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Can liability insurance cover employment discrimination?

Sandra D. Lumpen, a veteran sales representative for a computer software firm is interested in the regional vice president's position recently announced in her company newsletter. So, she applies for the job. Several weeks later she receives a short letter from the Human Resources Department stating, "...thank you for your interest. We are impressed with your credentials, but the firm has found someone whose skills, abilities and relevant experience are more suitable for the position." Later that day, she learns that the job went to John B. Gentry, a younger sales representative who just happens to be a member of the same country club as the director of Human Resources. Disgusted, Ms. Lumpen files a charge alleging sex discrimination, seeking damages for "mental anguish, distress and humiliation."

Just how concerned should employers be about discrimination and wrongful termination claims? By all accounts, employers today face enormous potential losses for defending claims made by past, present and future employees. Two reasons for this are the 1991 Civil Rights Act and the Americans with Disabilities Act (ADA). These two federal statutes may increase both the number and size of claims against employers.

Under the 1991 Civil Rights Act, employees will find it much easier to sue their employers-the burden of proof in unintentional discrimination cases has been shifted to the employer. Under the 1991 Act, employees may be able to recover all lost wages and fringe benefits as well as compensatory and punitive damages up to $300,000 for future pecuniary losses, emotional pain, suffering, mental anguish, etc. In addition, the size of damage awards may increase as a result of the 1991 Act's new provisions for jury trials.

The ADA, affecting employers with 25 or more employees, may prove to be an even bigger concern for employers. The ADA defines disability as a "physical or mental impairment which substantially limits one or more major life activities; or a record of such impairment; or being regarded as having such an impairment." The very broad nature of that definition should greatly increase the number of individuals considered "disabled." As a result, employers must prepare themselves for the wave of claims that will be filed by individuals alleging discrimination on the basis of a medical disability, emotional disability or physical disfigurement (as well as rumor, conjecture or misapprehension regarding those conditions).

Neither the 1991 Act nor the ADA are limited to discrimination at the time of employment. Under the two acts, employees are protected from discrimination with respect to all "terms, conditions and privileges of employment," including hiring, promotion, assignments, benefits and termination.

Are You Covered?

In light of Ms. Lumpen's aforementioned charge of discrimination, what should the risk manager for the software firm do: (a) think about hiring a good lawyer; (b) inquire as to whether the firm's workers' compensation insurance program can contribute toward the costs of defending the lawsuit; (c) file claims with the firm's liability insurance companies; or (d) all of the above?

The correct answer is (d) "all of the above." However, risk managers often forget about their liability insurance policies, assuming that discrimination claims are not insured. Some will even advise their organizations to lean on their workers' compensation insurer. But if an organization is "self-insured" for workers' compensation - as many organizations are today - the risk manager's advice could wind up costing his or her organization huge sums of money in both defense costs and indemnity (if the aggrieved employee wins in court). That, to say the least, would be a most unfortunate result-one that may have been avoided had the employer simply filed notice with its liability insurers.

The truth is, insurance companies have long provided coverage for claims of employment discrimination. No one should be swayed by the insurance industry's oft-repeated arguments that employment-related claims are "uninsured" or, worse, "uninsurable." Insurers not only drafted specific policy language for these claims, but also have argued for coverage when seeking indemnity or contribution for these claims from other insurance companies. What's good for the goose is good for the gander. Employers, too, should be able to procure coverage for many employment-related claims.

In the Beginning

Insurance coverage for intentional wrongdoing had its genesis in the late 1940s when Lloyd's of London introduced umbrella coverage in the United States. The "bright new star" in the insurance universe immediately attracted many followers. When the Lloyd's umbrella policy was first introduced, it was broader than any product sold in the U.S. market-as the Lloyd's sales force said, the new policy covered the policyholder's "complete tort liability" and "nearly every form of third-party liability."

Insurers in the United States were quick to respond to their new competitors. Early domestic umbrella policies were designed and sold to cover the policyholder for nearly every imaginable form of liability (thus the epithet, "umbrella insurance"). Witness the scope of coverage for "personal injury" in an early Insurance Company of North America (INA) umbrella policy: "(1) Bodily injury, sickness, disease, disability, shock, mental anguish and mental injury; (2) false arrest, false imprisonment, wrongful eviction, wrongful detention, malicious prosecution or humiliation; (3) libel, slander, defamation of character or invasion of rights of privacy, unless arising out of any advertising activities; (4) racial or religious discrimination not committed by or at the direction of the insured; and (5) assault and battery not committed by or at the direction of the insured...."

Note the provision for "racial and religious discrimination." INA's policy specifically provided coverage for some types of discrimination claims facing employers. As we shall see, however, an insurance policy may provide coverage for employment discrimination even if the policy does not expressly provide coverage for such a claim.

