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Playing with House Money – How to Trigger Insurance Coverage

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Playing with House Money – How to Trigger Insurance Coverage
Kimberly W. Geisler
EPLI Generally
Employment practices liability insurance (“EPLI”) first emerged on the scene in the late
1980s due to the fact that most general commercial liability polices do not cover employment
claims.1 While EPLI initially only covered the costs of defense of wrongful termination claims, by
the early 1990s, policies began to cover discrimination and sexual harassment claims and started
providing indemnity in addition to coverage for the cost of defense.2 New federal employment laws
enacted in the 1990s, such as the Civil Rights Act of 1991, the Americans with Disabilities Act, and
the Family and Medical Leave Act, led to an increase in federal employment claims and an increased
need for employers to protect themselves from the risk associated with such claims.3 Today, EPLI
has become a key form of risk management for employers.
Who Is Covered & When Is Coverage Triggered?
EPLI coverage typically extends to the covered business entity itself, as well as its officers,
employees, and former employees. Some EPLI policies may cover leased employees and
independent contractors. Coverage is triggered by a lawsuit, an administrative complaint, an
arbitration claim, or a simple demand letter. Oral demands are usually insufficient to trigger
coverage because of uncertainty as to proof and timing.4 When a claim is first presented in the form
of a lawsuit, the claim is deemed to be made upon the insured’s receipt of the summons or similar
What Is Covered?
Modern EPLI policies tend to cover a wide range of employment claims, including 1)
wrongful termination (including constructive discharge and retaliatory discharge), 2) discrimination,
and 3) retaliation.6 In addition, some policies contain a catch-all category to provide coverage for
claims of discrimination based on protected categories (i.e., sexual orientation) that are not covered
under federal discrimination statutes but may be covered by state or local law.7 Most EPLI policies
also provide coverage for various forms of harassment and alleged violations of the Family and
Joseph P . Monteleone, Em ployment Practices Liability Insurance, in P RACTITIONER ’S G UIDE TO THE D EFENSE
EPL C LAIMS 1,1 (Ellis B . Murov ed., 2005 ); Jeffery P . Klenk, Emerging Coverage Issues In Employmen t Practices
Liab ility Insurance: The Industry Perspective On Recent Development, 21 W . N E W E N G . L. R EV . 323-24, 333 (1999).
Montelo ne, supra note 1 , at 1.
Montelo ne, supra note 1, at 2; see also L. Kathleen Chaney, Employment Practices Liability Insurance, 30
C OLO . L AW . 125 , 125 (2001) (“T he rapid expansion of the EPLI market is attributable to a steady increase in the
frequency and severity of employment related claims over the last decade.”).
Montelo ne, supra note 1, at 8.
Id. at 8-9.
Montelo ne, supra note 1, at 10.
Medical Leave Act.8 EPLI policies typically exclude coverage for the following types of claims: 1)
workers compensation, 2) ERISA, 3) unemployment compensation, 4) COBRA, 5) wage and hour,
6) National Labor Relations Board decisions, and 7) breach of contract.9 The list of exclusions in
EPLI policies generally includes claims for bodily injury and property damage, but the EPL insurer
will often cover claims for mental anguish or emotional distress associated with covered losses.10
EPLI also generally excludes coverage for liability arising out of intentional wrongdoing.
Liability Limits
An important aspect of EPLI is that coverage for defense expenses is usually part of the
liability limit. Thus, lawyers defending EPLI claims face the challenge of adequately representing
the insured while knowing that every billable hour spent eats into the amount of coverage available
for indemnification of any future settlement or judgment.11 Further, defense expenses under an EPLI
policy are usually subject to a self-insured retention (or deductible). Many insurers will set
minimum retention amounts in order to avoid exposure to “routine, non-severe claims.”12 Most
often, there is an inverse correlation between the amount of the self-insured retention and the amount
of the premium.
