August 2010, Volume 44
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270.6-7

CG 21 47–EMPLOYMENT-RELATED PRACTICES
EXCLUSION AND EMPLOYMENT PRACTICES

(February 2008)

INTRODUCTION

Coverage for employment-related practices is a hot topic at the present time. It must be recognized, addressed and resolved by every employer in its internal organization as well as in conjunction with its insurance agent and insurance company. The issue to address and resolve is what employment-related practices are and how are they covered or not covered in the Insurance Services Office (ISO) Commercial General Liability (CGL) Coverage Form.

The first step in the analysis is to determine what employment-related practices are and to consider some of the issues to consider when evaluating this exposure. When an employer hires or goes through the process of interviewing and deciding on a prospective employee, it usually has written or unwritten standard operating procedures that apply to the interview and hiring process. These procedures include such things as who reviews and decides on the acceptability of a person for employment as well as a method for determining that acceptability. This is an example of an employment-related practice. In cases where there is no actual policy or procedure related to interviewing and hiring, the lack of such a policy or procedure is itself an employment-related practice.

Another element of employment-related practices involves the ongoing policies and procedures used during the course of normal daily business operations as they relate to employees and employment. These include the procedures, or lack of procedures, that relate to the evaluation, promotion, discipline, demotion, reassignment or termination of existing employees. Recent additions to this list include the employer’s tolerance and treatment of sexual, racial, gender or religious discrimination, tolerance or harassment. These issues all fall into the realm of employment-related practices.

Modern society considers most of the issues mentioned above to be the basic moral obligation of an employer to provide fair and equitable treatment to its employees. Added to these moral obligations are the legal obligations imposed by federal, state and local laws, in addition to various other related or similar regulations designed to specifically address the employer's conduct during these activities. These laws and regulations fall into two basic activities. One involves fairness in hiring, promoting, paying and the general non-discriminatory treatment of personnel. This type of activity is the one most often associated with employment-related practices. The other activity involves maintaining a safe workplace from the physical standpoint and taking all reasonable and necessary steps to minimize or prevent the occurrence of injury and disease.

Most public libraries have a variety of relevant and related material for those seeking in-depth discussions of federal and state laws regarding employment. For those with Internet access, log on and direct inquiries to the website at http://www.yahoo.com/Government/Law/Employment_Law/. This site contains both current and historical federal and state employment law information.

COMMERCIAL GENERAL LIABILITY COVERAGE AND BODILY INJURY TO AN EMPLOYEE

This analysis begins with a review of the definition of bodily injury in ISO Form CG 00 01–Commercial General Liability Coverage Form. Bodily injury means bodily injury, sickness or disease sustained by a person, including death resulting from these at any time. This definition is broad enough to include obvious physical illness, injury or disease as well as being interpreted in some jurisdictions to include the physical manifestations of stress and mental anguish.

The ISO CGL coverage form addresses the exposures relating to safe workplaces and the physical bodily injuries sustained by an employee while on the job. In addition to the federal government regulation of workplace safety at all levels, state governments also issue mandates concerning remedies through workers compensation, disability benefits, unemployment compensation and similar-type laws. CG 00 01–Commercial General Liability Coverage Form, Section 1–Coverages, Coverage A–Bodily Injury And Property Damage Liability, 2. Exclusions d. and e. address how physical injury to employees is treated.

d. Workers' Compensation and Similar Laws

The insurance coverage provided does not apply to any obligation of the insured under any workers' compensation, disability benefits, unemployment compensation or any similar law. The intent of this exclusion and the one that follows is to eliminate indemnification from more than one source for injuries that should be covered only under workers compensation or employer’s liability coverage forms or policies.

e. Employer’s Liability

The insurance coverage provided does not apply to bodily injury to an employee of the insured arising out of and in the course of employment by the insured or performing duties related to the conduct of the insured's business or to the spouse, child, parent, brother or sister of that employee as a result of the employment.

This exclusion applies whether the insured is liable as an employer or in any other capacity. It also applies to any other obligation to share damages with or repay another party that must pay damages because of the injury. It does not apply to liability assumed by the insured under an insured contract.

