You pay hefty premiums for liability insurance. So when a former employee sues your company’s president, you expect that your insurer will defend your organization. But as one employer recently found out, even if you think your insurance policy should cover employment-dispute lawsuits, it probably contains an employment-related practices exclusion—and you could be left to fend for yourself.
Employer Tells All, Gets Sued for Defamation
Los Angeles-based radio station KMEX aired a story on an employee’s harassment suit against his employer, U.S. Continental Marketing. The broadcast focused on the employee’s allegation that he was forced to have sex with his supervisor to keep his job. David Williams, who was U.S. Continental Marketing’s president, fielded questions about the company’s employment practices and acknowledged knowing that the supervisor had AIDS.
The supervisor then sued KMEX and Williams for defamation. He alleged that they had improperly disclosed private facts about his sexual orientation and medical condition, causing him severe emotional distress, humiliation, and loss of prospective employment.
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Liability Insurer Declines Coverage
U.S. Continental Marketing’s liability insurer, Golden Eagle Insurance Co., refused to defend the supervisor’s suit, pointing to a policy provision excluding coverage for employment-related practices (ERP). The provision stated that the policy didn’t apply to personal injury arising out of refusal to employ, termination of employment, or employment-related practices, policies, acts, or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, or discrimination.
U.S. Continental Marketing took Golden Eagle to court, arguing that the exclusion didn’t apply because the supervisor wasn’t employed by the company when the defamation incident occurred—and therefore the insurer was obligated to provide a defense.
No Duty to Defend
But a California Court of Appeal sided with Golden Eagle. The court explained that whether an ERP provision excludes a former employee’s defamation lawsuit depends not on whether the person was employed at the time of the incident but rather on the connection between the alleged defamatory statement and the injured party’s employment. Also relevant is whether a relationship exists between the employer and the injured party outside of the employment relationship.
The court concluded that Williams’ statement was employment-related—and therefore excluded under the insurance policy—because he made it in response to a question about the supervisor’s medical condition while an employee of Williams’ organization. Plus, there was no evidence that Williams and the supervisor had anything but an employment relationship.
Do You Need EPL Insurance?
It’s important to note that most general liability and workers’ compensation policies won’t cover employment disputes. This has fueled the popularity of employment practices liability (EPL) policies that protect you against lawsuits for wrongful termination, sexual harassment, and a host of other employment-related claims.
To evaluate whether you need EPL coverage, check whether your current policies—including general liability, directors and officers (known as D & O), and workers’ comp policies—exclude employment-related claims. If they’re not covered and you decide to shop around for EPL coverage, be sure to first identify the key provisions you want in the policy. For example, many EPL policies don’t allow you to select your legal counsel if you’re sued, and some policies don’t give you a say in whether to settle suits.
Put Your Policies in Order
Also, keep in mind that most EPL insurers will require you to have your workplace policies in order before they issue coverage. And how much you’ll pay for coverage often depends on your level of exposure to employment claims. Thus, insurers typically look to see that you have implemented smart employment practices, such as an employee handbook with an at-will policy, strong anti-harassment and discrimination policies, and a comprehensive complaint and investigation program.