Section Review

Running for coverage: How insurance can protect employers from employment-relate

This article appeared in the July 1999 issue of theSection Review.
© 1999 Massachusetts Bar Association
Paul E.Stanzler and Mark J. Ventola are partners with the Boston law firm of Burns& Levinson where they concentrate on labor and employment law and business litigation. © 1999 Burns & Levinson LLP Newspaper headlines serve as daily reminders to employersof the risks faced from employment-related claims. More and more employees arebringing suit under federal statutes, including Title VII of the Civil RightsAct,1 the Age Discrimination in Employment Act,2 or the Americans withDisabilities Act,3 and their Massachusetts counterparts. In Massachusetts,claims filed with the Massachusetts Commission Against Discrimination haveincreased more than 50 percent in the past 10 years, and the number ofcomplaints filed in the first quarter of 1998 demonstrates that the trend iscontinuing. This increase in claims is punctuated by high-profile cases, oftenaccompanied by high jury awards. Such cases underscore the need for employersto protect themselves with insurance.

GENERAL LIABILITY INSURANCE POLICIES When faced with the need to defend an employment-relatedclaim, employers first look to their general liability policies. Comprehensivegeneral liability policies, known as CGL policies, including"umbrella" policies, usually cover claims for bodily injury,property damage, personal injury, and advertising injury. The policies providethat liability for such injuries is covered only if the injury results from anoccurrence, which policies generally define as an action resulting in an injurythat is neither expected nor intended by the policyholder. Because generalliability policies do not cover intentional injury, Massachusetts courts, likecourts in other jurisdictions, often find that wrongful termination,discrimination and sexual harassment claims do not fall within thepolicies' coverage terms.
COVERAGE FOR BODILY INJURY Under typical CGL policies, coverage is provided if theunderlying complaint alleges bodily injury. Employment-related claims ofteninclude claims for mental anguish or emotional distress. A key questionregarding coverage, therefore, is whether these types of claims constitutebodily injury.
While jurisdictions are split on this issue, Massachusettscourts have held that a claim of emotional distress without any allegation ofphysical injury does not constitute bodily injury. In Allstate Insurance Co. v.Diamant, for example, the court denied homeowner's insurance coverage fora student who was sued by a teacher for intentional infliction of emotionaldistress due to an allegedly defamatory letter the student had written.4According to the court, "‘bodily injury' is a narrow term andencompasses only physical injuries to the body and the consequencesthereof."5 Because the underlying claim alleged "mental pain andanguish" and prejudice and harm in professional standing, but did notallege any physical injury, the court held that the policy did not cover theclaimed harm.6 COVERAGE FOR PERSONAL INJURY In addition to coverage for bodily injury, CGL policiesoften provide coverage for personal injury. Umbrella policies allow broadcoverage for such claims, and, in particular, include coverage for intentionaltorts.7 The definition of personal injury is generally found in the policiesthemselves. The definition may include such intentional torts asdiscrimination, violation of the right to privacy and defamation.8 Depending onthe language of their umbrella policies, therefore, employers likely can obtaininsurance coverage for their defense of discrimination and employment-relateddefamation and invasion of privacy claims.9 The other benefit of umbrella policies is that, unlike theCGL policies, coverage applies to offenses rather than occurrences. Asdiscussed below, occurrences are defined as those actions for which theresulting harm was neither expected nor intended by the insured. Becauseumbrella policies usually cover offenses, the difficult inquiry into whether theharm was expected or intended is not raised.
