EMPLOYMENT LAW ISSUES:
WHAT EMPLOYERS NEED TO KNOW ABOUT
INSURANCE FOR EMPLOYMENT LITIGATION
(SLIDE PRESENTATION)
By
Ann Kane Smith
Greenberg Glusker Fields Claman & Machtinger, LLP
MARCH 2000
9990800001-1120171.1
TABLE OF CONTENTS
Page
I.
INTRODUCTION........................................................................................1
II.
PUBLIC POLICY ISSUES RE: COVERAGE FOR
EMPLOYMENT PRACTICES LIABILITIES ............................................1
III.
VARIATIONS IN EMPLOYMENT PRACTICES LIABILITY POLICIES6
IV.
THE INSURER’S DUTY TO DEFEND AND THE INSURED’S DUTY
TO CO-OPERATE IN THE INVESTIGATION AND SETTLEMENT OF
A CLAIM ...................................................................................................10
9990800001-1120171.1
1
I.
INTRODUCTION
Employment litigation is not new to California employers. What is
relatively new is the insurance industry’s development of products to insure
against these risks. This paper is intended to provide some practical guidance to
employers contemplating employment practices liability insurance. It is not
intended to provide a detailed discussion of the coverage issues which frequently
arise under such insurance policies.
II.
PUBLIC POLICY ISSUES RE: COVERAGE FOR EMPLOYMENT
PRACTICES LIABILITIES
Generally speaking, Workers Compensation policies cover the employer’s
obligations under state law for employee injuries arising out of and occurring
during the course of employment.
In California, Worker’s Compensation is a
statutory no fault system, and imposes liability on the employer to pay for
temporary and permanent disabilities, medical and rehabilitation expenses, death
benefits and lost wages if the employee is injured in the course and scope of his
employment. In exchange, the employer is relieved from common law tort
9990800001-1120171.1
2
liability for personal injuries to the employee caused by the employer’s
negligence. California Labor Code §§ 3601, 3602 and 5300.
However, an employee’s claim that the employer violated federal and
state anti-discrimination statutes, or wage and hour laws, or a fundamental pubic
policy, or committed other intentional torts will not be barred by the exclusive
remedy provisions of California’s workers compensation statutes. La Jolla Beach
& Tennis Club v. Industrial Indem. Co., 9 Cal.4th 27 (1994). Rather, an employee
can also sue for such violations and, if successful, can recover damages in the
form of lost wages and benefits, compensatory emotional distress damages,
attorneys fees and costs, and in some cases fines, penalties and punitive damages.
In such cases, in order to prevail, the employee must prove that the employer’s
actions were intentional or willful. Texas Dept. of Community Affairs v. Burdine,
450 U.S. 248 (1981); St. Mary’s Honor Center v. Hicks, 509 U.S. 502 (1993).
It is this expanded liability that most employers are seeking to insure
against. However, there is a strong public policy which bars insurance
indemnification for a person’s intentional or willful misconduct. The general rule
is that “a contract of insurance to indemnify a person for damages resulting from
9990800001-1120171.1
3
his own intentional misconduct is void as against public policy and courts will not
enforce such a contract.” Dixon Dist. Co. v. Hanover Ins. Co. 641 N.E. 2d 395,
401 (Ill. 1994). In California this rule is codified in Insurance Code § 533 and
Civil Code § 1668.
The leading California case to address this public policy issue in the
employment context is Coit Drapery Cleaners Inc. v. Sequoia Insurance Co., 14
Cal.App.4th 1595, 18 Cal.Rptr.2d 692 (Cal.App. 1 Dist. 1993). In that case, the
employer sued its insurance carrier for breach of contract for the insurer’s failure
to defend and indemnify the company against an employee’s claims of sexual
harassment and wrongful termination. The court held that sexual harassment and
wrongful termination were intentional acts which were excluded by the terms of
the employer’s commercial general liability insurance policy, and for which
insurance coverage was barred by California’s Insurance Code § 533 prohibition
against coverage for willful acts. The court noted that: “One does not, for
instance, try to force an unwilling subordinate employee to the floor for
intercourse, or fire her for refusing sexual favors, as a result of mere negligence.”
The court explained that pursuant to Insurance Code § 533, “California law and
applicable precedents do not allow the recharacterization of such clearly
9990800001-1120171.1
4
intentional and willful sexual misconduct as merely negligent or nonwillful, so as
to trigger insurance coverage” (citations omitted). Id. at 1603.