EPLI provides coverage for “damages” in excess of the retention arising out of any
employment practices for which the policy provides coverage, which includes judgments,
settlements, back pay and front pay awards, pre-judgment and post-judgment interest, attorneys’ fees
and costs, and defense expenses.13 EPLI polices typically exclude coverage for wages, salaries,
benefits or expenses of the insured; punitive damages (unless coverage is permitted by applicable
state law); fines, penalties, or taxes; amounts due under an express employment contract; stock
options and deferred compensation; and injunctive relief (i.e., reinstatement, providing ADA
accommodations).14 Additionally, in order to enjoy coverage, damages must stem from claims made
by parties enumerated in the policy.15 It is also important to note that most EPLI polices define each
“employment practice” as one claim, so if more than one person makes a claim for the same
employment practice, the coverage available under the policy to pay those claims will be limited to
a single limit of liability.16
Chaney, supra note 3 , at 127 ; A Guide to Employment Practices Liability Insurance, T HE W O R K IN G P APER
(Phillips Lytle LLP, New Yo rk, N.Y.) March 20 07, at 2 [hereinafter The Working Paper].
Montelo ne, supra note 1, at 11.
The Working Paper, supra note 9, at 2.
Chaney, supra note 3, at 127 .
Chaney, supra note 3 , at 126 ; Montelo ne, supra note 1, at 9.
Montelo ne, supra note 1, at 9-10.
Chaney, supra note 3, at 126.
EPLI From the Perspective of the Employee’s Counsel
Triggering Coverage
Since it would be difficult to obtain an employer’s EPLI policy before litigation commences,
the employee’s attorney should be familiar with which types of claims are generally covered by EPLI
policies within the jurisdiction in which the employee is filing suit and should plead accordingly in
order to trigger coverage.17 For instance, if the employee has a strong FLSA claim but a weak race
discrimination claim, the attorney should include both claims in order to invoke EPLI coverage, as
the race claim would be covered by most policies whereas the FLSA claim would not be. Once
coverage is triggered, the plaintiff-employee must determine his or her strategy. One strategy is to
aggressively pursue litigation in order to “burn up” the employer-defendant’s deductible as quickly
as possible, so as to pressure the defendant-employer into settling.18 Another strategy is to proceed
slowly so that the defendant-employer does not go over its limit on its policy and cut into available
settlement funds.19
Pros and Cons of Invoking Coverage
Ordinarily, it is advantageous for a plaintiff to try to invoke EPLI coverage, the idea being
that if an insurance company is involved, there may be more money to throw into the settlement pot.
On the other hand, there may be reasons for avoiding the invocation of coverage. For instance, a
small employer without the benefit of insurance coverage may be intimidated into an early settlement
to avoid the uncertainties of litigation. Likewise, a large employer with deep pockets may be willing
to pay a higher settlement to protect its reputation, whereas an insurer may influence the employer
to focus on cost savings.
EPLI from the Defense Counsel’s Perspective
Ethical Issues Arising from the Tripartite Relationship
Counsel retained by EPLI carriers to defend employment claims for their policyholders face
a variety of challenges arising out of the “tripartite relationship” between the attorney, the insurer,
and the policyholder. While all three parties in the relationship share the basic goal of defending the
claim, the insurer and the insured may disagree about how the claim should be defended. Defense
counsel is often placed in the middle, trying to balance the interests of the insurer and the insured.
Stephanie D. Giro nda, EPLI Coverage: Practical Considerations From A Plaintiff’s Perspective, ava ilable
dam .pdf.
Who Is the Client?
Depending on the jurisdiction, counsel will either have one client (the insured) or two clients
(both the insured and the insurer). Most jurisdictions in the United States follow the “Two-Client
Theory,” meaning that both the insured and the insurer are clients of the defense attorney.20 The
Two-Client Theory is based on the premise that most cases settle quickly within policy limits and
that conflicts of interest are not likely to occur.21 The substantive law in most two-client states
provides that the insured is the “primary” client. A growing minority of jurisdictions follow the
“One-Client Theory,” which provides that the insured is the attorney’s only client.22 Supporters of
the One-Client Theory argue that “allowing an insurer to have an attorney-client relationship
weakens the attorney’s loyalty to the insured.”23 Counsel should familiarize themselves with the
applicable rules in the jurisdictions in which they practice.
Who Controls the Defense?
Given that it pays for the defense, EPLI policies usually allow the insurer to control costs
through the use of litigation management guidelines. EPLI carriers also routinely use internal or
external auditors to review legal bills to insure compliance with litigation management guidelines.
