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November 1, 2011

EPLI coverage protects employers from liability for wrongful employment practices.  Although coverage varies greatly, most EPLI policies cover claims for sexual harassment, discrimination, and wrongful termination.  EPLI policies became popular in the mid-1990s because of a major increase in the number of employment practices lawsuits.  The surge resulted from the passage of the Civil Rights Act of 1991, which gave employees the option of trying their claims to a jury instead of a judge, and which provided for both compensatory and punitive damages for certain employment practices violations.

Whether your EPLI policy covers you for certain claims depends on the language of the policy, including how the policy defines “insureds” and “employees” and “covered claims.”  Up until now, most insurers have treated a “covered claim” as including not only a claim brought directly by the prospective, current, or former employee, but also a claim brought by the Equal Employment Opportunity Commission on behalf of the employee.  The October 2011 Tennessee federal court decision in Cracker Barrel v. Cincinnati Insurance Company has called this practice into question, and is a warning to companies to check their EPLI policies and confirm that they do, in fact, cover actions brought by the EEOC or other administrative agencies such as the Illinois Department of Human Rights.

In Cracker Barrel, ten employees filed race and sex discrimination charges with the Illinois Department of Human Rights and the EEOC against Cracker Barrel.  The EEOC took great interest in the case, and itself brought a civil lawsuit on behalf of the employees against the company.  Cracker Barrel filed a timely claim under its EPLI policy which, as do most EPLI policies, covered “a civil, administrative or arbitration proceeding commenced by the service of a complaint or charge, which is brought by any past, present, or prospective employee.”

Cincinnati Insurance Company denied the policy claim because the lawsuit was brought solely by the EEOC, which was not a “past, present, or prospective employee” of Cracker Barrel.  Cracker Barrel objected, arguing that  the EEOC brought the suit on behalf of the employees,  and the civil lawsuit, while commenced by the EEOC, was brought only because the employees filed a charge with the EEOC.   The court sided with the insurance company, and concluded, as a matter of law, that the insurer had no duty to defend or indemnify Cracker Barrel.

Regardless of the merits of the court’s decision, it creates the potential for a gap in coverage that could expose you to significant defense and indemnity costs.  You should review your EPLI policies to understand exactly what is covered and, if necessary, fill the gap by getting confirmation from your insurer that these claims are covered.