The prohibition found at Insurance Code § 533 is implied into every
contract of insurance. J.C. Penney Cas. Ins. Co. v. M.K., 52 Cal.3d 1009 (1991).
Other courts have reached similar results in cases involving claims of
wrongful termination and employment discrimination finding that there is a strong
public policy which prohibits the shifting of liability to an insurance carrier for an
employers’ intentional wrongs. Allstate Ins. Co. v. Tankovich, 776 F.Supp. 1394
(N.D. Cal. 1991). The argument that the employer was simply negligent in its
supervision over the errant employee wrongdoer who acted outside his or her
authority will not trigger insurance coverage for the damages or injuries the
employee suffered from the intentional act. Courts have found that the
employer’s general intent to commit an act which is inherently harmful, rather
than any specific intent to cause harm to the victim, is sufficient to preclude
coverage. American Guar. & Liability v. Vista Medical Supply 699 F.Supp. 787
(N.D. Cal. 1988); B&E Convalescent Center v. State Compensation Insurance
Fund 8 Cal. App. 4th 78, 9 Cal. Rptr. 2nd 894 (1996).
9990800001-1120171.1
5
Under California law, punitive damages are awarded as a deterrent for
malicious or oppressive acts. Given that purpose, it is against California’s public
policy to allow an employer to insure against an award of punitive damages. PPG
Industries v. Transamerica Ins. Co., 20 Cal.4th 310 (1999).
Although California law has prohibited this type of insurance, the
insurance industry is nonetheless offering employers employment practices
liability insurance (“EPLI”) which expressly covers intentional acts, including
sexual harassment, discrimination and wrongful discharge in violation of public
policy. Employers are purchasing such policies in order to better manage the risks
of employment litigation. Employers should be aware that such EPLI policies and
their coverage terms have not yet been tested by the courts, and ultimately
employers may be unable to enforce their rights to indemnification of liability
under such insurance contracts if any dispute arises.
While public policy, Civil Code § 1668, and Insurance Code § 533 may
preclude indemnification of liability for intentional wrongs, an employer may still
be entitled to indemnification for the costs of defending against such claims,
9990800001-1120171.1
6
depending upon the facts in each case. Melugin v. Zurich Canada, 50 Cal.App.4th
658 (1996).
III.
VARIATIONS IN EMPLOYMENT PRACTICES LIABILITY POLICIES
There are many insurance companies, large and small, offering EPLI
insurance, and there are significant variations in coverage. Leading insurance
carriers are now offering coverage for the following employer conduct:
a.
All forms of employment discrimination, including
harassment and retaliation; and,
b.
Wrongful Employment Decisions/Acts defined as: actual or
constructive termination, wrongful demotion, wrongful
evaluation or discipline, failure to hire, failure to promote,
negligent administration of human resources policies and
procedures, promissory estoppel, intentional interference
with contract, misrepresentation, personal injury caused by
libel/slander, intentional infliction of emotional distress,
humiliation, invasion of privacy, violation of public policy
terminations, violations of family medical leave act, civil
9990800001-1120171.1
7
rights violations, failure to grant tenure, failure to make
partner, failure to make shareholder, negligent hiring,
negligent supervisor, and retaliation connected to
whistleblowing).
Typically, there is no coverage for conduct which occurred outside the
policy period. Other common exclusions from EPLI coverage are:
a.
National Labor Relations Board proceedings;
b.
claims arising from strikes or lockouts;
c.
WARN Act violations;
d.
COBRA violations;
e.
Wage & Hour violations;
f.
Employment Retirement Income Security Act (“ERISA”)
claims for benefits or for breach of fiduciary duties;
k.
9990800001-1120171.1
g.
incidents of workplace violence;
h.
class actions;
i.
Worker’s Compensation claims;
j.
claims for breach of a written contract for employment;
downsizing or restructuring of an organization or entity;
8
l.
alleged criminal conduct; and
m.
claims for breach of collective bargaining agreements.
Covered “losses” generally include awards or settlements for:
 Front Pay
 Back Pay
 Insurance Benefits
 Punitive Damages
 Liquidated Damages
 Claimant’s Statutory Costs and Attorneys’ Fees
 Defense Costs
However, civil or criminal fines or penalties, amounts owed under local or
state wage and hour laws, bonuses, commissions, salary and benefits amounts in a
written contract, and profitsharing benefits are usually excluded from the
definition of covered losses.