Given their detailed requirements, billing guidelines can influence judgment as to how the litigation
should be conducted. The ABA advises that an who attorney believes that his or her professional
judgment is being impaired by litigation guidelines should consult with both the insured and the
insurer.24 In the event of a conflict, the insurer can agree to withdraw or modify the offending
guideline or the insured can agree to the limited representation. If the three parties cannot agree on
the manner in which the defense should be prosecuted, “the resulting conflict between the insurer’s
directives and the insured’s immediate interests requires the lawyer to withdraw from representing
the insurer and to protect the immediate interests of the insured in the litigation.”25
Who Controls Settlement?
Traditionally, EPLI policies gave the insurer the exclusive right to settle covered claims.
However, as employers increasingly demanded more control over settlement, insurance carriers
began to include “hammer clauses” in their policies, which provide that “if the insurer can obtain
Amber C zarne cki, Ethical Considera tions W ithin the Tripartite Relationship of Insurance Law-Who Is The
Rea l Client?, 74 D EF . C O U N S . J. 172, 174 (2007).
Id. at 174-75.
Id. at 176.
Id. (citing Atlan ta Int’l In s. Co. v. Bell, 475 N.W . 2d 294 (M ich. 1991)).
Ellis B. Murov, Ethical Issu es Arising O ut of D efense of Claims Un der E mp loym ent P ractices Lia bility
Policies, in P RACTITIONER ’S G UIDE TO THE D EFENSE OF EPL C LAIMS 303, 306 (Ellis B. Murov ed., 2005) (citing ABA
Comm. on Ethics and Prof’l Responsibility, Formal Opinion 01-421).
an opportunity to settle, that is, an offer that the plaintiff has stated he or she would accept, then,
if the insured refuses to consent to the insurer settling the claim, the insurer’s liability under the
policy will be capped at the amount of the foregone settlement plus defense expenses incurred
through that point in time.”26 A hammer clause “permits the insured to object to a settlement
opportunity, but it requires the insured to bear the cost of making a bad decision.”27 Some hammer
clause provisions are less severe in that they only require the insured to pay a percentage of the
defense costs beyond the rejected settlement amount.28
Often, there is tension between the insurer’s desire to settle quickly and cost-effectively and
the insured’s desire to fight the claim in employment-related cases. Conversely, an insured may
want to settle quickly in order to avoid embarrassment while the insurer would like to pursue
litigation. The insured can be especially resistant to settlement if the settlement amount is within
the self-insured retention. Difficult situations can also arise when a settlement requires the
employer to reinstate a terminated employee. Counsel should keep in mind, however, that the
insured always retains the right to reject the defense offered by the insurer. Indeed, lawyers who
participate in settlement against the insured’s wishes have been held liable for malpractice.29 A
lawyer faced with a irreconcilable conflict between the insured and the insurer over settlement may
be left with no choice but to withdraw. However, as a practical matter, insurance examiners are
business-minded in terms of relationships with employer-clients, and in most situations, if defense
counsel has given a candid assessment of the case’s strengths and weaknesses, all parties can
eventually reach a consensus as to settlement.
The Clash Between Insurer and Insured when there is a Reservation of Rights
Frequently, a complaint filed against an insured will state both covered and non-covered
claims or be written in such a way that it is not possible to determine whether a particular policy
exclusion applies. In such situations, the insurer may elect to defend the claim under a reservation
of rights, which “allows the insurer to comply with its defense obligations without waiving its right
to withdraw the defense at a later date [or] its right to refuse indemnity for non-covered claims.”30
Reservation of rights can present challenges for defense counsel. For example, in cases that involve
both covered and non-covered claims, should counsel follow the insurer’s instructions to seek
dismissal of covered claims even if doing so would destroy the basis for coverage? Dismissal of the
covered claims would almost certainly cause the insured to assume defense costs. On the other hand,
leaving covered claims that are ripe for dismissal in play could jeopardize counsel’s long-term
relationship with the insurer. Counsel facing this situation may be forced to withdraw if the insurer
Montelo ne, supra note 1, at 7.
Klenk, supra note 1, at 340.