The clarification provided in this exclusion is important because of the widespread use of contractors, subcontractors, independent contractors and leased employees. When any of these classes of employees are involved, a great deal of uncertainty exists concerning who is responsible for the costs of their injuries and losses.

Another important issue involves monopolistic states that provide or require workers compensation coverage but do not similarly require employer’s liability coverage or make it available. This situation could result in a significant gap in coverage for the insured employer. Over the years, many insurance companies developed their own manuscript endorsements and guidelines to add employer’s liability coverage in monopolistic states. ISO recently introduced a standard endorsement that does the same thing. This employer’s liability coverage is sometimes referred to by the term "stop-gap." It provides coverage by amending or deleting the employer’s liability exclusion in the ISO CGL coverage form.

It is clear that the ISO CGL coverage form does not apply to losses or suits for bodily injury sustained by an employee. A Workers Compensation and Employers Liability Insurance Policy is the normal means employed to provide this coverage and protect against such losses.

In addition, bodily injury an employee may experience due to the other categories of employment-related practices, such as unfair treatment or discrimination, is also not covered by the ISO CGL coverage form because of the exclusions outlined above. Employers are becoming increasingly overwhelmed with claims being made against them for the mental stress and related physical illnesses that occur as a direct result of their allegedly unfair employment practices. The ISO CGL coverage form excludes this growing problem in our society. Coverage does not apply to employers that do not treat their employees in a fair and non-discriminatory manner.

The ISO CGL coverage form also uses Exclusion a., Expected Or Intended Injury, to reinforce this position. Coverage does not apply to bodily injury or property damage expected or intended by the insured. The exclusion has an exception and does not apply to bodily injury resulting from the use of reasonable force to protect persons or property. The intent of this exclusion is to protect insurance companies from paying claims as a result of intentional acts, such as discrimination and unfair treatment, by the insured. This exclusion is in the public interest and ensures that the insured employer does not use the coverage provided to insure against the consequences of such illegal behavior.

Example: A woman sued her employer, the insured, alleging she was forced to engage in sexual acts with the employer in order to keep her job. The CGL insurer denied coverage. The insured claimed that the resulting injury was not expected or intended. Appeals were made and a decision was eventually rendered in favor of the insurance company and against the insured. The decision was that the employer intended the bodily injuries sustained by the employee. (American Manufacturers Mutual Ins. Co. v. Wodarski et al., US Court of Appeals for the Tenth Circuit, October 18, 1995.)

COMMERCIAL GENERAL LIABILITY COVERAGE AND BODILY INJURY TO NON-EMPLOYEES

Another issue is determining what happens when the bodily injury incurred by a person who is not an employee is a direct result of the insured employer's employment practices. Suppose that a man applies for a job for which he is completely qualified but the prospective employer unfairly refuses to entertain the application based solely on race, sex or religion. Does the ISO CGL coverage form respond if the man sustains bodily injury in the form of stress-caused illness? Does the exclusion for expected or intended injury apply? While it appears on the surface that coverage would apply, the language of this exclusion is currently being challenged and is under review in a number of court cases around the country. The issue is that, even though the act was intentional, the injury or damage that resulted is greater than expected or intended. For this reason, coverage should apply. Cases like these now before state supreme courts may affect the use of this exclusion and should be watched carefully over the next few years to see how they are resolved.

The ISO CGL coverage form is not intended to respond to and cover such injuries. Unfair treatment and discrimination practices are illegal and against public policy, based on state and federal equal opportunity employment practices regulations. The hope is that the courts will rule against this coverage being provided but such a ruling may occur in one or more jurisdictions until at least some, if not all, of the many cases currently being litigated are resolved. At the same time, the two exclusions outlined above definitely do not apply to situations involving potential, not actual, employees. As a result, coverage may be found to apply in those cases and jurisdictions where the Expected Or Intended Injury Exclusion does not hold up or is challenged.