Whenever an employer is confronted with an employee’s claim or lawsuit,
it should review its current insurance policies to determine what coverage it may
9990800001-1120171.1
9
have for employment related risks. Commercial General Liability policies, Errors
and Omissions policies, Directors and Officers liability policies and Worker’s
Compensation policies may cover some employment related claims. While such
policies may cover some risks, it is likely there will be gaps in coverage.
Nevertheless, the employer should immediately tender the claim or the lawsuit to
its insurance carriers. If the employer has EPLI insurance, it is likely that the
insurer will accept the tender for at least some of the claims.
9990800001-1120171.1
10
IV.
THE INSURER’S DUTY TO DEFEND AND THE INSURED’S DUTY
TO CO-OPERATE IN THE INVESTIGATION AND SETTLEMENT OF
A CLAIM
Liability insurance imposes two separate obligations on the insurer: (i) to
indemnify the insured against claims covered by the policy, and (ii) to defend such
claims against its insured.
The duty to defend is broader than the duty to indemnify. The insurer may
owe a duty to defend claims that are potentially covered under the policy,
including groundless, false or fraudulent claims, claims for which the insured
reasonably expects coverage and any lawsuit in which any claim is covered or
potentially covered even if others are not.
Whether there is a duty to defend is determined at the outset of the
litigation. It depends upon the terms of the policy, the allegations of the
complaint/claim and the facts known to the insurer from any source. Montrose
Chem. Corp. v. Sup. Ct., 6 Cal.4th 287 (1993) [Canadian Universal Ins. Co., Inc.]
9990800001-1120171.1
11
The insurer has the choice of (a) refusing the insured’s tender of the claim;
(b) accepting the insured’s tender of a claim without raising any objection to
coverage; or (c) defending on a “reservation of rights” basis.
If the insurer refuses to defend, it loses control of the defense, it is
not entitled to any notice of developments in the litigation, and it will be bound by
the issues litigated.
If the insurer accepts the tender of the claim unconditionally it forfeits the
right to challenge coverage later.
By accepting the defense without reservation, the insurer will have the
right to control the defense and settlement of the claim.
If the insurer undertakes defense of a third party lawsuit, it must employ
competent counsel to represent the insured and provide such counsel with
adequate funds to defend the suit.
9990800001-1120171.1
12
The counsel must be competent to defend the particular matter at issue.
Travelers Ins. Co. v. Lesher 187 Cal.App.3d 169, 186. In employment cases, this
rule generally requires the insurer to retain experienced employment litigation
counsel.
An insurer is generally not liable for its appointed lawyer’s mistakes or
negligence. The remedy for such malpractice lies against counsel, not the insurer.
Merritt v. Reserve Ins. Co., 34 Cal.App.3d 858, 882 (1973). But see Travelers
Ins. Co. v. Lesher, 187 Cal.App.3d 169, 186 (1986).
The insurer must also adequately fund the defense. Problems arise where
there is a disagreement between the insurer and counsel when the insurer wants to
limit the case preparation, e.g., limiting the number or length of depositions,
expert witnesses, etc. If there is no potential risk of adverse consequences to the
employer, it is the insurer’s problem if it limits the preparation of a defense. But
if there is a potential adverse impact on the employer, it may become a more
significant issue and could create a conflict between the insured and the insurer
which would require counsel to withdraw and the insurer to retain independent
counsel for the insured.
9990800001-1120171.1
13
The insurer cannot unilaterally terminate its duty to defend while the
insurer is at risk of an adverse judgment.
The duties of defense counsel employed by an insurer to defend a claim
without any reservation of rights are as follows:
1.
Counsel is deemed to have an attorney-client relationship with both
the insurer and insured. State Farm Mut. Auto Ins. Co. v. Federal Ins. Co., 72
Cal.App.4th 1422 (1999).
2.
The clients’ written consent is not required when attorney jointly
represents insured and insurer because no potential conflicts exists.
3.
Although counsel has fiduciary duty to both the insured and
insurer, the primary duty is to the insured. Purdy v. Pacific Auto, 157 Cal.App.3d
59 (1984
).
4.
The Attorney-Client Privilege is held jointly by insurer and
insured, Counsel’s duty to protect client confidences may create conflicts later
requiring withdrawal. Cal. State Bar Form Opn. No. 1995-139.
