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RISKVUE ARCHIVE | INDUSTRY WATCH > EMPLOYMENT PRACTICES LIABILITY (EPL)
Employment-Related Claims Under The CGL Policy: How To Deal With The Denial Of Coverage
By Robert L. Carter and Marci A. R. Rosenthal
Many employers purchase Employment Practices Liability Insurance (EPLI) to protect themselves from employment-related liability. EPLI, though, is a relatively new product and many businesses do not carry the specialized coverage. Employers without EPLI coverage may still find some coverage under another policy, such as a Directors & Officers (D&O) policy or an Errors & Omissions (E&O) policy. The most likely source of such coverage, however, is the Commercial General Liability (CGL) policy.
But what should you do if you have submitted notice of an employment-related claim to your CGL insurer, and the insurer denies coverage? Accept the denial? Call your broker? Call an attorney?
Denial of coverage for employment-related claims under the CGL policy is increasingly common. Insurance company claims adjusters almost routinely deny coverage for such claims, relying upon a number of different policy provisions. The CGL policy provisions most frequently raised in response to employment claims are (1) the absence of an “occurrence,” (2) the “employment-related practices” exclusion, (3) the “employee” exclusion, and (4) the “intentional acts” exclusion. Together, these provisions can be a formidable barrier to most claims.
However, the specific facts of each case need to be evaluated before coverage is granted or denied. A good first step is to call the insurance company’s claims adjuster to seek review of a denied claim. You should also consider appealing to the claim adjuster’s supervisor, as adjusters often have limited authority and money with which to settle claims.
Before contacting any insurer staff, however, closely examine the adjuster’s reasons for denying coverage. In many instances, the adjuster’s reasons for a denial of coverage actually may not preclude coverage for the claim at issue, as described below.
Absence of an “Occurrence”
The vast majority of employment claims include allegations that the employee (or former employee) has suffered mental anguish or emotional distress. Because many such claims do not include allegations of physical injury, many adjusters may initially deny bodily injury coverage under a CGL policy. Some courts, including the highest courts in New York, Maine and South Carolina, have held that mental injury, even unaccompanied by physical injury, constitutes bodily injury for the purpose of invoking the duty to defend under a CGL policy. Other courts do require physical manifestation of injury in order for a claim of emotional distress to be considered bodily injury. When responding to an adjuster’s initial denial of coverage, it is important to note the courts' interpretation of “bodily injury” in the state whose law governs application of the policy.
Even if your state does not define “bodily injury” to include mental injury, it is important to recognize that the “occurrence” requirement pertains only to the bodily injury portion of the CGL coverage. Insurance companies are obligated to defend policyholders if even one allegation in the underlying claim invokes any portion of the insurance policy. Therefore, even if you are unable to defeat the “occurrence” requirement, you may still be entitled to a defense from your insurance company on the basis of the “personal injury”1 portion of the CGL policy.
Employment-Related Practices Exclusion
Another frequently raised defense is the employment-related practices exclusion. This broad exclusion generally bars coverage for injury arising out of refusal-to-employ, termination of employment, or other employment-related practices, policies, acts or omissions. At first glance, this exclusion may appear to be an insurmountable obstacle to obtaining coverage for employment-related claims.
Closer inspection may reveal that the employment-related practices exclusion does not in fact bar coverage for all employee claims. Several courts have found the language of the exclusion itself to be so ambiguous as to preclude its application. In particular, courts have found the phrase “arising out of” to be problematic because taken literally it would bar coverage for any claim connected in any way, no matter how attenuated, with the individual’s employment. Courts consider this interpretation to be too expansive to be applicable.
Additionally, courts have found some scenarios that initially appear to be employment-related, are not be employment-related at all. The HS Services 2 case is particularly interesting in this regard.
