Employment Practices Liability at the Bottom

In the 20 years I have been in the insurance business, one of the hottest and perhaps least understood topics has been employment practices liability (EPL), and how the exposure relates to a directors’ and officers’ liability (D&O) coverage. Judging by the number of questions those of us specializing in D&O receive on a regular basis, there still is a fair bit of confusion surrounding this topic.

This interest is heightened in light of the media exposure and the large dollar amounts being paid out for EPL claims. One of the most recent examples saw U.S. rental giant Rent-a-Center paying out $47 million to women who faced employment discrimination. Whether those kinds of awards will transfer to Canada remains to be seen, but certainly there is incentive to understand where corporate exposures lie and how they can best be addressed.

EPL “101”

Broadly defined, EPL encompasses discrimination in the workplace, sexual harassment and other employment related practices and conduct that may give rise to legal liability. In Canada and the U.S., laws governing the treatment of employees by employers have been enacted at both the federal and provincial/state level. The most common EPL claim in Canada is for wrongful dismissal, including emotional distress and mental anguish arising from dismissal.

Less common, but on the increase, are allegations of sexual harassment, discrimination, failure to be promoted, or failure to be hired. Allegations of wrongdoing can be made against the employer, the directors and officers of the employer, fellow employees or a combination of the above. The allegations can relate to specific conduct, existing policies, workplace conditions or a combination of all of these.

The combination of legislation, employee awareness of their rights and publicity surrounding workplace issues have contributed to an increase in litigation, which has increased pressure on insurers and brokers to deal with the exposure in a cost effective and straightforward manner.

U.S. litigation

As with many key issues in the insurance industry, EPL is very much driven by U.S. litigation, and any discussion of this topic requires a brief history of its origins south of our border. Up until 1991, most awards for job related claims in the U.S. were limited to back pay and court ordered relief. However, in 1991 the federal government enabled the Civil Rights Act, which contained two provisions that dramatically changed employment practices litigation.

The first allowed plaintiffs to collect punitive damages, and the second permitted jury trials. This environment, as any insurance professional can imagine, contributed to the huge awards that swiftly followed. The public awareness of sexual harassment was also raised at this time with the Anita Hill accusations of sexual harassment against Clarence Thomas at his Supreme Court confirmation hearings and the publicity surrounding allegations of sexual misconduct against the naval officers of the Tailhook.

All of these factors, combined with the ingenuity of lawyers in framing their allegations using existing legislation such as the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, and the Equal Pay Act, ultimately led to an explosion of litigation involving EPL. In addition to individual actions, class action lawsuits dramatically raised the bar for awards. An illustration of the financial exposure was the $176 million class action award against Texaco for systematic racial discrimination. It is safe to say the trend continues unabated in the U.S as awards continue to grow with the little or no judicial or statutory relief in sight.

The Canadian case

While the nature of the allegations of EPL claims in Canada are similar to those in the U.S., the frequency and severity of the claims is significantly lower. Part of the reason for this is Canada’s less litigious environment, but equally important is the way EPL allegations are adjudicated in Canada.

The majority of allegations, aside from wrongful dismissal, are handled by administrative tribunals such as the Canadian Human Rights Tribunal, the Federal Labour Relations Board or the Employment Equity Tribunal. For those cases that do make it to court, most are heard by judges, resulting in more consistent and reasoned judgements. This does not mean that the potential for a large award does not exist. Given the recent judgement in Whiten v. Pilot, where the insurer was ordered to pay $1 million in punitive damages, the same effect could certainly spill over to EPL cases. However, the likelihood of awards ever reaching U.S. levels, even contemplating successful Canadian class actions, is remote.

Coverage trends

Although the Canadian insurance market has not seen the same tremendous increase in frequency and/or severity of EPL claims (due to the fact that insurance companies in Canada do not face the same litigious climate as their American counterparts), there is a potential for increased claims to be brought in this area. Heightened public awareness of EPL exposures lead to increased queries for specifically identified coverages. To this end, the insurance marketplace has responded with products modified to address perceived exposures.

The first to respond were the American insurance carriers who, given their existing involvement in the U.S. market, had policy wordings available which were adapted for the Canadian market. The introduction of these coverages, coupled with the promotional literature accompanying their roll out, has continued to raise the awareness level of brokers and their clients alike.

As requests for EPL coverage increased, many Canadian D&O insurers drafted and introduced their own “Canadian” versions. The lack of significant Canadian lawsuits and settlements (jurisprudence) in the EPL arena, coupled with the extremely competitive D&O insurance marketplace that existed prior to the end of 2001, resulted in insurers extending coverage under D&O policies to address EPL concerns. This as opposed to offering separate or stand-alone EPL coverages which, although seen by many as providing the most comprehensive coverage, were deemed cost prohibitive.

Given the extremely litigious climate of the US insurance market, it is of interest to note that the significant (in fact disastrous) losses and settlements involving EPL related claims has resulted in insurers withdrawing EPL extensions of coverage under D&O policies in favor of separate EPL policies. Certain Canadian D&O insurers offer EPL extensions to traditional D&O policies. Other D&O insurers contend that this approach is not consistent with the prime intention of providing comprehensive coverage to the directors and officers. The wordings and amendments referred to may differ in construct and verbiage but ultimately they all attempt to address the exposures involved.

Key points to consider when dealing with EPL coverage include:

Entity Coverage. Most, if not all, EPL claims name the entity as a defendant. There are various levels of entity coverage currently available. At its most basic, coverage is available for defence costs in a claim as it relates to the entity, but excludes any damage award against the entity. While limited, this form is quite suitable for risks limited to Canada.

Where there is a significant U.S. employee exposure it is prudent to request coverage that includes damages awarded against the entity. This is necessary as many claims, particularly awards, involve federal legislation that makes the entity solely responsible for the damages awarded.

However, most insurers seem unwilling to provide this coverage to U.S. exposures unless there is a large retention and premium attached to it.

Employers in many instances are the genesis for an EPL action based upon a situation where one employee is wronged by a fellow employee. Although directors and officers and the entity may all be named in the same action, it is the interaction between the employees which is the source of the claim. Tailored EPL coverage contemplates these actions and extends coverage to employees.

Class actions. The phrase “class action” sends shudders through executives in the U.S., and for good reason. Those multi-million-dollar settlements that make headlines in the U.S. and Canada are generally the result of successful class action litigation, such as the Rent-a-Center case.

While class actions are a factor in Canada, they have not yet achieved the same profile or magnitude as in the U.S., and seem unlikely to do so. Nevertheless, it is very important to ensure that this exposure is covered.

Contractual liability. Where entity coverage is provided, it will always be accompanied by some form of contractual liability exclusion. The reason for this exclusion is to eliminate exposure for those parts of an award that the insurer did not intend to cover. The most concrete and simple example is the award of salary in lieu of notice in a wrongful dismissal action. Salary is the responsibility of the entity. To my knowledge, no insurance carrier is willing to cover this exposure.

It is important, however, to understand the scope of this exclusion. It is strongly recommended that this exclusion be read carefully. If in doubt as to intent or meaning, ask the insurer for clarification.