Not Giving Timely Notice to the Insurer of a Charge of Discrimination May Doom Coverage under an Employment Practices Liability Insurance Policy
Under most states’ laws, a policyholder’s failure to report a claim to the insurer within the time prescribed by a claims made liability insurance policy will compromise coverage. A late notice scenario that recurs all too often involves an employer that loses coverage for an employment discrimination lawsuit by failing to report the earlier “charge of discrimination” to its Employment Practices Liability Insurance (“EPLI”) carrier.
By way of background, Title VII of the Civil Rights Act of 1964 (“Title VII”), the Age Discrimination in Employment Act (“ADEA”), the Americans with Disabilities Act (“ADA”), and many similar state statutes, require administrative exhaustion as a prerequisite to a lawsuit. Specifically, those statutes require a complainant (a current or former employee) to file a charge of discrimination with the federal Equal Employment Opportunity Commission (“EEOC”) and/or a state or local fair employment practices agency (“FEP Agency”). These administrative agencies are supposed to investigate the charge to determine if there is “probable cause” to believe that the complainant suffered illegal discrimination. In most cases, when the administrative agency completes or has other reasons to terminate an investigation, it will issue a “right to sue” letter. The letter may indicate a finding of “probable cause,” “no probable cause,” or simply that the matter is closed. Whatever the letter says, the complainant has the right to file a lawsuit based on alleged discrimination, if at all, within 90 days of receipt of that letter.
An employer that receives a “notice of charge of discrimination” may not be concerned with insurance coverage. Employers often believe that the charge will just go away, “because we didn’t do anything wrong.” They may not engage counsel or incur substantial expense in responding to a charge, and some employers may believe that notifying the EPLI carrier of the charge doesn’t make sense. Perhaps the employer believes the potential loss won’t exceed a self-insured retention or deductible or that the premiums will increase if the insurer knows of the charge.
Moreover, some employers may be confused about the legal effect of a failure to report a claim in a timely manner. Generally speaking, an insurer may not deny coverage based on late notice under an “occurrence policy”, unless the insurer has suffered prejudice because of the delay. (Commercial General Liability, Business Auto Liability, and Workers Comp/Employers Liability coverages are more typically issued on an “occurrence” basis.) But, under most states’ laws, that’s not true when it comes to EPLI policies, which nearly always are claims made policies: an insurer need not suffer any prejudice to deny coverage based on late notice under a claims made policy.
The risk of forfeiting EPLI coverage for an employment lawsuit based on the failure to report a charge of discrimination in a timely manner is a real and substantial risk. Employers that maintain EPLI policies are well-advised to understand and comply with those policies’ claims reporting provisions, including by reporting charges of discrimination to EPLI insurers in a timely manner.