COVERAGE FOR PROPERTY DAMAGE Although CGL policies provide coverage for propertydamage, employment practice plaintiffs do not usually include such claims intheir complaints. Even if they do so allege, damages in employment claim casesoften are not considered property damages because property damages do notinclude strictly economic losses.10 Accordingly, claims for lost wages orincome, which are economic losses, would not be considered claims for property damage.11 Moreover, employment-related damages also do not includeclaims for the loss of use of personal property. In New England Mutual LifeInsurance Co. v. Liberty Mutual Ins. Co., the court held that the insurer hadno duty to defend against the property damage claims because theplaintiff's allegation — that she was forced to sell her home andmove to another state out of fear that she would be discharged for filing anequal opportunity complaint — did not constitute the loss of use ofpersonal property.12 WHAT CONSTITUTES AN OCCURRENCE? General liability policies allow coverage for liabilitiesdue to injury resulting from an occurrence. The policies usually define anoccurrence as "an accident … which results in bodily injury …neither expected nor intended from the standpoint of the insured."13Insurance companies try to avoid coverage responsibilities foremployment-related liabilities on the grounds that the injury neither arosefrom an accident, nor was it expected or intended by the insured.
EXPECTED OR INTENDED In general, Massachusetts follows the majority ofjurisdictions in narrowly construing the "expected or intended"language, barring coverage only where the insured committed an intentional actand intended or knew with substantial certainty that some injury would resultfrom its conduct.14 A recent case in the employment practice context broadenedthe expected or intended exclusion to some extent by finding that the exclusionapplies when the policy holder both committed an intentional act and"should have known that some harm was likely to occur as a result of[the] clearly intentional act."15 In Timpson v. Transamerica InsuranceCo., the court held that a sexual harassment claim was not an occurrencewarranting coverage where a professional football player should have known thathis laughing and encouragement of his teammates' lewd acts toward afemale journalist would harm the journalist in some way.16 A discrimination and retaliatory discharge claim was heldnot to be an occurrence, and therefore not covered by the employer'sgeneral liability policy, in Rideout v. Crum & Forster CommercialInsurance.17 In Rideout, the court found that the employer's sexuallydiscriminatory acts of denying equal pay, overtime work and promotions and theemployer's retaliatory discharge of employees implied an intent to causelost wages.18 In the case of such intentional injury, therefore, the claims areexcluded from coverage under the employer's CGL policy.
NEGLIGENT ACTS Although intentional acts resulting in intentionalinjuries are excluded from insurance coverage, negligent acts and theirresulting injuries are not. Massachusetts courts have found that injuriesresulting from reckless conduct are not expected or intended, but accidentaland therefore are covered under CGL policies.19 Accordingly, a careful readingof the allegations in an employment practice complaint reveals whether theclaims are covered under a CGL policy and whether the insurer has a duty todefend.
WRONGFUL ACTS A Massachusetts statute precludes insurance companies frominsuring "any person against legal liability for causing injury, otherthan bodily injury, by his deliberate or intentional crime orwrongdoing."20 Yet, at least in the context of employment discrimination,"the fact that a wrongful act was committed intentionally … doesnot alone bar coverage."21 Coverage is prohibited only if the insuredintentionally committed the wrongful act knowing that it was wrongful.22 Atissue in Andover-Newton Theological School, Inc. v. Continental Casualty Co.was the insurer's obligation to defend against a claim brought under theAge Discrimination and Employment Act. According to the court, indifference orreckless disregard for one's conduct under the ADEA may be willful, butdoes not rise to the level of conduct known by the actor to be unlawful.23
REASONABLE EXPECTATIONS Some courts narrowly construe the expected or intendedexclusion with reference to the reasonableness of the policyholder'sexpectations of coverage. Under the "doctrine of reasonableexpectations," these courts enforce the insurance contract in accordancewith the policyholder's reasonable expectation that the policy will coverthe loss at hand, even though the insurance company might make an equallyreasonable argument that coverage is excluded.
The doctrine of reasonable expectations has beenconsidered in Massachusetts, but not specifically adopted.24 It was rejected inJefferson Insurance Co. v. Holyoke because the policyholder was unable to showthat the structure, content, manner of printing of the insurance contract orthe methods and practices of the policy's marketing created reasonableexpectations of a greater area of coverage. Thus, no case law supportsMassachusetts policyholders arguing the doctrine of reasonableness in coveragedisputes.
