Suit By EEOC Not Covered Under EPLI Policy

It probably seemed like such a simple proposition. EEOC sues employer for sexual and racial harassment, racial discrimination, retaliation and constructive discharge. Employer has an EPLI policy.

Big claims, big settlement -- $2,000,000 plus another $700,000 in legal fees.

No question but that all of the allegations are clearly covered under the policy.

But the definition of covered "claim"?  That was a different story. It read simple enough:

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(s).’

Since the underlying case settled, the law suit was between the employer and the EPLI carrier, who argued that the claim was not covered because it was not brought by a 'past, present or prospective employee.'

You know it is no longer a simple proposition, when the Court summarizes some of the arguments in this way:

In its Response to [the Insurance Company's] Motion,  [the Employer] elaborates that the use of a comma followed by the word “which” means that the qualifying phrase modifies only the subject that immediately precedes the comma – in this case, only to “complaint or charge.”  [The Employer] asserts that if [the Insurance Company] intended to require that the “proceeding” be brought by an employee, the entire phrase “commenced by the service of a complaint or charge” should have been offset with commas. 

Hard to believe, but it gets even worse when the Court goes on to note that what the Employer was really referring to was the grammar principle of the "last antecedent rule."

But the bottom line in the trial court -- no recovery as not covered by the policy. Cracker Barrel Old Country Store, Inc. v. Cincinatti Insurance Co., 3:07-cv-00303 (M.D. TN 8/11/11).  If you are the employer, that's a big ouch.

Two thoughts:

1. Given the dollar amount and the result, it is likely the 6th Circuit will get to weigh in on this decision;
2. In corporate risk departments right now, EPLI policies are being re-read and calls are being made to brokers making sure that suits brought by governmental entities on behalf of employees are covered.

Life is never as simple as it seems.

EPLI Coverage is Governed by Definition

Although it's probably only a matter of time, there are still not many EPLI coverage questions that have been decided. In fact, I can only remember one prior case that I have commented on, see Check Your EPLI Policy - When Coverage For Discrimination Doesn't Mean The Most Common Type of Discrimination Claim.

And I would not have caught the latest one, Valley Imaging Partnership Medical Group LP v. RLI Ins. Co. (9th Cir. 3/5/08) [pdf] an unpublished decision, if it hadn't been for the ever vigilant work of the folks at Alaska Employment Law.

There's not a clear explanation of the underlying situation in the appellate decision. However, from the district court summary judgment opinion ($ Pacer) it appears that VIP was a doctor's practice which performed imaging services for a hospital. The underlying suit for which the EPLI carrier was contesting coverage was a sexual harassment suit against VIP brought by Hernandez.

Hernandez was a registration clerk at a VIP office which was on the campus of the hospital. Pursuant to a Service Agreement between VIP and the hospital, she was actually paid by the hospital, but reported to VIP personnel and VIP reimbursed the hospital for her wages plus 26% (apparently to cover benefits).

VIP bought the EPLI policy, which defined employee as "any person who receives wages or a salary from the Entity (defined as VIP) for work that is directed and controlled by the Entity..."

Unfortunately VIP, which I am sure intended and thought it had EPLI insurance, learned the important lesson that the definitions in a policy are critical. Here the above definition, didn't fit the actual situation since the registration clerk "received [her] wages or salary" from the hospital, not VIP, the Entity.

As the 9th Circuit wrote:

That VIP reimbursed [the hospital] does not change that fact that [the hospital] was the entity paying Hernandez’s salary and that, therefore, Hernandez was not a VIP employee as defined by the insurance contract.

Bottom line, no coverage. But the lesson is clear -- make sure you have read the policy carefully to ensure that it covers your particular situation.