Thoma s E. D eer, Settlement Issues and Strategies for EPL Claims, in P R A C TIT IO N ER ’S G U ID E
EPL C LAIMS 265, 267 n.5. (Ellis B. Muro v ed., 2005).
Murov, supra note 24, at 321 (citing cases).
Steph en E . W hitehead & Je nnifer W . Hall, The Insurance Tripartite Relationship: “Who Is My Client
Anyway?”, 69 A LA . L AW . 416, 417-18 (20 08).
refuses to retract its instructions to seek dismissal.31
Enhanced Policy of Good Faith
Some states, while allowing an insurer defending under a reservation of rights to control the
defense, impose an “enhanced duty of good faith” on the insurer. In Alabama, for example, the
enhanced duty of good faith imposes the following requirements on insurers: “1) Thoroughly
investigate the claims asserted against its insured; 2) Fully inform the insured of all developments
relevant to policy coverage; 3) Allow the insured to make the ultimate choice regarding settlement;
and 4) Pursue a course of action that is advantageous to the insured.”32 An insured’s failure to follow
these requirements can constitute a forfeiture of coverage defenses.33
Other Theories
Some states view a reservation of rights as presenting an inherent conflict of interest and
allow the insured to reject the defense offered by the insurer under a reservation of rights and select
its own independent counsel to be paid for by the insurer.34 Other states do not presume that a
reservation of rights presents a conflict, but allow for independent counsel if a conflict is presented
by the facts of a particular case.35 For example, California law requires an insurer offering a defense
under a reservation of rights that presents a conflict, as determined by a fact-specific test, to provide
independent counsel to defend the insured at the insurer’s expense, unless the insured waives, in
writing, the right to independent counsel after disclosure of the conflict.36 Conversely, Florida
assumes that a reservation of rights presents a conflict of interest and requires the insurer either to:
“(1) obtain a non-waiver agreement from the insured after full disclosure of the specific facts and
policy provisions upon which the coverage defense is asserted and the duties, obligations, and
liabilities of the insurer during and following the pendency of the subject litigation or (2) retain
independent counsel �which is mutually agreeable to the parties.’”37 Counsel should familiarize
themselves with the applicable rules in the jurisdictions in which they practice.
Morov, supra note 24, at 319.
W hitehead & Hall, supra note 30, at 418 (citing L&S Roofing Supply Co., Inc. v. St. Paul Fire & Marine
Ins. Co., 521 So. 2 d 12 98 (Ala. 1987 )). See also Tank v. State Farm Fire & Cas. Co., 715 P. 2d 1 133 (W ash. 1986).
W hitehead & Hall, supra note 30, at 418.
W illiam T . Barker, Insurer Co ntrol o f Defense: R eservation of Rig hts and the R ight to Independent Counsel,
71 D EFENSE C OU NS EL J. 16, 17-18 (20 04).
Id. at 18.
W hitehead & Hall, supra note 30, at 418 (citing CAL. C IVIL C ODE В§ 2860 ).
Id. (quoting Section 627.426 of the Florida Claims Administration Statute).
Theory into Practice – Mock Complaint
Attached is a mock complaint designed to illustrate the issues faced by both plaintiffs and
defendants regarding EPLI coverage.
BECKY BARKLEY, on behalf of
herself and all similarly situated
COMES NOW the Plaintiff, Becky Barkley, by and through the undersigned
attorney, on behalf of herself and all similarly-situated individuals, and states the
This action for injunctive relief and damages is brought pursuant to the
Fair Labor Standards Act, 29 U.S.C. § 201, et seq (“FLSA”) and pursuant to the
Family and Medical Leave Act of 1993, 28 U.S.C. § 2601, et seq (“FMLA”). District
Court jurisdiction exists pursuant to 29 U.S.C. В§ 216(b), id. В§ 217, and 28 U.S.C. В§
1331. The jurisdiction of this Court is invoked to secure protection for and to redress
the deprivation of rights and Defendant’s violation of the Acts and for injunctive
relief and damages.
Plaintiff Becky Barkley (hereinafter “Plaintiff”) is a citizen of the United
States and a resident of Hoover, Jefferson County, Alabama. Plaintiff was formerly
employed by Defendant at its location in Hoover, Jefferson County, Alabama.