This case was a situation where the employee/plaintiff had been fired for falsifying documents and committing other dishonest acts. The fired employee then started a competing business and disseminated a rumor that the employer was going bankrupt. In response, the employer provided its employees with a memorandum of talking points to use when customers asked about the company’s alleged impending bankruptcy. The memorandum instructed employees to state that the former employee had been terminated for dishonesty.
The employer sought coverage from its insurer for the former employee’s ensuing defamation and wrongful termination suit, and the insurer denied coverage. The insurer invoked the employment-related practices exclusion, reasoning that the statements forming the basis for the former employee’s lawsuit resulted from his termination. The court, however, found that no causal relation existed between the former employee’s termination and the allegedly defamatory remarks because the former employee himself had “broken the chain” of causation by spreading rumors to the employer’s customers.
The lesson is that it is important to look closely at all the facts of an employee’s allegations. Circumstances that may initially appear to be employment-related, and which the claims adjuster may have interpreted so, may not actually be so in the eyes of a court. Factors such as these are important to bring to the attention of insurer claims staff when seeking a review of the initial denial of coverage.
The Employee Exclusion
Another common exclusion adjusters use to deny coverage is the employee exclusion. The primary purpose of this exclusion is to avoid any overlapping CGL coverage with workers’ compensation and employer’s liability coverage. Again, it is important to analyze the factual circumstances surrounding an employee’s claim. Situations to which this exclusion seemingly apply often do not invoke the exclusion when analyzed more closely.
For example, the employee exclusion bars coverage for bodily injury arising out of and in the course of employment. When an employee sues both the company and a managerial employee or officer of the company (for a tort such as sexual harassment), courts have found that the employee exclusion does not bar coverage for the managerial employee/officer because he/she is not the employer. Accordingly, if your company is faced with an employee claim against officers or other employees as well as against the company itself, you should highlight to your claims examiner the possibility of coverage for at least the managerial employee/officer.
The Intentional Acts Exclusion
The GCL’s intentional acts exclusion precludes coverage for bodily injury or property damage “expected or intended” from the standpoint of the insured. Typically, an insurance adjuster relies on this exclusion to deny coverage for such employment-related torts as discrimination and harassment. These actions are usually intentional by nature and are seemingly excluded from coverage by the intentional acts exclusion.
If you are faced with such a rationale from the adjuster, it is important again to consider how “intent” is defined in the state whose law applies to your policy. In several states, the courts hold that the exclusion bars coverage only if the policyholder intended the injury that results from an intentional act. It does not bar coverage if the policyholder intended only the act, without the resulting injury. In other words, the courts consider the person’s subjective intent in determining whether the intentional acts exclusion applies. As a result, coverage may be available under the CGL policy for injuries resulting from intentional actions.
Conclusion
Persistence and non-confrontational dialogue are the keys to changing a claim adjuster’s mind. When dealing with an insurer’s representatives, remember that the existence of coverage may depend upon the particular facts and circumstances of a claim, regardless of the policy language and exclusions. Research the facts and emphasize why you believe the exclusions and language the adjuster is using to deny coverage do not apply to your situation.
The CGL policy was never intended to cover all employment-related claims. To obtain the broadest protection against such claims, consider purchasing alternative types of coverage, such as EPLI, that are designed for the sole purpose of addressing an insured’s employment practices liability. 
ABOUT THE AUTHOR
Mr. Carter is a partner and Ms. Rosenthal is an associate in the Washington, DC office of McKenna & Cuneo, L.L.P. Mr. Carter and Ms. Rosenthal are members of McKenna & Cuneo’s Insurance Recovery Group that regularly represents policyholders in disputes against insurance companies.
Notes
1 Personal injury in the CGL policy means injury, other than bodily injury, arising out of specific offenses named in the policy, namely: false arrest, detention or imprisonment; malicious prosecution; wrongful eviction or invasion of privacy; and oral written publication of material that violates a person’s right of privacy.
2 HS Services, 109 F.3d at 647.
riskVue | The webzine for risk management profesionals
April 2000
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