5.
Counsel is obligated to communicate settlement offers and to
advise the insured about potential consequences of an adverse verdict.
9990800001-1120171.1
14
6.
Counsel is obligated to communicate settlement offers and to
advise the insured about potential consequences of an adverse verdict.
7.
If actual conflict of interests arises, informed written waiver and
consent to representation is required. California Rules of Professional Conduct,
Rule 3-310(c)-2. Betts v. Allstate Ins. Co., 154 Cal.App.3d 688 (1984).
8.
Examples of actual conflicts which arise between insured and
insurer are:
a.
Covered and non-covered claims in same lawsuit;
b.
Potential liability to insured in excess of policy limits;
c.
Prejudicial settlement terms to insured;
d.
Conflicts among jointly represented interests due to their
divergent views on liability and litigation tactics;
e.
Conflicts based upon client confidences.
Employment litigation often involves these conflicts of interests, and it is
not at all uncommon for counsel to point out these risks to the employer before
the claim is tendered to the carrier.
9990800001-1120171.1
15
If the insurer believes that there is a potential coverage issue, or a potential
conflict between the insurer and the employer, it may accept the tender of the
defense subject to its reservation of rights.
The reservation of rights must be expressly made, either orally or in
writing.
The insured’s non-qualified acceptance of the defense may be deemed to
be an acceptance of the defense based on the reservation of rights. If the insurer
properly reserves its rights, it may recoup from the insured the costs of defending
an uninsured claim.
When an insurer asserts a reservation of rights, a conflict arises. The
conflict arises because the insurer’s desire to exclusively control the defense may
compete with the duty to defend the insured. San Diego Navy Fed. Credit Union
v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984).
Civil Code § 2860 governs the appointment of independent counsel when
a conflict arises between an insurer and the insured.
9990800001-1120171.1
16
The conflict must be significant, not theoretical. The test is whether the
conflict precludes insurer - appointed defense counsel from presenting a quality
defense for the insured. Dynamic Concepts, Inc. v. Truck Ins. Exch. 61
Cal.App.4th 999, 1007-1008 (1998).
The obvious case is where the conduct at issue in the underlying lawsuit is
the conduct which provoked the reservation of rights. The insurer’s interest
would be to find that the conduct was not covered by the policy, whereas the
insured, if it was to be found liable at all, would want the liability to be based on
the claim that is insured.
The test is whether defense counsel can control the outcome by shaping
the case in such a way that it favors the insurer over the insured or vice-versa. If
so, independent Cumis counsel must be retained.
If Cumis counsel is to be appointed, it is the insured who selects counsel,
although the independent counsel must meet the minimum requirements under
Civil Code § 2860, i.e., five (5) years of litigation experience and E&O insurance.
Also, the defense costs and attorneys fees must be reasonable and will be limited
9990800001-1120171.1
17
to the hourly rates actually paid by the insurer in the defense of similar actions in
the community where the lawsuit is being defended.
The insurer’s litigation management guidelines to outside counsel are not
applicable to independent counsel.
However, ‘[u]nder no circumstances can such
guidelines be permitted to impede the attorney’s
own professional judgment about how best to
competently represent the insureds. If the attorney’s
representation is to be limited in any way that
unreasonably interferes with the defense, it is the
insured, not the insurer, who should make that
decision.’ [Dynamic Concepts, Inc. v. Truck Ins.
Exch. (1998) 61 CA4th 999, 1009, 71 CR2d 882,
889, fn.9]
Although paid by the insurer, Cumis counsel represents solely the insured.
No attorney-client relationship exists between the insurer and Cumis counsel.
9990800001-1120171.1
18
Employers Ins. of Wausau v. Albert D. Seeno Const. Co., 692 F.Supp. 1150, 1157
(N.D. Cal. 1988), approved on appeal, 945 F.Supp.284, 288 (9th Cir. 1991).
Defense counsel must timely “inform and consult with the insurer on all
matters related to the litigation” and “disclose all information concerning the
action except privileged materials related to coverage disputes.” Civil Code §
2860(d).
The attorney-client privilege under Civil Code § 2860(d) has not been
construed by the courts. It is important that counsel avoid any waiver of the
privilege in cooperating with the insurer.
An insurer cannot maintain a malpractice action against the independent
counsel, but can sue for violation of the duties set out in Civil Code § 2860.
9990800001-1120171.1