretation that purely emotional or mental injuryclaims arising from employment are not compensable. Thosejurisdictions that do permit workers' compensation coverage forclaims for mental injury without accompanying bodily injuryemphasize that the difficulty of formulating appropriate legaltests does not justify denying such claims. For example, in NPSCorp. v. Insurance Company of North America, the New Jerseyappeals court held that emotional distress and mental anguishcaused to an employee by sexual harassment from a fellow employeeconstituted bodily injury. The court stated that New Jersey hadcome to recognize that mental and emotional distress are just asreal as physical pain and that its valuation is no more difficult.The court said, “We are unable to separate a person's nerves andtensions from his body since, clearly, emotional trauma can be asdisabling to the body as a visible physical wound.”

Note that the New Jersey Supreme Court offered its disagreementwith this thinking in SL Industries, Inc. v. American MotoristsInsurance Company, 607 A.2d 1266 (1992). In that case, thecourt said that NPS presents “irreconcilable inconsistencies andambiguities lacking coherent underlying principles.” The court heldthat “in the context of purely emotional distress without physicalmanifestations, the phrase 'bodily injury' is not ambiguous; itsordinary meaning connotes some sort of physical problem.”

Some jurisdictions may rule that workers' comp is the exclusiveremedy in employment-related mental injury claims only when thereis extraordinary mental distress that is significantly greater thanordinary workplace stress. This was evident in Arizona, where afast-food worker tried to sue her employer for sexual assault by acoworker who previously had molested another employee. The court,in Irvin Investors v. Superior Court, held that workers'compensation was the exclusive remedy for the employee's injuries.The sexual molestation caused such extraordinary stress that theclaim met Arizona's workers' compensation category of unexpected,unusual, or extraordinary mental injury. The mental injury wascompensable in Arizona, and the employee's personal injury suit wasnot allowed to proceed.

Decisions for Dual Claims
Mixed motivecases—where the employer's conduct is comprised of both intentionaldiscrimination and negligence—may result in workers' comp applyingto part of the claim and a personal injury claim being permitted toproceed for the intentional discrimination. This is seen in aVermont case, Gallipo v. City of Rutland, where anemployee alleged he was injured by an accident for workers'compensation purposes and also claimed that he was injured byunlawful discrimination. The Vermont Supreme Court allowed bothclaims to proceed, stating that the dual claims were notinconsistent and should be allowed to proceed.

When a personal injury lawsuit is allowed to proceed, theemployer may face a difficult situation if an EPLI policy is not inplace.

The employer's liability part of the workers' compensationpolicy addresses employee tort actions against their employers forinjury that is not covered by the workers' compensation section ofthe policy. There are a number of exclusions on the employer'sliability portion of the policy, including bodily injuryintentionally caused or aggravated by the employer and, even moreimportantly, damages arising out of coercion, criticism, demotion,evaluation, reassignment, discipline, defamation, harassment,humiliation, discrimination against or termination of any employee,or any personnel practices, policies, acts, or omissions. Thus, theemployer's liability coverage would not be triggered for employeeclaims of harassment or discrimination.

The possible application of workers' compensation coverage toemployment-related practices liability claims does not negate theneed for an EPLI policy, by any means. It may even preclude claimsthat qualify for the exclusive-remedy protection of the workers'comp system. At the least, it points out that EPLI claims have tobe considered carefully so that all possible coverage istapped.