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

Employment practice lawsuits can be expensive for carriers in this complicated line of business. From the insured's perspective, an EP loss is disruptive, leading to employee turnover and loss of productivity, and affecting goodwill. A best-case scenario arises for insurers and insureds when legal exposures are avoided or minimized, such as when the carrier provides policyholders with access to personnel management strategies at the start of the policy period.

The adjustment of EPL claims should be regarded as a comprehensive endeavor involving loss intervention and risk management activities. Opportunities for risk minimization may be realized at the claim-reporting stage, particularly if the incident has not yet matured into a lawsuit or administrative charge. Suppose that the insurer has been put on notice of a harassment complaint that has not been investigated by the insured. Risk minimization may be achieved when claim models direct insureds to initiate timely, appropriate remedial action in response to complaints, because the law requires covered employers to promptly redress harassment.

It makes good business sense for the EP claim manager to conduct a quality assurance audit to evaluate whether the existing system allows for the gathering and follow-up of essential information during the early stages of adjustment, as this also may result in the achievement of cost-containment goals. The adjuster or defense counsel will not be required to make numerous follow-up requests for information and records. Additionally, having much of the key data in advance will help to develop a clearer understanding of the scope of liability.

Time is of the Essence

The EP claim manager should assess whether the current model allows for prompt responses to claims, especially in cases that have not progressed to litigation. Employee-relation grievances tend to grow exponentially over time. A single unresolved or mishandled 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 through loss intervention.

The claim model should include a mechanism to direct insureds immediately to experts who can assist in mitigating losses. If the insurer offers risk management consultive services, adjusters should procure assistance on behalf of insureds. If the carrier does not offer this benefit, adjusters should ask whether insureds have sought the advice of such company officials as directors of human resources or general counsel. Adjusters never should assume that insureds have done this. Managers, supervisors, and executives can be territorial regarding departmental operations. When their egos get in the way, they can resist seeking guidance from colleagues who possess EP expertise.

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

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

Because many employment statutes require employees to exhaust administrative remedies before initiating lawsuits, adjusters should ask whether insureds had received administrative inquiries previously. Insureds should be directed to provide copies of any administrative charges, as well as services of process. This will save time later in clarifying whether employees had exhausted any applicable administrative remedies and whether insureds had breached any late-notice clauses of the policies.

If claims involve administrative charges, prompt and proper response is needed. Suppose that an employee has filed a complaint of racial discrimination with the Equal Employment Opportunity Commission. The EEOC's investigation may include a written request for information, interviews with various employees, and an on-site inspection of the workplace. The EEOC can dismiss a charge if it determines that further investigation will not establish a violation of the law. If the matter ends up in suit, however, the remedies that are available include back pay, front pay, other actions that will make the individual whole, attorney's fees, expert witness fees, court costs, and, in cases when intentional discrimination is found, punitive and compensatory damages. Accordingly, insureds should seek the advice of experts who can advocate for them during EEOC investigation processes.

Claims Under EP Policies

Policies may limit claims to actual lawsuits or administrative charges, or they may be characterized more broadly to include prospective claims by means of threatening letters from attorneys or written employee grievances. Even if incidents have not yet risen to the level of claims required by the policies, adjusters should thoroughly document occurrences and initiate loss intervention activities as indicated. Claim managers should ensure that proper questions are asked during the reporting process.

Policies may include cooperation clauses that require insureds to identify the names of those making claims. The claim-reporting model also should address complainants' employment status, length of service, job titles, and where they fall on the organizational chart. Developing a thorough understanding of who has made claims will illuminate the prospective scope of losses. A loss may be excluded if, for instance, the policy only covers employees retained on a full- or part-time basis, and the complainant happens to be an independent contractor. An employee also may be precluded from initiating litigation if the challenged EP is governed by a statute that limits remedies to certain eligible employees. If the incident relates to an alleged failure to grant parental leave pursuant to the federal Family and Medical Leave Act, this statute defines eligible employees as those who have worked for the employer for at least 12 months and for 1,250 hours during the 12 months preceding the leave.

Insureds should report whether claims involve coworkers, supervisors and subordinates, or third parties, such as vendors or customers. If a complaint has been lodged against an individual who has been conferred the authority to make employment decisions on behalf of the insured, the exposure will be greater than if the claim involves coworkers. The higher up in the organization an individual's job title falls, the greater the prospective liability. If that individual's management style includes a disregard for the law and his job title is positioned near the top of the organizational ladder, the complaint may be just the tip of the iceberg.

Furthermore, insureds' applications for EP coverage may have inquired about insureds' loss histories and any supplemental EP claims that they may have had in the past. If claims involve supervisors, managers, or executives, adjusters should ask whether these people have been targeted previously. It may be wise to evaluate whether insureds' management teams require training on legally compliant employment practices.

Types of Claims

Next, managers should focus on whether the claim-reporting process allows for proper analysis of substantive aspects of the incidents. Ample questions relating to what has occurred can help to identify whether a challenged EP is covered, such as when insureds' liability arising out of fraudulent, criminal, or malicious acts or omissions are excluded from coverage.

Suppose that a claim deals with an allegation of sexual harassment, a category of liability that generally is covered and one that has been the focus of much litigation. The insurance application may have included questions regarding whether the insured had an established formal written policy and grievance procedure. The EP policy may even require that insureds have these sorts of preventive measures in place, because of the Supreme Court's 1998 rulings in the landmark cases Faragher v. City of Boca Raton and Burlington Industries, Inc. v. Ellerth. In those cases, the court found that employers defending against certain types of sexual harassment lawsuits can raise affirmative defenses to liability.

Employers are strictly liable for harassment resulting in tangible employment actions, including when supervisors demote subordinates for refusing to engage in sexual conduct. If the conduct does not result in tangible employment actions, employers can raise affirmative defenses to liability based on the Faragher/Ellerth rubric as follows: i) the defendant/employer exercised reasonable care to prevent and correct promptly the discrimination, and ii) the plaintiff/employee unreasonably failed to take advantage of these preventive or corrective opportunities to 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 alleged harassers? Did the companies conduct anti-harassment training sessions? Did the involved parties attend? Do the companies have established grievance procedures? Were investigations conducted into the employees' complaints? Were any violations of the policies found? Were appropriate remedial measures taken to address the conduct giving rise to the complaints?

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

Insureds should provide details regarding whether the incidents occurred in the workplaces, at company-sponsored events, or elsewhere to determine whether incidents truly are related to employment practices or, conversely, involved private actions between two adults who happen to be employed by the insured.

Another important location-related inquiry is the identification of entities that were employers of record with respect to complaining parties. Corporate takeovers and mergers have become common. EP policies may not provide coverage for new organizations that are formed or acquired by named insureds during policy periods.

Quality assurance audits should ensure that sufficient information is obtained concerning the time frames of incidents. EP policies tend to be claim-made, requiring that notice be given to insurers during policy periods. The insurance contracts may state that claims must be made within fixed periods after the expiration of policy periods. In certain instances, insureds may be required to purchase additional extended reporting coverage. Accordingly, information concerning when claims occurred is crucial in determining whether occurrences are covered.

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

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Managing and Investigating EPL Claims

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