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The number of employment discrimination cases filed in federal courts nearly tripled between 1990 and the end of 1998, increasing from 8,413 to 23,735, according to the most recent figures from the U.S. Department of Justice. During the same time period, federal civil rights cases jumped from 9 percent to 17 percent of all civil complaints filed in federal court. In 1990, juries (as opposed to judges) rendered verdicts in 48 percent of all civil rights cases that went to trial in federal court. By late 1998, however, this figure had risen to 77 percent. During this same nine-year period, the percentage of plaintiffs in federal court who won their civil rights cases and were awarded $10 million or more jumped from 1 percent to 9 percent. In 1998, the median damages award to plaintiffs in federal employment discrimination cases was $137,000. These Justice Department figures, however, do not capture fully either the number or the types of employment-related claims that employers face today. Employers also must deal with claims brought in state court, including claims alleging violation of state civil rights laws, wrongful termination, infliction of emotional distress, failure to pay overtime and defamation. With the continuing rise in the number of employment lawsuits being filed each year, the need for insurance coverage in this area is more compelling now than ever. When it comes to employment-related claims, however, many employers lack adequate coverage. Employment practices liability insurance (EPLI) is a way for employers to obtain not only indemnification for certain employment claims, but also payment for the cost of the defense against such claims, which can be substantial. In the past, employers have attempted to obtain coverage for employment claims under comprehensive general liability (CGL) insurance policies. But coverage for employment claims under CGL policies has become increasingly difficult in recent years because insurance companies have expressly excluded such claims from policy coverage. The same holds true for other forms of insurance, such as directors and officers (D&O) liability insurance. Thus, if an employer wishes to insure against employment claims, EPLI coverage may be essential. At the same time, employers should be aware that EPLI premiums and deductibles are expected to rise significantly in 2002, as much as 25 percent. EPLI has not been profitable for insurers, due to the rise in both the number of employment cases brought and the size of jury awards to plaintiffs in such cases. SeeReed Abelson, “Surge in Bias Cases Punishes Insurers, and Premiums Rise,” N.Y. Times, Jan. 9, 2002, at C1. Given the anticipated increases in premiums, employers should look carefully at the scope and level of coverage they are receiving. STATE VARIATIONS Although the availability of coverage for certain employment claims will vary from state to state, for example, based upon a particular state’s laws concerning the insurability of certain claims, the following are several key issues to consider in connection with obtaining EPLI. The first important issue to consider is the specific acts and types of claims that are covered by the policy. Workers’ compensation claims and claims for unemployment insurance, for example, are not covered by EPLI. Generally speaking, EPLI covers claims for discrimination, harassment (including sexual harassment), retaliation, wrongful termination, wrongful demotion, failure to promote or hire, defamation, infliction of emotional distress and invasion of privacy. But policies can vary considerably, so care must be taken in choosing a policy. For example, some policies fail to cover claims of retaliation, or claims of harassment other than sexual harassment. (Retaliation is discrimination against a person for opposing unlawful harassment or discrimination in the workplace, by, for example, filing a complaint.) Harassment consists of conduct such as slurs, threats or other verbal or physical conduct based on a person’s race, national origin, etc., that creates an intimidating or hostile work environment, unreasonably interferes with job performance and/or otherwise affects a person’s employment opportunities. See, e.g., Meritor Savings Bank FSB v. Vinson, 477 U.S. 57 (1986). The “wrongful employment practices” covered by such policies generally are separated into three categories: wrongful employment termination, discrimination and sexual harassment. Because the definition of “discrimination” used in some policies may be limited to “the actual or alleged failure to hire or employ an applicant for employment … or the actual or alleged failure to promote, the demotion of, or the employment related defamation of any employee because of race, color, [etc.],” any claim for retaliation or harassment on a basis other than sex (i.e., based on race, color, national origin, age, religion or disability), simply would not be covered by such a policy. It is a question of the definition used in the policy. Retaliation is not covered, nor is harassment other than sexual harassment. Therefore, harassment based on race, national origin, age and the like are not covered by the policy. Claims for retaliation and harassment other than sexual harassment are not uncommon, however. Thus, employers that are insured under a policy with this limitation would likely have to foot the bill for any retaliation and harassment claims brought against them. With the expected substantial general increase in EPLI premiums and deductibles, this issue takes on added importance. CAREFUL REVIEW Thus, it is essential that an employer review the EPLI policy it is considering in order to make sure that all of the claims one could reasonably anticipate being asserted by current or former employees are included in the definitions of the acts and claims covered