Many employers purchase Employment Practices Liability Insurance (“EPLI”) polices to protect themselves against employment related lawsuits by current or former employees or job applicants, such as claims of alleged discrimination, harassment, retaliation, and wrongful termination.
The “Claims Made and Reported” Time Trap
EPLI policies are often written on a “claims made and reported” basis. A claim is covered only if two conditions are satisfied: (1) the covered “claim” is first made against the insured during the policy period and (2) the covered “claim” is reported to the insurer during the policy period. This creates a real time trap that frequently results in a denial of coverage that will likely withstand legal challenge. For example, EPLI insurers take the position that a DFEH Complaint requesting only a right-to-sue letter is a “claim” and must be reported to the insurer during the effective dates of the policy. The trouble is the person receiving notice of the DFEH Complaint might not think of it as a “claim” since no employer response is required, and there is often almost a year lapse between the date of the “right-to-sue” notice and the date the employee or former employee files suit. When that happens, as it often does, there is a high likelihood that the policy expired or was renewed between the time the “right-to-sue” notice was issued the time the suit is filed. If the policy is a “claims made and reported” policy, the EPLI insurer will almost certainly deny coverage. Why? Because both conditions were not satisfied. The “claim” was not first made and reported during the same policy period.
Therefore, even if a “claim” is not immediately recognized as a “claim,” it should be tendered more or less immediately because the claim might be made very near to the date the policy is set to expire or be renewed. Generally speaking, it is a best practice to more or less immediately tender anything that even looks like a “claim” alleging employment related wrongdoing on the part of the employer, such as a letter from an attorney for an applicant, an employee, or a former employee; a DFEH Complaint, a Summons and Complaint (i.e., a lawsuit).
Pre-Tender Defense Costs And Settlements Are Never Covered
Even if coverage is not jeopardized altogether by delayed reporting of a “claim,” every EPLI policy contains a policy condition stating more or less “the insured will incur no liability or expense without our express written consent.” This is significant for several reasons: Attorney’s fees and other litigation expenses incurred before a “claim” is tendered will not be covered, and the EPLI insurer will not reimburse the insured for such pre-tender fees and expenses. Likewise, any settlements entered into or fixes performed before a “claim” is tendered will not be covered, and the EPLI insurer will not reimburse the insured for any pre-tender settlement agreed to by the insured. Furthermore, In many instances, pre tender expenses will not count toward satisfying the self-insured retention if there is one.
The Benefits of Reporting Circumstances That Might Reasonably Be Expected To Lead To a Claim
Even if a “claim” has not been made, it might still be a good idea to notify the appropriate liability insurer of “circumstances that might reasonably be expected to lead to a claim.” Many “claims made and reported” policies contain a provision stating that if the insured becomes aware of “circumstances that might reasonably be expected to lead to a claim” and reports to the insurer the information specified in the policy, the insurer will then deem a subsequent “claim” arising from those circumstances to have been first made and reported to the insurer during the effective dates of the policy in effect at the time the insured reported the “circumstances that might reasonably be expected to lead to a claim.” Doing this potentially does two nice things: (1) It preserves the policy limit of the policy in effect when the claim is made, and (2) it makes potentially covered claims that otherwise would not be covered, such as a “claim” first made after a policy expired.
How Should A Claim Be Tendered?
Some EPLI policies have very specific claim reporting requirements. Some policies will have buried within the policy a provision that states where the claim must be reported to and the information the insured must provide to satisfy the “claim” reporting requirements of the policy.
Generally speaking, the best way for an employer to tender a “claim” is to send to the employer’s insurance broker a copy of whatever is being tendered together with a writing requesting that the broker tender the “claim” under all potentially applicable insurance policies. Why do it this way? It’s easy! The employer need not dig through the policy or policies to find out how and where to tender the “claim.” The employer need only notify the broker and let the broker do the rest. Insurance brokers generally know how to properly tender “claims” to each insurer they write business for. They do it every day.
This article is the first of a series of articles addressing insurance-related topics of interest to California businesses and to businesses doing business in California Questions about this article can be addressed to the author who regularly represents corporate policy holders involved in disputes with their insurers.
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