DISPARATE TREATMENT VERSUS DISPARATE IMPACT In employment discrimination claims, plaintiffs may makeclaims under either of two theories of liability: disparate treatment anddisparate impact. The theory of liability at issue may determine whether theclaim is considered a covered occurrence. Disparate treatment occurs when anemployer treats an employee differently because of an impermissibleclassification like race, religion sex or national origin.25 The majority ofcourts have found that when an employer engages in disparate treatmentdiscrimination, it has expected or intended to cause the resulting harm andthus claims arising from such actions are not covered by CGL insurancepolicies. For example, the disparate treatment claim of sexual discriminationin Rideout was excluded from coverage because the employer intended to treatmen and women differently.26 In contrast, disparate impact occurs when facially neutralpractices and procedures are the basis of a finding of unlawful discriminationbecause such practices or procedures have a negative impact on a protectedclass of employees.27 Because intent is not an element of disparate impactdiscrimination, insurance coverage for disparate impact discrimination cases isusually upheld.28 In conclusion, the discussion above demonstrates thatgeneral liability insurance provides coverage to companies for the defense ofemployment-related claims only in limited circumstances. For fuller coverage,therefore, companies must look to more specialized insurance products.
EMPLOYMENT PRACTICES LIABILITY INSURANCE In the early 1990s, insurers responded to the demand formore extensive coverage for employment-related liabilities and began offeringemployment practices liability insurance. EPLI policies cover such claims aswrongful discharge, employment discrimination, sexual harassment, violation ofthe Americans with Disabilities Act, and other employment-related claims. EPLIpolicies may cover some or all of these types of claims.
Because EPLI policies are relatively new, a standardpolicy has not yet developed and there is very little case law interpretingexisting policies. Usually, EPLI provides coverage on a claims-made basis anddefense expenses are included in the limits of liability. EPLI usually includescoverage for back pay, but restricts or excludes coverage for fines orpenalties, multiple damages or punitive damages. EPLI policies may also containseveral types of exclusions including those for ERISA liability, criminal or intentionalacts, claims for nonmonetary or injunctive relief, claims arising fromcircumstances known prior to policy inception, retaliatory actions, and others.
There are provisions in the EPLI policies that raisesignificant coverage issues. While these provisions have yet to be interpretedby the courts, they are likely subjects for litigation. These issues include:

  • whetheran EPLI policy's definition of sexual harassment includes rape and sexualassault
  • whetherclaims that arise from discrimination, sexual harassment or wrongfultermination, such as defamation or infliction of emotional distress, arecovered under an EPLI policy
  • howpolicy exclusions are applied
  • whethera claim is one for damages under an express contract (which is not usually coveredunder an EPLI policy) or is instead an equitable claim for wrongful termination
  • whetherthe policy covers on-the-job discrimination that does not result in employmenttermination
  • whetherthe term "termination of employment," used in the context ofwrongful termination, means only full and complete severance of the employmentrelationship29
Due to its relatively recent entry into the insurancemarket, EPLI is fairly expensive. Some insured companies, therefore, prefer torely on coverage provided under their general liability policies and attempt totake actions that will reduce the risk of having employment-practice claimsbrought against them in the first place.
When a company purchases EPLI coverage, the underwritingprocess is fairly extensive. The applicant may be required to provideinformation and documentation proving that the company has interviewing andapplications procedures, regular employee performance evaluations, an employeehandbook, sexual harassment policies and training, discharge procedures and apost termination reference policy.
Additional information about EPLI policies may be obtainedfrom a commercial insurance agent or on the Internet. Articles and analysis ofcertain policy provisions can be found at http://www.edgewater.net. Samplepolicies are not available online due to insurance companies' concernsabout providing information to competitors.
CONCLUSION General liability policies are often insufficient toprotect the employer against employment practice claims. Policy coverage, whichis often limited to occurrences that include accidents resulting in bodilyinjury or property damage neither expected nor intended from the standpoint ofthe insured, excludes many types of employment practice claims due to theintentional or wrongful nature of the underlying acts.
