INSURER'S "HISTORICAL PRACTICE" HELD TO BE BAD FAITH
Claims against employers have become more commonplace. In response, insurance carriers have expanded their offerings of Employment Practice Liability Insurance ("EPLI"). EPLI is a relatively recent form of liability insurance which provides protection for employers against claims made by employees related to wrongful employment practices. Generally, EPLI coverage limits range from $1 million to $25 million and most policies include coverage for legal defense within the aggregate insurance limits, along with covering costs for adverse judgments and/or settlements. EPLI coverage varies based on the type, size, and risk profile of a business. Although EPLI coverage differs substantially between policies, it commonly covers claims related to discrimination (race, age, sex, disability, etc.), sexual harassment, wrongful termination or discipline, breach of employment contract, emotional distress, invasion of privacy, libel or slander, and employee benefits mismanagement.
Knowing the coverage scope of an EPLI policy is particularly important when an employer faces claims brought by a class of employees. A class action based on violations of law for minimum wages, holiday pay, or deprivation of meal and rest breaks, for instance, can force an employer to expend significant time and expense in litigation. Often numerous claims are included in the same complaint requesting retroactive payment and injunctive relief for the employer to change its practices. However, although these claims can often seem integrally related in a complaint, the coverage under an EPLI policy for each specific claim can be drastically different. Indeed, an insurance carrier that treated a meal and rest break claim as a wage and hour law violation under its EPLI policy was recently ruled as a matter of law to have acted in bad faith for doing so.
In Travelers Cas. & Sur. Co. of Am. v. Spectrum Glass Co., Inc.,2 Judge Coughenour, of the Western District of Washington, examined the obligations of an insurance carrier under an EPLI policy. The insurer's EPLI policy contained a "sub-limit" for $100,000 for defense costs to be paid in relation to "wage and hour" claims.3 The insurer determined that since the complaint sought relief which "looked like the other causes of action for failure to pay overtime and wages, [it] treated it as a wage and hour claim."4 In regard to the meal and rest break claim, rather than examining the claim separately to determine whether it fit within the wage and hour sublimit, Travelers "chose to characterize the break claim as one seeking unpaid wages - a conclusion that inured to its own benefit."5 Travelers came to such a conclusion even though the class action complaint requested that the policyholder be made to provide breaks in the future.6 As explained by the court, Travelers' self-serving characterization of the claims to fit within the sublimit of its EPLI policy harmed its policyholder by forcing them to pay more than $500,000 in defense expenses after Travelers withdrew from defending the dispute (when the wage and hour sublimit was reached).7
Moreover, there is little doubt that Travelers has similarly mistreated claims tendered by other EPLI policyholders. Besides characterizing the claims in this instance as "meal and rest break claim[s as] ultimately a claim for unpaid wages,"8 Travelers went further to explain that it had "traditionally handled meal and rest break claims together with wage and hour claims,"9 and that it had "historically treated meal and rest break claims as subject to the [w]age and [h]our [s]ublimit because such claims are closely related to wage and hour violations,"10 However, as explained by Judge Coughenour, it is bad faith to make such an assumption as to how a particular claim should be treated in a complaint because the insurer inherently fails to give equal consideration to the interests of its policyholder.11
In an additional attempt to avoid accountability, Travelers argued that its policyholder failed to timely object to the characterization of the meal and rest break claim as being a wage and hour law violation.12 However, the court explained that "Travelers offer[ed] no authority for the subtext of that argument, which is that an insured's initial acquiescence in a coverage determination insulates the insurer from its duty to investigate."13 Furthermore, the court affirmed that an insured "cannot be faulted for relying on [its insurer] to perform its obligations under the policy in good faith," irrespective of whether the policyholder seemingly agrees with the insurer's initial coverage determination.14 In short, a policyholder's failure to notify the insurer of its objection to the coverage determination does not obviate the insurer's continued responsibility to properly investigate and determine whether its policy conceivably covers the asserted claims in the complaint.
Given Judge Coughenour's ruling, it is highly advisable for EPLI policyholders that have previously tendered wage and hour and other EPLI claims to Travelers, or to other insurance carriers, to reexamine the way in which the carrier treated those claims. In particular, if a policyholder finds an instance where its insurer characterized different claims as being the same, it is vital to have a knowledgeable attorney analyze the particular policy language and relevant claims. Even where the policyholder believed the insurer's characterization of the policy to be initially correct, such acquiescence does not limit the policyholder from bringing claims at a later date, so long as suit is brought within the applicable limitations period (under law or the policy itself). Policyholders should make certain that they received the full benefit they contracted for under their EPLI policy.
2 Case No. C11-1324-JCC, Dkt. 59 (W.D. Wash. Aug. 31, 2012); 2012 WL 3780356.
3 See slip op. at 2-3; 2012 WL 3780356 at *1-2.
4 Slip op. at 7; 2012 WL 3780356 at *4.
5 Slip op. at 12; 2012 WL 3780356 at *7.
6 See id.; see also Washington State Nurses Ass'n v. Sacred Heart Med. Center, 287 P.3d 516, 520-21 (Wash. 2012) (explaining mandatory breaks are considered to be more than just wages as they are vital to employees' health and efficiency).
7 See Travelers Cas. & Sur. Co. of Am., slip op. at 15; 2012 WL 3780356 at *9.
8 Id., Dkt. 52 at 12:22-23.
9 Id. at 12:15-16.
10 Id., Dkt. 53 at 2:9-10.
11 See slip op. at 12; 2012 WL 3780356 at *7.
12 Slip op. at 7-8; 2012 WL 3780356 at *5.
13 Slip op. at 7; 2012 WL 3780356 at *5.