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After being served with a discrimination lawsuit seeking millions ofdollars in damages, and trying to determine whether insurance coverageexists, a defendant’s counsel quickly will be exposed to the maze ofissues and pitfalls surrounding employment insurance. While one may findcoverage for certain employment-related claims under common insurancepolicies, such as comprehensive general liability, homeowners’ ordirectors’ and officers’ liability policies, the policy terms oftensignificantly limit coverage. Even one relatively simple single-plaintiff employment discriminationlawsuit may result in substantial losses, which can be devastating forsmall- to mid-size employers, particularly if punitive damages areawarded. And the legal expenses of defending such a lawsuit, even ifsuccessful, may be just as costly as losing the court battle. Moreover,the number of discrimination cases remain on the rise — sex harassmentcharges alone jumped nearly 50 percent from 1992 to 2001. In response, the insurance industry has developed a specific product,Employment Practices Liability Insurance (“EPLI”), designed to covercosts and liabilities arising out of claims for wrongful employmentpractices. EPLI policies, however, may not be the entire answer. Many employers recognize the frequent and often unavoidable nature ofemployment claims and treat this exposure as another cost of doingbusiness, despite what they may view as the outrageousness of the suitsthemselves. Employers seeking greater protection for employment-relatedclaims with less risk of a coverage dispute now turn to EPLI, makingEPLI a hot new product. Though only 10 percent of employers carried EPLIcoverage in 1999, it is estimated that within a few years up to 70 percent ofemployers will purchase some form of EPLI. The coverage is particularlypopular with larger employers. EPLI coverage varies significantly by carrier and by policy; there is nostandard EPLI policy and most terms remain negotiable. Employers andtheir counsel need to understand the alternatives as well as the termsof their own EPLI policies, and the legal, ethical and practical issuesthat accompany such policies. WHAT’S COVERED? The scope of EPLI coverage depends entirely on the definition of theinsured’s conduct and the specified exclusions. Generally, EPLIcontracts cover claims by applicants and past and present employeesarising out of employment practices that result in claims ofdiscrimination, harassment, wrongful termination and other workplacetorts. While some policies list the types of wrongful conduct covered,more comprehensive policies now utilize sweeping language to encompassall “employment-related causes of action.” Despite using such broadlanguage that seemingly offers blanket coverage, EPLI policiesnonetheless often expressly exclude coverage for a variety of claims. For example, EPLI policies may not protect an employer from claims forbodily injury (except for claims for emotional distress), breach of anexpress employment contract, fraud, “wanton, willful, reckless orintentional disregard of any law(s),” or violation of specified laws,such as the Consolidated Omnibus Budget Reconciliation Act, the EmployeeRetirement Income Security Act, the Labor-Management Relations Act, theWorker Adjustment and Retraining Notification Act or the OccupationalSafety and Health Administration Act. Employers and their attorneys mustcarefully review the terms of EPLI coverage (including all riders) todetermine whether all potential wrongful employment practices, includingviolations of state laws and local ordinances, are included in the termsof the policy. Some EPLI policies do not cover claims for punitive damages, nonmonetaryor equitable relief, or those pursued in a class action, yet theseclaims often represent some of the more costly aspects of employmentlawsuits. For example, industry statistics reveal that in 2001, punitivedamages were awarded in nearly one-third of EPLI cases with plaintiffverdicts. The average punitive award in those cases totaled$595,750 — well in excess of the average compensatory award. Andsettlement terms of large class actions often include significanttraining and monitoring components, which may cost millions of dollarsto develop, implement and maintain. Yet even when EPLI coverage is intended by both parties to extend toclaims for punitive damages or intentional discrimination, state law maydeclare that portion of the insurance contract void as against publicpolicy. Some jurisdictions even consider intentional discriminationuninsurable as a matter of public policy. In addition, some states donot permit insurance coverage for punitive damages awards, as they areintended to punish the wrongdoer, not simply compensate for loss. Thus, employers should consult counsel as to the particular