Employment practices liability insurance policies providea new choice of coverage specifically designed to cover sexual harassment,wrongful termination and discrimination claims. Such coverage, however, isfairly expensive, and the policy language is not yet uniform. Moreover, legalinterpretation and analysis of these policies is extremely sparse and thussomewhat unpredictable. Accordingly, while insurance coverage for employmentpractices does provide some protection for companies, emphasis must also beplaced on adopting internal preventive measures such as policy manuals,training sessions, and the exercise of plain old common sense to achieve theoptimum level of risk management.
END NOTES 1. 42U.S.C. § 2000(e) et seq. (1995).
2. 42U.S.C. § 626 et seq. (1995).
3. 42U.S.C. § 12101 et seq. (1995).
4. 401Mass. 654, 655, 518 N.E.2d 1154, 1155 (1988).
5. Id.at 656, 518 N.E.2d at 1156.
6. Id.See also MacNeill v. Metropolitan Property and Liability Ins. Co., 420 Mass.587, 590, 650 N.E.2d 793, 795 (1995). But see Rideout v. Crum & ForsterCommercial Ins., 417 Mass. 757, 763, 633 N.E.2d 376, 379 (1994) (failing toassess existence of physical injury when addressing coverage question foremotional distress claim and instead denying coverage because emotionaldistress claim was not a covered "occurrence").
7. See,e.g., Poulton, et al., Northern California Chapter Society of CharteredProperty and Casualty Underwriters, Umbrella Liability Coverage, 13 CPCU AnnalsNo. 3, 243 (1960).
8. See,e.g., 1993 Lloyd's of London umbrella policy reproduced in The UmbrellaBook: Analysis of Commercial General, Umbrella, and Excess Liability L-1(1996).
9. SeeScott R. Berman and Mark E. Cohen, Insurance Coverage Law in Massachusetts,National Business Institute 1997, at 75-76.
10. See,e.g., Smartfoods Inc. v. Northbrook Prop. & Cas. Ins.Co., 35 Mass. App. Ct.239, 618 N.E.2d 1365 (1993).
11. See,e.g., Kline v. The Kemper Group, 826 F. Supp. 123 (M.D. Pa. 1993, aff'd,22 F.3d 301 (3d. Cir. 1994) (holding that back pay and loss of employmentopportunities resulting from wrongful discharge were "plainly notencompassed by the policy definition of property damage").
12. 40 Mass.App. Ct. 722, 728, 667 N.E.2d 295, 299 (1996).
13.GeneralLiability Policy of Canadian Universal Ins. as quoted in Continental Cas. v.Canadian Universal Ins., 924 F.2d 370, 373 (1st Cir. 1991).
14. HanoverIns. Co. v. Talhouni, 413 Mass. 781, 784, 604 N.E.2d 689, 691 (1992); QuincyMutual. Fire Ins. Co. v. Abernathy, 393 Mass. 81, 84, 469 N.E.2d 797, 799(1984).
15. Timpsonv. Transamerica Ins. Co., 41 Mass. App. Ct. 344, 352, 669 N.E.2d 1092, 1098(1996).
16. Id. at352, 699 N.E.2d at 1098.
17. 417Mass. 757, 633 N.E.2d 376 (1994).
18. Id. at763, 633 N.E.2d at 379.
19. See,e.g., Worcester Ins. Co. v. Fells Acres Day School, Inc., 408 Mass. 393, 411,558 N.E.2d 958 (1990).
20. M.G.L.c. 175 § 47.
21. Andover-NewtonTheological School, Inc. v. Continental Casualty. Co., 409 Mass. 350, 352, 566N.E.2d 1117, 1118 (1991).
22. Id. 23. Id. 24. Andover-NewtonTheological School, Inc. v. Continental Casualty. Co., 23 Mass. App. Ct. 472, 503 N.E.2d 474(1987).
25. SeeInternational Bd. of Teamsters v. United States, 431 U.S. 324 (1977).
26. 417Mass. 757, 633 N.E.2d 376.
27. Griggsv. Duke Power Co., 401 U.S. 424 (1971).
28. See,e.g., Solo Cup Co. v. Federal Ins. Co., 619 F.2d 1178 (7th Cir. 1980).
29. Behmanand Cohen, Insurance Coverage at pp. 76-77.
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