The following case is interesting as it relates to the Expected Or Intended Injury Exclusion. It took place in Ohio, which is a monopolistic workers compensation state, and suit was brought under the employer’s CGL coverage. The insured employer was sandblasting a bridge and did not provide its employees with any fall protection, such as safety belts, lifelines or nets. An employee fell and died from the injuries he sustained. The surviving spouse sued the employer. The insurance company denied coverage, contending that coverage did not apply because of the Expected or Intended Injury Exclusion. The insurance company argued that the employer intentionally neglected to provide safety equipment and should have expected that such injuries might occur. The trial court found in favor of the employer and the insurance company appealed. The appellate court affirmed the lower court decision in favor of the employer and coverage was found to apply because no proof was given to substantiate the allegation that the injury was expected and intended. (Beacon Ins. Co. of America v. Kleoudis, 652 N.E. 2d 1 (Ohio App. 8th Dist. 1995).

In another case, the insured employer hired the son of a current employee to do janitorial work. The boy's mother just happened to be in charge of personnel records for the employer and concealed the fact that her son had a criminal record and had previously committed a violent crime. Based on its personnel policies and procedures, the employer would not have hired the boy if it knew of his criminal record. During the course of his employment, the boy raped and robbed a fellow employee. The victim subsequently sued the employer for negligent hiring, managing and supervision of the boy. The CGL insurer denied coverage based on the Expected Or Intended Injury Exclusion and stated that the mother, being the employee in charge of personnel records, should have expected such injury. The employer appealed the denial of coverage. The appellate court held that the exclusion did not apply in this case and the insurance company was required to defend and indemnify on behalf of the employer. (Sphere Drake Ins. Co. v. P.B.L. Entertainment, Inc. 30 F.3d 21 (2d Cir. 1994).

In a suit alleging religious discrimination, an employee was not allowed to attend a religious service during working hours. The employer fired the employee when he attended the service without approval. In the resulting discrimination suit alleging personal injury, the employer's CGL insurer denied coverage and refused to provide a defense. The employer then hired independent counsel but lost the case. At that point, the employer sued the insurance company. The employer won in the lower court proceeding and the insurer appealed. The appellate court held that personal injury, including discrimination, was covered as long as it was not against the law or public policy. However, intentional discrimination is not covered. Because the insurance company could not prove that the discrimination was an actual act of intentional religious discrimination, coverage applied and it was responsible for defense costs and the award made to the employee. (Ron Tonkin Chevrolet v. Continental Ins. Co., 870 P. 2d 252 (Or. App. 1994).

COMMERCIAL GENERAL LIABILITY COVERAGE AND PERSONAL AND ADVERTISING INJURY–OTHER THAN BODILY INJURY

The focus of the previous sections of this analysis was on bodily injury. The result of that analysis was that the ISO CGL coverage form excludes physical or bodily injury sustained by an employee. On the other hand, coverage for physical or bodily injury to persons who are not employees may apply, depending on whether or not the cause is expected or intended by the insured. A related question concerns what happens when an insured employer is sued, or a claim is made against that employer, for damages other than bodily injury, such as monetary damages, loss of income or loss of potential financial resources. Claims like these could be from either an employee who feels he or she has been treated unfairly or from a person who is not an employee. Keep in mind that only bodily injury to employees is excluded.

The definition of property damage in the ISO CGL coverage form must be reviewed. Property damage means physical injury to tangible property, including all resulting loss of use of that property. Loss of use is considered to occur at the time of the physical injury that caused it. It also means loss of use of tangible property not physically injured. In this case, loss of use is considered to have occurred at the time of the occurrence that caused it.

With this definition in mind, it is clear that any monetary damages resulting from employment-related practices do not fall into this category because no actual tangible property has been damaged or injured. These kinds of claims most often fall into the personal and advertising injury category. Under Coverage B–Personal And Advertising Injury Liability, the insuring agreement states that the insurance company agrees to pay the sums the insured is legally obligated to pay as damages because of personal and advertising injury to which the coverage applies. The insurer has the right and duty to defend the insured against any suit seeking damages if the coverage applies to the injury.