Plaintiff was an employee within the contemplation of 29 U.S.C. В§ 203(e)(1). Thus,
pursuant to 28 U.S.C. В§ 1391(b), venue for this action properly lies in the Northern
District of Alabama, Southern Division.
Defendant Pet World, Inc. (“Defendant” or “Pet World”) is a California
corporation with corporate headquarters located in Eureka, California. Pet World has
numerous locations throughout the United States, including a location in Hoover,
Alabama. Defendant is an entity subject to suit under 28 U.S.C. В§ 1331 and 29
U.S.C. В§ 2617(a)(2). Defendant employs at least fifty (50) persons and is an
enterprise as contemplated by 29 USC В§ 203(r). Therefore, this Court has personal
jurisdiction over Defendant.
Plaintiff hereby incorporates by reference each and every material
averment contained in paragraphs 1 through 3 above as if fully set forth herein.
At all times relevant, Plaintiff and those similarly situated to Plaintiff
were employed by Pet World as “exempt” Assistant Managers. As “exempt”
Assistant Managers, Plaintiff and those similarly situated to Plaintiff worked the cash
registers, monitored the cleanliness of the store, stocked shelves, and greeted
customers. Plaintiff and those similarly situated to Plaintiff were not granted
authority to supervise, hire, fire, or promote other employees. In fact, Plaintiff and
those similarly situated to Plaintiff did not perform any managerial functions
whatsoever – the term “manager” was utilized by Pet World in an attempt to avoid
paying Plaintiff and those similarly situated to Plaintiff the overtime compensation
to which they were rightfully entitled. Accordingly, Plaintiff and those similarly
situated to Plaintiff were improperly classified as exempt employees by Pet World.
Plaintiff and those similarly situated to Plaintiff were paid a salary in the
range of $30,000-$40,000 per year. Plaintiff specifically was paid $35,000 per year.
Plaintiff and those similarly situated to Plaintiff regularly worked over
40 hours in a work week. Plaintiff and those similarly situated to Plaintiff worked
numerous overtime hours and lunch periods without being paid overtime wages. Pet
World, however, did not pay Plaintiff and those similarly situated to Plaintiff for all
hours worked in order to avoid overtime payments.
Pet World has failed and continues to fail to meet the requirements of the
FLSA by instituting policies and engaging in practices that violate the overtime pay
and record keeping provisions of the FLSA. Specifically, Pet World has violated
these provisions by:
requiring, suffering, and/or permitting Plaintiff and those similarly
situated to Plaintiff to work on holidays, weekends, and after regular
work hours and failing to record or pay overtime for the time worked;
requiring, suffering, and/or permitting Plaintiff and those similarly
situated to Plaintiff to work hours off the clock throughout their work
day and failing to record or pay wages for hours worked, and by
engaging in a policy or practice of reducing hours on employees’ time
requiring, suffering, and/or permitting Plaintiff and those similarly
situated to Plaintiff to perform work during their meal periods despite
deducting those meal periods from the employees’ hours;
violating the record-keeping provisions of the FLSA by failing to
properly record hours worked; and
failing to properly calculate the overtime rate by, among other things,
failing to record or pay wages for all hours worked and failing to pay
overtime premiums at one and one-half times the employees’ regular
rate of pay as required by law.
The named representative, Plaintiff, as well as all others similarly
situated to Plaintiff, present and/or former employees of Pet World were and/or are
subject to the policies, conduct, and practices of Pet World set forth above and, as a
result, their number of hours worked as recorded by Pet World were far less than their
actual number of hours worked.
Pursuant to Pet World’s policies and practices, Pet World has failed and
continues to fail to pay Plaintiff and those similarly situated to plaintiff the required
overtime premium pay of one and one-half times their regular rate of pay for all hours
worked in excess of 40 per work week.
As a result of the overtime pay and record keeping violations of the
FLSA, the named representative, Plaintiff, as well as those similarly situated to
Plaintiff, have suffered damages by failing to receive their lawful wages during their
tenure of employment with Pet World. In addition to the amount of unpaid wages,
Plaintiff and those similarly situated to Plaintiff are also entitled to an additional
amount as liquidated damages pursuant to 29 U.S.C. В§ 216(b) and/or prejudgment
Plaintiff and those similarly situated to Plaintiff are also entitled to an
award of attorneys’ fees pursuant to 29 U.S.C. § 216(b).