local law inassessing the enforceability of such terms before employersincorporating and relying on these types of coverage. In addition,employers may negotiate and purchase other options the insurer mightoffer, such as the use of “wrap around” policies to provide punitivedamages coverage in jurisdictions where it may have been prohibitedlocally. WATCH OUT FOR AMBIGUITIES Both employers and counsel must also recognize that key terms andprovisions within EPLI coverage often may be undefined or ambiguous,especially considering the nascence of many of the programs, leading topossible disputes between the insurer and insured over the intendedscope of the coverage. And employers may face two lawsuits, seeking bothto defeat the plaintiff’s allegations and to force its own insurancecarrier to indemnify and defend it. The terms of an EPLI policy should at a minimum cover acts by theemployer, whether a corporation, limited liability company, partnershipor joint venture, and its subsidiaries. Beyond that, EPLI policies varyas to who is covered, generally encompassing the actions of directors,officers and full-time and part-time employees. However, the terms ofthe policy may not include independent contractors, temporary employeesor leased workers. Although these types of workers may technically beemployees of another entity, such as a temporary agency, their actionsmay very well expose the lessor (the employer contracting for theservices) to potential liability. Thus, although anyone acting on behalfof an employer may subject it to liability, EPLI may not protect theemployer from wrongful conduct depending on the employment relationshipat issue. To complicate matters further, defining “employees” broadly in an EPLIpolicy to include independent contractors and leased workers isill-advised; it jeopardizes the contractor status of the worker,possibly leading to the employer having to recognize temporary workersas “employees,” adverse tax consequences and other insurance-relatedproblems. Thus, EPLI-covered employers and their counsel should monitorand address the behavior of contingent workers as closely as, if not moreclosely than, that of actual employees. EPLI policies commonly impose two primary obligations on the insurer.First, the insurer must provide the insured with a defense at theinsurer’s expense against lawsuits that assert covered claims (the “dutyto defend” clause). Second, the insurer must indemnify the insured forlegal liability incurred for covered conduct (the “duty to indemnify”clause). The duty to defend, also referred to as litigation insurance, empowersthe employer with the right to defense counsel and obligates the insurerto provide the defense. At its inception, knowledge of a claim triggersthe duty to defend. Best practices dictate that an employer compare theallegations in the complaint or discrimination charge against the termsof the insurance policy to determine available coverage. If any claim inthe complaint could conceivably be covered by the policy, upon propernotice, the insurer usually must provide the insured with a full defense(typically subject to a deductible) of covered and noncovered claims,until the insurer can demonstrate that certain defense costs can beallocated to a noncovered claim. With today’s litigation costs, theright to a defense provides significant value to an employer. Still, in evaluating the terms of EPLI policies, an employer also mustunderstand that costs incurred to defend a claim are typically includedin the limits of the insurance. Thus, the insurer may deduct legal feesand costs from the policy limit before paying any judgment. Obviously,employers prefer to exclude defense costs from the limits of insurance,but insurers understandably prefer to confine their potential exposureto stable policy limits. CONTROL OF THE SUIT Aside from the division of costs, the most significant issues concerningthe insurer’s duty to defend include determination of which party holdsthe right to choose defense counsel, to control the strategy of thedefense and to authorize settlement. Power to select defense counsel turns on the language in the specificinsurance contract. Some policies authorize the insurance company todesignate counsel of its choosing; certain policies permit the insuredto choose defense counsel from those on a panel list provided by theinsurer; and others allow the insured to select its own defense counsel.Although many employers are reluctant to permit the insurer to selectcounsel, there can be advantages to such an arrangement. For example,the insurance company may be able to retain superior legalrepresentation at lower cost than the employer could have negotiated. AsEPLI policies have become more prevalent, some insurers have recognizedthe value of specialized employment counsel and more often include themon available