Not long ago, few insurance companies wrote employment practices liability insurance that included third-party coverage. When EPLI was introduced, the loss potential of third-party coverage was not fully understood, which made many insurers apprehensive. While most EPLI carriers now offer the coverage, a few still don't, mainly because there is not enough actuarial data to statistically support it.
Third-party EPLI is intended to protect an insured entity and its employees from allegations of various wrongful acts committed against the insured's customers, clients, vendors, suppliers and visitors. The list of potential claimants may even include medical patients, volunteers and all other non-employees. A few EPLI forms also grant coverage for wrongful acts committed by such third parties against the named insured's employees.
Third-party wrongful acts include harassment and all forms of discrimination. Discrimination claims may allege discriminatory practices against a person based on their race, religion, age, sex, national origin, disability, pregnancy or sexual orientation. Harassment claims allege unwelcome sexual advances or requests for sexual favors. Such acts include verbal and physical conduct, and other forms of harassment that create a hostile or offensive work environment. Some policies also respond to allegations of mental anguish, emotional distress and humiliation. Some go so far as to cover allegations of assault.
Businesses and institutions that have a lot of direct contact with the public are more prone to third-party claims than those that do not. Hotels, restaurants, country clubs, medical facilities, schools, religious institutions, the entertainment industry, and the legal and real estate professions are a few examples. In some cases, EPLI carriers may not provide third-party coverage to such insureds because of their claims potential. In others, a carrier may offer only limited coverage; e.g., for allegations of discrimination but not for harassment, or vice versa.
An example of a recent, well-publicized case involving third-party issues concerned two women who were denied membership to an exclusive men's country club. They sued the club for gender-based discrimination. Since 9/11, there also has been an increase in the number of discrimination claims made on the basis of national origin, race and civil rights violations. Many have been made by persons of Arab or Middle-Eastern descent. They have been made against an array of businesses and industries. More recently, we have seen an increase in third-party claims alleging a violation of the Americans with Disabilities Act.
As previously mentioned, there are two types of third-party claims: In one, employees allege they were harassed by third parties. In the other, third parties claim they were harassed by the employees. For example, a waitress at a nightclub may be subjected to many forms of harassment by its patrons. On the other hand, it's also possible for a waitress to harass the customers.
It's possible for a third-party claim to also be interpreted as a "hostile work environment" claim against an employer. Suppose a document messenger makes daily stops at a real-estate agency, where he greets the receptionist. After a number of visits, the messenger begins making suggestive sexual remarks. The receptionist complains to the owner of the business, who does nothing other than advise the receptionist to just tell the messenger to stop bothering her.
One day the messenger appears and makes suggestive remarks to the receptionist and even touches her inappropriately. Visibly shaken, the receptionist complains again to her boss, who takes no action. Not being able to endure the continuing harassment, the receptionist quits and sues her boss for emotional distress and failing to prevent an assault.
This is a clear example of an employer tolerating a hostile work environment, a typical EPL claim. The mere inaction of the employer makes him responsible. This also could be pursued as a third-party claim against the messenger's employer.
Let's consider some other claim scenarios under which third-party EPLI is needed:
–A regional furniture manufacturer decides to relocate its manufacturing facility and engages a real estate firm to handle the transaction. The real estate firm assigns one of its top agents to the account. She happens to be pregnant, although that is not obvious when she meets the client.
The real estate agent stands to earn a lucrative commission because of the size of the deal. The transaction is nearing completion when, after about six months, the real estate agent is suddenly pulled from the account, with no explanation given. Shortly thereafter, she goes on maternity leave for three months. When she returns, she learns she was pulled from the deal because the furniture manufacturer feared her pregnancy would interfere with the closing of the transaction. She sues the furniture manufacturer for pregnancy discrimination.
–A man of Middle-Eastern descent attempts to rent an apartment. When he arrives at the premises, the property manager tells him the apartment has already been rented, even though a "For Rent" sign is still displayed. Suspecting that he is not being told the truth, the man has a Caucasian friend ask about the apartment. The property manager tells him it is available and also mentions that he wants to rent only to "our kind." Enraged by the property manager's comments, the man of Middle-Eastern descent sues him for violations of his civil rights and for discrimination on the basis of his national origin.
–A man confined to a wheelchair goes to dine at the local establishment of a well-known restaurant chain. He has dined at one of its establishments in another locale. He parks in the handicapped-parking spot and exits the vehicle in his wheelchair. Upon approaching the entrance, he notices there are a number of stairs to negotiate, but he sees no ramp and so cannot gain access.
After hearing that many other wheelchair-bound persons have complained about the restaurant's lack of access, he calls the restaurant. He is told the restaurant has no plans for providing wheelchair access and that he will just have to go elsewhere.
The man sues the restaurant chain, on behalf of himself and other patrons, for disability-based discrimination under the ADA. The danger in this scenario is that if there are enough patrons and their claims are deemed similar, the cases could be certified for class-action status, which could be extremely expensive to settle or litigate.
Only third-party EPLI will respond to the allegations in these scenarios. EPLI alone will not, nor will a general liability policy, since it responds only to claims for bodily injury or property damage. Furthermore, almost all GL policies have specific EPL exclusions.
The importance of education
With more third-party EPL claims being filed every day, education is becoming increasingly important. Employers should implement policies and procedures addressing EPL exposures arising from the actions of employees and third parties alike. EPLI underwriters certainly are requesting such measures.
Orientations for new employees should address EPL and third-party exposures, and periodic updates should be provided to those already employed–especially supervisors. Training should include how to report and handle a third-party claim. Since it is difficult to influence customers and other third parties with whom a business interacts, it is all the more important for employees and management to be cognizant of the perils and to know how to respond to them.
Most EPLI policies have third-party coverage that would respond to the scenarios presented in this article–except for the one alleging violation of the Americans with Disabilities Act. Regardless, management should review its EPLI policy's definition of a claim to determine how the policy will respond. A number of policies define a claim as a "demand for monetary damages." This can be problematic in an ADA claim, since it may seek only reasonable accommodations. Therefore, it is best for the definition to include claims for non-monetary damages as well. Be advised, however, that while a policy with such a definition may respond to indemnity and defense costs associated with an ADA claim, it will not pay to bring a facility into compliance with the act.
As time goes on, we will see if third-party EPL coverage moves toward the limelight. For now, it remains under the radar.
Wayne Bernstein is a managing director and founding member of Executive Perils Inc., a national wholesale insurance broker, specializing in EPL, D&O, professional liability, fiduciary liability, intellectual property, crime and technology liability insurance for financial institutions and other corporate insureds. He can be reached at (310) 444-9333 or at wayneb@eperils.com.
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