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Murky Waters
A Dive into the murkey waters of Third Party EPLI Coverage
Lynn Van Winkle
The image of a sunlit glistening lake does not normally come to mind when thinking about Employment Practices Liability Insurance (EPLI). However, in contrast to the murky waters of traditional "third-party" coverage, the standard EPLI cover seems crystal clear. This article is an attempt to shed some light on some of the issues presented to underwriters who are considering whether or not to provide the coverage.
What is "third-party" liability? Let's start with the fundamentals of EPLI. EPLI generally covers three basic types of claims — wrongful discharge, unlawful discrimination and unlawful harassment. Under most EPLI policies, the "wrongful act" must arise from an "employment practice" as defined in the policy and the claim must be made by an "employee." Some insurance carriers are adding new coverage to the EPLI policy, third-party coverage, which turns this simple notion on its head. Simply put, third-party liability extends potential claimants to include anyone (e.g.,customers and vendors) who has contact with the business or its employees. All that is required for a third party to bring a claim is harassment, coercion, or discrimination of the third party by the insured. No employment relationship need exist between the claimant and the insured. Certainly, this was not the intent of the EPLI policy. The objective was to insulate employers from the increasing number and costs of employment suits. However, given the changes in the marketplace, this coverage is being offered more readily and merits some attention and understanding.
It is a complicated topic and many questions surround the issue of third-party EPLI coverage. It is important to understand that third-party claims are brought under public access and accommodation discrimination laws. These laws are similar to the employment discrimination laws and were frequently enacted at the same time. These laws are, however, a distinct and separate category of existing laws, with different compliance criteria and claim exposures. The Americans with Disabilities Act, for example, prohibits both employment discrimination and public access discrimination based on disability, but the applicable provisions and compliance requirements are
significantly different. In expanding EPLI coverage to these claims, it will be necessary for the insurance carrier to expand its areas of expertise to include this broader category of laws.
Loss Activity
What types of third-party losses have we seen to date? For the last 18 months or so, we have been collecting articles from newspapers and have at least 40 examples of third-party lawsuits. These suits did not necessarily involve third-party insurance but are indicative of the types of losses that could fall within such coverage if it were granted. Here is a sampling of losses:
Shell Oil Company's Marketing Practices Challenged as Racially Discriminatory
September 1998 — A class of African-American consumers announced the filing of a federal lawsuit against Shell Oil Company and its dealers for racial discrimination in the sale of gasoline.
Miami Beach, Florida, Group Sues 7-Eleven Stores for Disability Compliance
October 1998 — The Miami Beach chapter of the Association for Disabled Americans filed a proposed federal class-action lawsuit against 7-Eleven convenience stores. The plaintiffs sought changes in 7-Eleven facilities and grounds, but no monetary damages. The group also sought the right to inspect the roughly 5,000 U.S. 7-Eleven stores for compliance with the Americans with Disabilities Act.
Avis Religious Discrimination Lawsuit Gets Class-Action Status
February 1999 — Avis Rent a Car Inc. was faced with a class-action lawsuit by customers who said the company denied them corporate accounts because of their Jewish backgrounds. U.S. District Judge Alan Gold granted class-action status to the suit, which means that more than 10,000 of Avis' customers from 1993 to 1998 could become involved in the suit.
Franchise Companies Lose U.S. High Court ADA Bid
March 1999 — The U.S. Supreme Court refused to absolve companies of legal responsibility for ensuring their local franchise owners construct buildings that are accessible to the handicapped. The justices rejected an appeal by Cendant Corporation's Days Inns of America unit, which sought to stop the Justice Department from suing the company over alleged violations of the Americans with Disabilities Act at a South Dakota hotel.
McDonald's Sued for Discrimination in California
March 1999 — McDonald's Corporation was sued for allegedly discriminating against a black family at a California restaurant. The fast-food chain allegedly refused to serve a black family while serving other patrons, according to a lawsuit filed in San Bernardino, California Superior Court.
