Check Your EPLI Policy - When Coverage For Discrimination Doesn't Mean The Most Common Type of Discrimination Claim

Posted 12:56 PM by Michael Fox

Employment practices liability coverage has had a resurgence in the last few years. But as most developments in the law it takes time for issues related to that coverage to work their way through the courts. There must first be a claim, the claim has to be denied, litigated in the trial court and then appealed for appellate case law to develop. All of that takes time. Earlier this week the 5th Circuit handed down one of the first major EPLI decisions that I can remember seeing based on policies sold since EPLI became such a popular form of coverage.

Although hard to tell who will ultimately "win" this particular battle between a Louisiana School Board that bought an EPLI policy from Mid-Continent Casualty Insurance Company, the holding is significant enough for all those who are purchasers of such insurance to make sure that the scope of the coverage is what they think it is.

In simplest terms, the policy appeared to provide for coverage of discrimination claims since wrongful act was defined to include:

(1) actual or alleged discrimination, whether based upon race, sex, age, national origin, religion, disability or sexual orientation; [and] (2) actual or alleged sexual or racial harassment;...

But the policy also had an exclusion for loss resulting from any claim:

brought about or contributed to in fact by any dishonest, fraudulent or criminal Wrongful Act or by any Wrongful Act committed with actual knowledge of its wrongful nature or with intent to cause damage.

This provision was referred to by the Court as the "intentional acts" provision.

The School Board was sued for racial discrimination under a disparate treatment theory. Because disparate treatment requires a finding of intentional discrimination, what the policy appeared to cover was eliminated by the intentional acts exception according to the insurance company.

The School Board was less than happy, as the Court noted:

The Board acknowledges, as it must, the presence of the exclusion for intentional acts, but urges that the exclusion cannot be squared with the policy’s explicit coverage of racial discrimination and racial harassment as both are inherently intentional in nature. The Board argues that any attempt to reconcile the policy’s exclusion with its coverage for discrimination and harassment leads to the absurd result that coverage is available only for “unintentional” “intentional” acts.

But the money quote by the Court deciding whose view was correct was this:

We are persuaded that the exclusion for intentional acts in the School Board’s policy does not conflict with the policy’s coverage for racial discrimination and racial harassment. It is well settled that claims for racial discrimination may allege either “intentional” or “unintentional” acts. Specifically, “[i]n the context of Title VII litigation, we recognize two types of discrimination claims: disparate treatment and disparate impact.” “Disparate treatment refers to deliberate discrimination in the terms or conditions of employment,” whereas disparate impact claims “do not require proof of intent to discriminate.” As written, the policy can readily be interpreted to extend coverage for claims alleging disparate impact discrimination while excluding coverage for disparate treatment discrimination.

Coleman v. School Board of Richland (5th Cir. 7/25/05)[pdf].

Although the Court noted other cases had taken a more favorable view of the argument made by the Board, it found its holding that coverage was properly denied proper under Louisiana law for construing insurance policies and also by the position taken by the 7th Circuit in Solo Cup Co. v. Federal Insurance Co. 619 F.2d 1178 (7th Cir. 1980).

The Court looked more favorably on another argument of the Board, that other portions of the claim were covered, at least for the purposes of providing a defense.

Although this decision is based on Louisiana law, it should make clear the importance to anyone purchasing EPLI insurance, who certainly would expect that the most common variety of discrimination claims -- those based on a disparate treatment theory -- would be what it is buying protection for, should be sure to review the proposed policy in light of this decision.

Comments:

Bad decision IMO. A couple of thoughts: 1. It is the vicarious liability of the School Board for the wrongful acts of its members that the insurance is to cover -- that is how the EPLI carriers "sell" the coverage around the intentional acts clause. Ironically, see fn 44 of the 5th Cir's opinion starting with Leon Lowe v. Great Am. for the case support 2. She sued under 1983 which is a discrimination in contract claim --why is this not "intentional" and excluded? (no negligent breach of contract) 3. What about fraud, breach of warranty, etc. against the agent who sold it, as one would only guess what the sales pitch on coverage included, and 4. I suppose that EPLI carriers and sales persons are shuttering at this one as it pings a continual area of concern in the purchase of an EPLI policy -- how can you insure an intentional act? Are the punitive damage coverage provisions next?

# posted by

Anonymous : 4:29 PM

Strike #2 they did exclude the 1983 claim! Still a hard decision for carriers wanting to sell and policyholders needing to claim . . .

# posted by

Anonymous : 4:37 PM