Personal and advertising injury means injury, including consequential bodily injury, caused by, resulting from or arising out of one or more of the following offenses:

  • False arrest, detention or imprisonment;
  • Malicious prosecution;
  • Wrongful eviction from, wrongful entry into, or invasion of the right to private occupancy of an area occupied by a person, committed by or on behalf of its owner, landlord or lessor;
  • Any oral or written publication of material that slanders or libels a person or an organization or that disparages the goods, products or services of a person or an organization;
  • Any oral or written publication of material that violates a person's right of privacy;
  • Use of another party's advertising idea in the named insured's advertisement; or
  • Infringement of the copyright, trade dress or slogan in the insured's advertisement.

Note: Personal and advertising injury is injury other than bodily injury. This is interpreted to include monetary damages and mental anguish. As a result, personal and advertising injury is very relevant and applies to employment-related practices claims and suits. The ISO CGL coverage form may be called on to provide defense and coverage in some cases in accordance with the personal injury coverage provided.

In a Rhode Island court case, a former employee sued the insured employer for racial discrimination and violation of human rights. The employee had legitimate grounds and was awarded back pay and defense costs. The employer’s CGL insurer denied coverage and the insured then sued it. The finding was that the insurer was not liable for two reasons. The first was that the complaint was based on intentional racial discrimination, which is specifically excluded. The second was that there was no allegation of either personal injury or bodily injury. Since only monetary damages were involved, there was no coverage under the ISO CGL coverage form. (Foxon Packaging Corp. v. Aetna Casualty & Surety Co., 905 F. Supp. 1139 (D.R.I.1995).

CG 21 47–EMPLOYMENT-RELATED PRACTICES EXCLUSION

CG 21 47–Employment Related Practices Exclusion was developed by ISO to eliminate many, but not all, of the employment-related practices coverages in the Commercial General Liability coverage form for certain specified causes.

A. This portion of the exclusion is added to Paragraph 2., Exclusions of Section I–Coverage A–Bodily Injury And Property Damage Liability. Coverage does not apply to bodily injury to:

  • A person arising out of any refusal to employ that person, termination of the employment of that person or employment related acts, omissions, practices or policies of the type listed; or
  • A family member of that person as a consequence of the bodily injury to that person at whom any of the employment-related practices described above is directed.

Note: This exclusion applies, whether the injury-causing event described above occurs before, during or after employment of that person, whether the insured may be liable as an employer or in any other capacity, or to any obligation to share damages with or repay another party that must pay damages because of the injury.

Note: This exclusion is not limited to either employees or persons other than employees. It covers any bodily injury and applies to both groups.

Consider refusal to employ. There is no coverage if the insured employer decides not to hire a person for any reason, whether the reason is sound and valid, is simply due to standard company procedure or results from an unfair practice. It is clear that no coverage applies to the insured that refuses to employ an individual due to race, sex or religious practices. On a related matter, a company having a written policy to not hire relatives of current employees faced a lawsuit from the sister of an employee. The sister was eminently qualified and had outstanding credentials and qualifications but was denied employment because of her relationship to a current employee. There is no coverage when this endorsement is attached to the ISO CGL coverage form, regardless of whether the insured was found liable for damages in the suit or not.

Unfair or discriminatory termination of employment is clearly excluded. There is no coverage, even in cases where the termination is valid, such as when a company must downsize and reduce staff in order to survive, or cases where the employee did not meet performance standards and was terminated for cause.

Coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination, malicious prosecution or other employment-related practices, policies, acts or omissions are excluded. The intent of this endorsement is to exclude coverage for unfair, inappropriate and illegal acts of the insured employer, including the employer's management and supervisory employees. Practices like those listed above should not be tolerated under any circumstances and are excluded by the coverage form.

Note: Malicious prosecution was added to the 12 07 edition because the court in Peterborough Oil Company, Inc. v. Great American Insurance refused to exclude malicious prosecution as an employment-related practice. The court's reasoning was that if the insurance company did not intend to cover malicious prosecution, it would have listed it. The court's interpretation was that this exclusion must be read narrowly so that even with the term "such as" preceding the listing, only the actual listed practices would be considered part of the exclusion.