Boston Settles Suit on Racism in Public Housing
July 1999 — The Boston, Massachusetts Housing Authority settled a lawsuit with tenants over racial harassment in public housing projects for $1.5 million in damages
and legal fees. As part of the settlement, the Housing Authority agreed to adhere to a program to combat racism in public housing through a rigorous civil rights protection plan.
Dillard's Department Stores Suit Award of $1.56M
November 1997 — A federal jury in Kansas City, Kansas awarded $1.56 million to a woman who said she had been stopped and searched by department store security guards because of her race. Evidence presented during her civil suit indicated that Dillard's department store in Overland Park, Kansas systematically placed black customers under intense surveillance even when they exhibited no suspicious behavior.
Problematic Classes
From a review of recent suits, it appears that certain characteristics of a company are more likely to lead to third-party suits. Some of these include larger companies, those with a broad market reach, and those with a profile attracting the attention of civil rights activists. It must be noted that our review involved national news organizations that are more likely to publicize large verdicts and well-known companies rather than focusing on small "mom-and-pop" businesses that may be experiencing similar losses.
Also keep in mind that factors other than class-of-business may be equally important or of greater importance to the selection of a good risk — such as the type and size of
customer base, the number of employees and whether it has good risk management tools in place. With these notes of caution, we can discuss the characteristics of those classes that we believe are potentially more problematic.
Those companies offering loans, credit lines, or various types of financing have been accused of redlining or discrimination based on race or religion. These classes of
business include finance, insurance, government contractors, real estate agencies, car dealers, furniture sales, and other retail. Firms working in the medical, allied health, and counseling fields have faced lawsuits for discrimination based on disability and race as well as sexual harassment issues. These classes of business include physicians, dentists, and counselors. Membership clubs, such as health clubs, country clubs, or private clubs, have encountered both discrimination suits for excluding individuals from membership and harassment problems. Companies who deal directly with the general public have seen their share of loss primarily arising out of discrimination for failing to serve certain customers or arising out of overzealous security searches. Such companies might include hotels/motels, rental car companies, restaurants, retail stores, and theaters. Finally, students who were not granted admission to schools or universities have brought discrimination suits. Harassment claims have also arisen in the teacher/student setting.
Additional Risk Management Tools
The Boston Housing Authority case previously mentioned serves as a good example of the risk management tools that might be considered to avoid third-party liability. While the Civil Rights Protection Plan agreed to in the settlement focused on social service operations and may not be appropriate for every risk, it does serve as a good
starting point for a risk management strategy. The Housing Authority plan included:
1. Zero-tolerance towards violators;
2. A hotline to handle complaints;
3. An active plan to evict aggressors;
4. Additional staff to handle complaints of racism;
5. Evaluation of how well employees follow civil rights procedures;
6. Increased police patrols in problem areas;
7. Weekly searches for racist graffiti; and
8. Hiring a civil rights monitor to oversee the program.
The Housing Authority example provides a good lesson for underwriters and may be considered to formulate a strategy in underwriting third-party coverage.
Information Gathering for Underwriters
What additional information should be requested for third-party coverage?
As a starting point, the following questions should be raised:
• Loss History: Has the company or any insured person been the subject of claims by third parties (e.g., vendors, suppliers, customers) for unlawful discrimination or unlawful harassment during the last five years?
• Business Mix: What type of customer base does the company serve?
Do they serve corporate or business clients only, a mix of individuals and corporate/business clients, individuals but not the entire general public, or the general public?
• Customer Service Policy: Does the company have a bill of rights statement explaining customers' rights? Have employees received training to teach employees how to deal appropriately with the public?
While the questions above highlight some of the more important issues surrounding third-party EPLI coverage, they are by no means comprehensive. They are intended to serve as a springboard to further study in this developing area.
Third-party liability is a risky area; it is difficult to underwrite because unlike other lines-of-business we have neither history nor pools of data to guide us. There is also an increasing trend of losses in this area with a huge severity potential. While some carriers are adding a surcharge to EPLI for third-party coverage, there is no real
rate correlation to EPLI. Losses will be based on different factors than those associated with employment practices. We think that third-party liability may be more than just murky water; it may in fact be the rock hiding beneath the murky waters. |
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