by the policy. These typically include claims for discrimination, harassment (not limited to sexual harassment), retaliation, wrongful demotion, failure or refusal to promote, failure to hire, wrongful termination (including constructive termination), breach of an implied contract of employment, negligent hiring, defamation, infliction of emotional distress, wage claims and invasion of privacy. Another issue to consider is whether the EPLI policy covers only claims that seek damages, or also covers claims that seek relief other than damages (such as equitable relief, including job reinstatement or an injunction against future discriminatory practices). If a policy covers only claims for damages, then a proceeding brought against an employer by, for example, the U.S. Equal Employment Opportunity Commission (EEOC) seeking injunctive relief may not be covered. Since EEOC proceedings can be quite expensive, employers should know whether or not such suits would be covered under the policy in question. Since many EPLI policies cover only claims for damages, if an employer wishes to protect against such things as EEOC proceedings, it should request a specific endorsement that covers governmental and administrative proceedings. Another major issue to consider is whether the policy simply indemnifies an employer against certain claims, or also includes an express obligation on the part of the insurer to defend the employer against employment claims. This is a crucial issue. Whenever possible, employers should obtain coverage that includes not only indemnification of employment claims, but also the express requirement that the insurance company pay for the costs associated with the defense of employment claims. Attorney fees, expert witness fees and the other costs associated with litigation can be quite substantial. When an insurance policy provides only for indemnification, an insurance company’s duty to defend is “linked” to its duty to indemnify. The advantage of having an EPLI policy that expressly provides that the cost of the defense will be paid by the insurer is that any uncertainty as to the insurer’s ultimate obligation to pay these costs is removed. Absent such an express provision, however, uncertainty exists because in many states it may be unclear if particular employment claims are covered under the indemnification provision of the policy. This is so, given the prohibition on insuring against injuries caused by the intentional conduct of the insured contained in the laws of states such as Arizona, California, Florida, New York, Pennsylvania and Rhode Island. Take California law as an example. California Insurance Code � 533, by its express language, prevents an insurer from being obligated to indemnify an insured for any injuries caused by the intentional conduct of the insured. But to the extent that someone other than the insured engaged in the alleged conduct causing the injury, � 533 is not implicated, and insurance coverage is proper. For instance, when the insured is held vicariously liable for the intentional conduct of its lower-level employees based solely upon the doctrine of respondeat superior, coverage for the insured would not be prohibited by � 533 when the insured did not authorize or ratify the conduct. Coverage would also be allowed for an employment discrimination claim based on a disparate impact theory. Here, the allegation is not that the employer intentionally discriminated against a protected class of employees, but that its facially neutral policies or practices have a discriminatory effect on the protected class and cannot be justified by business necessity. In many states, the fact that certain claims may not be indemnified does not prevent an insurance company and an insured from contracting for the defense of such claims. For example, California case law provides that Insurance Code � 533 relates only to indemnification and places no limits on the ability of parties to contract for the defense of claims that are based upon intentional conduct. See, e.g., Downey Venture v. LMI Insurance Co.,66 Cal. App. 4th 478, 508 (1998). Hence, in California and states with similar laws, employers may remove any uncertainty regarding whether their insurer must pay for the defense of employment claims by expressly contracting for the defense of such claims. HOW MUCH IS ENOUGH? The next issue for an employer to consider is the proper level of EPLI coverage to obtain. In this regard, it is important to understand that most EPLI policies include defense-related expenses in the calculation of the liability limit under the policy. An employer’s determination of the level of coverage it needs will take into account a variety of factors, including the number of employment suits the employer expects to receive during the policy period; its estimate of the average cost of those suits, both in terms of defense costs and settlement costs and/or judgments; the size of the dollar “cushion” the employer wishes to have above and beyond these estimates; and the premium the employer is willing to pay. In this time of rising employment claims, EPLI coverage is something that most employers should have and that all employers should consider as an essential element of an employer’s overall risk-management strategy. Of course, the best insurance is prevention. With the expected significant increases in both premiums and deductibles for EPLI, employers would be wise also to ensure that they have appropriate training programs and personnel policies in place to help prevent the conduct giving rise to employment claims in the first place. Karen L. Corman is a partner, and Gary H. Green II an associate, in the Los Angeles office of Skadden, Arps, Slate, Meagher & Flom, www.skadden.com.They are both members of the firm’s labor and employment law practice.

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