Note: The employment related practices exclusion applies even if the injury occurred before the individual became an employee or after the individual's employment ended. This paragraph was added to the 12 07 edition in response to Owners Insurance Company v. Clayton South Carolina Supreme Court, where the insurance company was required to pay for damages to a terminated employee who was slandered after her employment ended.

The unfair and discriminatory employment practices are excluded. In addition, lawsuits filed against the insured employer as a result of the employer's legitimate and sound procedures are also excluded. A disgruntled current or former employee may attempt to make the employer pay by starting a frivolous or inappropriate lawsuit. For example, an employee demoted for cause may attempt to sue the employer anyway and see how far it can go. When this endorsement is attached to the coverage form, there is no coverage for the situation or for defense of the suit.

B. This portion of the exclusion is added to Paragraph 2., Exclusions of Section I–Coverage B–Personal and Advertising Injury Liability. Coverage does not apply to personal and advertising injury to:

  • A person arising out of any refusal to employ that person, termination of the employment of that person or employment related acts, omissions, practices or policies of the type listed; or
  • A family member of that person as a consequence of the bodily injury to that person at whom any of the employment-related practices described above is directed.

Note: This exclusion applies whether the injury-causing event described above occurs before, during or after employment of that person, whether the insured may be liable as an employer or in any other capacity or to any obligation to share damages with or repay another who must pay damages because of the injury.

By way of summary, when this endorsement is used, there is no coverage for either bodily injury or personal and advertising injury for the causes and reasons outlined or listed for any person, whether employed or not. Coverage does not apply for many of the exposures that result from the most commonly experienced employment-related practices.

In cases where the insured has acted properly, such as in cases of termination for cause where a lawsuit is filed against the insured employer by the former employee, much depends on the language of the coverage form and the endorsements used. It is important to be familiar and conversant with the coverage form and understand any endorsements added to it. For example, in a recent court decision, the insured school district fired a teacher for cause. The teacher then sued the school district alleging wrongful termination, ruined reputation and impaired ability to earn future income. Since there was obviously no bodily injury, the allegations of the suit were based on personal injury. While the teacher eventually lost the suit, the school district incurred substantial defense costs. The CGL insurer denied coverage on the basis that the claim was fraudulent, not covered and of a kind where providing a defense was not required. The school district sued the insurance company. In the decision that followed, the insurer was found guilty of breach of contract. This was because providing a defense was required, even if the claim was fraudulent, frivolous or without cause. (Indiana Ins. Co. v. The North Vermillion Community School Corp., Indiana Court of Appeals, May 24, 1996.)

Note: In this case, CG 21 47–Employment Related Practices Exclusion, was not attached to the ISO CGL coverage form. As a result, the ruling favored the insured with respect to court costs. If the exclusion had been attached, it is likely that defense would not have been required.

EMPLOYMENT-RELATED PRACTICES COVERAGE

The impetus for this coverage began with public interest in the confirmation hearings of Supreme Court Justice Clarence Thomas and his alleged relationship with a female co-worker. Other changes in federal and state laws, including the Americans with Disabilities Act and the Civil Rights Act of 1991, along with new consumer awareness of the practice of sexual harassment and discrimination in business, all contributed to the attention given to this case. Coverage was previously available for only the legal costs to defend claims against sexual harassment, wrongful termination and discrimination. Policies and coverage forms have since been developed that actually provide coverage for the insured's legal liability for such acts.

The coverage form or policy covers the legal liability of the insured employer for certain employment practices that lead to allegations of wrongful termination, discrimination or sexual harassment. These events are excluded in the standard ISO Commercial General Liability Coverage Form, Excess Liability, Employers’ Liability and Directors & Officers Liability policies. Limits are available that range form as little as $25,000 per claim to as much as $10,000,000 in the aggregate. Some policies include and cover employees as additional insureds.

Please refer to PF&M Section 369.4-2, Employment Practices Liability Insurance Coverage Form Analysis–EP 00 01 for an in-depth review of this coverage form.