Also worth noting in the above policy are the provisions for "slander," "defamation" and "invasion of rights of privacy." These policy terms, surviving today under "personal injury" provisions in standard form liability policies, may provide coverage for a wide range of employment-related claims. In fact, the insurance industry itself has often championed this view. When seeking coverage on their own behalf, or when seeking contribution from other insurance companies, insurers have taken strong pro-coverage positions on many issues including coverage for employment discrimination.

For example, in a case against Caulkins Indiantown Citrus Company, U.S. Fire Insurance Company sought contribution from several other insurers for two lawsuits alleging employment discrimination. U.S. Fire, an excess insurer for the policyholder, provided coverage for "discrimination not committed by or at the direction of the insured." The primary insurers, whose policies did not contain discrimination clauses, refused to provide coverage. In turn, U.S. Fire told the U.S. Court of Appeals for the 11th Circuit that standard form "personal injury" provisions - present in the primary insurance policies-obligated the primary insurers to defend the policyholder in the discrimination lawsuits.

Nothing but the Facts

Although the Caulkins court eventually ruled against U.S. Fire on other grounds, U.S. Fire's candid admissions provide an interesting insight into how insurers view the broad coverage afforded for discrimination claims under standard-form liability insurance policies. An insurance policy need not expressly provide coverage for discrimination to provide coverage for such claims. According to U.S. Fire, as long as a lawsuit or claim alleges facts pertaining to any of the covered injuries in liability insurance policies (for example, slander, libel or disparagement), the insurer, at a minimum, has a duty to defend the policyholder.

Regarding slander and libel, U.S. Fire wrote, "an employment classification that limits or otherwise adversely affects an employee on the basis of sex or race simply constitutes an announcement to the employee and others in the workplace that the employee is not equal in status to other employees purely because of the employee's race or sex." U.S. Fire also noted that "the employer's very act of denying employment or a promotion because of race or sex is inherently disparaging." The act of disparagement, U.S. Fire concluded, obligated the primary insurer to defend the policyholder in the discrimination lawsuits. And with respect to the "right of privacy," U.S. Fire wrote: "it is not unreasonable that such language should include the natural right to be free of offensive discrimination based on such purely personal characteristics as one's race or sex."

In support of these arguments, U,S. Fire invoked the well-established rule that an insurer's duty to defend is triggered by the facts alleged in a lawsuit, not the formal legal theory upon which a lawsuit is based. In National Casualty Company vs. Great Southwestern Fire Insurance Company-another insurer vs. insurer dispute-National Casualty explained the "nothing but the facts" rule to the Colorado Court of Appeals: "An insurer may not justifiably refuse to defend an action against its insured unless it is clear from the face of the complaint that the allegations fail to state facts which bring the case within, or potentially within, the policy's coverage."

The "nothing but the facts" rule is worth noting for at least one other reason. While many courts have found coverage for lawsuits alleging unintentional discrimination (what the courts call "disparate impact"), several have ruled against coverage for alleged intentional discrimination ("disparate treatment"). But rarely does a discrimination lawsuit confine its allegations to the neat, simple theories of "disparate impact" and "disparate treatment." Frequently, lawsuits contain allegations of both. And as long as the facts alleged by the claimant potentially bring the insurance policy within coverage, the insurer, at a minimum, has a duty to defend its policyholder.

Mind and Body

Employers may also find coverage for discrimination under the "bodily injury" provision in standard-form liability insurance policies. The 1986 standard-form Commercial General Liability (CGL) insurance policy defines bodily injury to include "sickness or disease sustained by any person which occurs during the policy period, including death at any time resulting therefrom."

Many discrimination and wrongful termination lawsuits involve claims of "humiliation," "mental anguish," "distress" or other "mental suffering." The question for employers is whether mental suffering constitutes bodily injury. In a brief filed with the Colorado Court of Appeals, National Casualty Company argued that "claims of mental anguish, fright, distress and humiliation were within an insurance policy's definition of bodily injury." The insurance company cited a number of court decisions that held that claims of mental suffering constitute bodily injury under standard-form liability insurance policies.

A similar argument was made by U.S. Fire in the Caulkins case. The insurer argued that the allegations in one or two discrimination lawsuits filed against the policyholder "would be enough upon which to base a judgment for, say, the negligent infliction of emotional distress." "Emotional distress," argued U.S. Fire, would have been covered under the bodily injury provisions of a policy issued by St. Paul Fire and Marine Insurance Company.