Pet World’s actions in failing to compensate Plaintiff and other similarly
situated employees of Pet World in accordance with the provisions of the FLSA were
willful and not in good faith.
There are numerous other similarly situated employees and former
employees of Pet World who have been improperly classified and thus improperly
compensated in violation of the FLSA and who would benefit from the issuance of
court-supervised notice of the present lawsuit and the opportunity to join the present
lawsuit. Specifically, all employees and former employees of Pet World who have
been employed by Pet World as non-exempt Assistant Managers in any facility
owned and/or operated by Pet World, including their stores in Hoover, Alabama;
Wasilla, Alaska; Eureka, California; Bowling Green, Kentucky; Bangor, Maine;
Worcester, Massachusetts; Crookston, Minnesota; Tupelo, Mississippi; White Fish,
Montana; Toledo, Ohio; Hershey, Pennsylvania; Waco, Texas; Olympia, Washington;
and Charleston, West Virginia should receive notice and the opportunity to join the
present lawsuit.
WHEREFORE, PREMISES CONSIDERED, the named representative,
Plaintiff Becky Barkley, individually, and on behalf of all other similarly-situated
persons, pursuant to 29 U.S.C. В§ 216(b), prays for the following relief:
that the Court issue notice to all similarly-situated persons;
that other similarly situated past or present employees be given the
opportunity to join this lawsuit as party-plaintiffs by filing written
consent pursuant to 29 U.S.C. В§ 216(b);
that Plaintiff, and all others who file consent, be awarded damages in the
amount of their unpaid wages, an additional equal amount as liquidated
damages pursuant to 29 U.S.C. В§ 216(b), and/or prejudgment interest;
that Pet World be required to pay Plaintiffs’ attorneys’ fees;
that Pet World be required to pay the costs and expenses of this action;
that Plaintiff and all others who file consents be granted such other,
further, and general relief to which they may show themselves entitled.
Plaintiff hereby incorporates by reference each of the allegations
contained in paragraphs 1 through 14 above as if fully set forth herein.
On or about December 16, 2011, Plaintiff reported to work, as usual.
Around 2:00 p.m., Plaintiff received a call while she was at work that her dog, a
brown Standard Poodle named Stefan, was being taken to the emergency vet after he
suddenly fainted and entered into a coma.
Plaintiff followed proper protocol by contacting her supervisor, Ron
Katz (“Katz”), and telling him that an emergency had arisen and the basis of the
Katz gave Plaintiff authority to leave immediately to care for Stefan.
Plaintiff left and drove immediately to the emergency vet.
Stefan remained at the emergency vet for five days in critical care.
During this time, Plaintiff never left his side. The vet told Plaintiff that it was her
continuing presence that brought Stefan out of his coma.
Defendant did not provide Plaintiff any FMLA paper work in order to
account for her time absent to be treated as FMLA leave time, despite the fact that
Defendant was aware of Plaintiff’s FMLA qualifying need.
On December 18, 2011, Plaintiff received a call from Katz and was
informed that her employment with Defendant was terminated, effective immediately.
Plaintiff was shocked by Katz’s lack of compassion, especially given that it is his job
to work with and be sympathetic towards pets on a daily basis.
Plaintiff’s employment was terminated while she was off on FMLA
qualifying leave. Defendant intentionally and willfully violated the FMLA by
terminating Plaintiff’s employment, causing damage to Plaintiff.
As a result of Defendant’s violation of the FMLA, Plaintiff has been
damaged, suffering loss of pay and benefits.
WHEREFORE, PREMISES CONSIDERED, Plaintiff seeks an award of
compensatory and liquidated damages, attorneys’ fees and costs, and any additional
relief as may be determined by the Court to which Plaintiff is entitled.
Counsel for Plaintiff Becky Barkley
999 Law Street
Birmingham, Alabama 35203
Telephone: (205) 111-1111
Plaintiff demands a trial by struck jury for the trial of this cause.
Counsel for Plaintiff Becky Barkley
Pet World, Inc.
c/o Steve Fox
Registered Agent
12345 Pets Drive
Eureka, California 35226
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