panels. Such counsel can provide valuable experience indefending employment claims as well as an objective perspective on thecase. In some cases, coverage issues may create a conflict of interest betweenthe insurer and insured as to the underlying claims. In thesecircumstances, the insured may have a right to select independentdefense counsel who will be paid by the insurer. When the insurerappoints or effectively controls the choice of counsel, a “tripartiterelationship” between the insurer, defense counsel and the insured isestablished. This relationship has long been recognized as an ethicalminefield. While defense counsel owes his or her loyalty to the insured,it may have a long-standing relationship with the insurer, and a steadyflow of cases from the insurer may generate significant income for thatfirm. These and other factors can lead to arguments that defense attorneysimproperly slanted efforts toward the interests of the insurer in termsof prosecution or defense or settlement. CONFLICTS CAN ABOUND When the insurer issues a reservation-of-rights letter or otherwiseasserts a coverage defense, defense counsel must deal with the clientand the insurer who have potentially conflicting interests. An insurer,who has the primary financial stake in the outcome of the case, might befocused on the fastest and least-expensive means of resolving thedispute, whether that involves settlement or reinstatement of theplaintiff’s position. But the employer may not wish to capitulate to theplaintiff and, in the process, encourage additional lawsuits. Whilecourts and ethics committees have concluded that a defense counsel’sprimary fiduciary obligation is to the insured, the law remains in astate of flux, varying from state to state and even among courts withinsome states. Employers and defense attorneys should familiarizethemselves with pertinent judicial rulings and ethical opinions inapplicable jurisdictions and consult with qualified insurance counselconcerning such conflicts. Employers and defense counsel must be aware of policy provisionsrelating to settlement, which vary greatly among EPLI policies. MostEPLI policies provide for joint control over settlement within policylimits. Some settlement provisions, however, mandate that if an insuredwithholds consent to a settlement within policy limits, the insurer canrefuse coverage of defense costs from that point forward and laterrefuse to pay any adverse judgment beyond that for which it could havesettled. And if an insurer refuses to agree to a reasonable settlementdemand within the policy limits, the insured may be able to hold theinsurer responsible for the entire amount of any adverse award.Employers must evaluate this issue prior to purchasing EPLI and counselmust be careful to respect the arrangements agreed upon by the insurerand the insured. The duty to indemnify obligates the insurance company to pay on thatportion of loss covered by insurance after liability has beenestablished through settlement or litigation. Typically, the insurerwill cover judgments and interest, backpay and, possibly, attorneyfees. EPLI does not cover fines or penalties, punitive damages, lostbenefits, including potentially significant stock options andnonmonetary awards. GIVE NOTICE PROMPTLY Generally, there are strict requirements as to when and how an insuredmust give notice to the insurance company of a claim potentially coveredby an EPLI policy. Indeed, it is vital that an insured follow the noticeprovisions in its EPLI policy or coverage can be threatened. Unlike other types of insurance, EPLI coverage is typically written on a”claims-made” as opposed to an “occurrence” basis. As a general rule,most EPLI policies require notice of written demands for relief — whetherby letter, charge or complaint. Many require that for a “claim” toexist, there must be a claim for “money damages.” It is critical thatemployers and counsel understand reporting requirements under thepolicy, to prevent waiver. EPLI can greatly reduce the financial burdens associated with modernemployment-related litigation, though often in exchange for somesacrifice in control of the case and significant premiums. Because ofthe variety among EPLI policy terms, employers and their counsel shouldreview and understand the particular provisions of any policy beforepurchasing EPLI, tailoring those terms to the employer’s specific needswherever possible. Steven T. Catlett and Michael J. Gray are partners in the labor andemployment practice at the Chicago office of Jones, Day, Reavis & Pogue ( www.jonesday.com),where Catlett coordinates that practice. Catlett and Gray representmanagement in all manner of labor and employment issues. If you are interested in submitting an article to law.com, please click herefor our submission guidelines.

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