Even insurance company lawyers admit the potential for coverage of emotional suffering under the bodily injury provision. Several years ago, two lawyers wrote in the Defense Counsel Journal that if "emotional distress actually leads to physical injury, all related injuries are compensable under a general liability policy." The authors cited a Louisiana court decision that held that "humiliation" and "mental anguish" are compensable as bodily injury as long as the mental suffering is accompanied by "physical manifestations" such as tears or bad dreams. In a recent case, Lavanant vs. General Accident Insurance Company of America, the high court of New York reached a similar conclusion, noting that to the average policyholder the term "bodily injury" "may include mental as well as physical sickness or disease." Employees frequently assert physical manifestations (for example, nerves and stomach pain) of mental conditions. Such allegations may also trigger workers' compensation insurance.

Coverage Obstacle #1

Insurance companies are certain to construct several obstacles to policyholders seeking coverage for discrimination claims. One obstacle is the definition of an insured "occurrence" under standard-form liability policies, which is generally defined as damage or injury that is neither expected nor intended by the policyholder. Typically, insurers will argue that the occurrence definition bars coverage for discrimination and wrongful termination because the intentional nature of those offenses precludes insurance coverage.

That argument, however, is based on a simple misreading of the policy language. The definition of occurrence-injury or damage-should bar coverage only if the policyholder subjectively intended to cause the specific resulting injury, not the offense. As Aetna Casualty & Surety told the New York Court of Appeals in Ethicon Inc. vs. Aetna Casualty & Surety Company, insurance coverage may be denied only when the policyholder had a "preconceived design to inflict injury."

Policyholders should also keep in mind that not all insurance policies are anchored to the occurrence definition. As noted earlier, many policies are specifically designed to cover the policyholder against claims alleging intentional wrongdoing, and many of these policies do not condition coverage on an "occurrence." Insurers will be hard pressed to deny coverage for intentional wrongdoing under policies specially designed for such claims.

Coverage Obstacle #2

The widespread misunderstanding of the occurrence definition derives in part from the insurance industry's artful exploitation of an ethical question: is insurance for reprehensible acts-such as discrimination and wrongful termination-against "public policy." Policyholders must not allow insurers to confuse the courts. As many legal commentators have noted, the role of public policy in the insurance context is to ask whether allowing insurance for acts proscribed by statute will encourage the policyholder to continue to engage in those acts.

In Union Camp Corporation vs. Continental Casualty Company, a case that involved coverage for alleged racial discrimination under a personal injury provision, a federal district court in Georgia noted that "the proposition that insurance taken out by an employer to protect against liability under Title VII [of the 1964 Civil Rights Act] will encourage violations of the Act is based on an assumption that is speculative and erroneous." The court held that since the policy in question did not cover intentional acts of discrimination, there would not have been any incentive for the employer, from an insurance standpoint, to discriminate.

As noted earlier, many discrimination and wrongful termination lawsuits involve allegatigns that the employer unintentionally committed the injury. But even a showing that an employer acted deliberately may not be enough to reject coverage on public policy grounds. One legal commentator noted that "a public policy restriction is justified only by misconduct performed with calculating intent, and employment discrimination litigation in most cases does not address the issue."

Policyholders should also insist that insurers state exactly what they mean by "public policy." The phrase has become a catch-all for all vague notions regarding the government's role in guiding and shaping public morality. In the Union Camp case in which Continental Casualty Company attempted to deny coverage on the basis that the policy it had written went against public policy, the court ruled in favor of the policyholder. The court noted that "neither Congress nor the Equal Employment Opportunity Commission proscribed policies for intentional acts that intentionally cause injury."

Think Insurance

In light of these considerations and recent legislative developments, the first thing an employer must do is make certain it is acting in strict compliance with the law. If a lawsuit or administrative charge alleging discrimination or wrongful termination is filed, the employer should immediately look to its liability insurance policies to see whether any coverage exists.

Under coverage for bodily injury, CGL insurance policies may provide coverage for "emotional distress" under the "bodily injury" provision. Under coverage for personal injury, CGL insurance policies may provide coverage for a wide range of intentional acts that are sometimes alleged in discrimination and wrongful termination lawsuits-libel, slander, disparagement, right of privacy, etc.

Typically, umbrella and excess insurance policies also provide coverage for intentional acts. In addition, some of these policies were written to specifically provide coverage for discrimination. And umbrella and excess policies are particularly valuable for at least one other reason: if the policyholder's primary policy is deemed insufficient to cover a specific claim, the policyholder's excess or umbrella insurance company must "drop down" to defend and indemnify the claim. Thus, employers should check all insurance policies and understand the relationship between primary and umbrella insurance policies.
COPYRIGHT 1993 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Anderson, Eugene R.; Berringer, John B.; Rodriguez, Giovanni
Publication:Risk Management
Date:Jul 1, 1993
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