There is no apparent reason as to why there has been a sudden increase in the insurance field in the area of employment practices policies. One can speculate, however, that it is the result of recent case law decisions precluding coverage under workers' compensation policies, a narrowing and clarifying of the prohibitions against insuring for intentional acts in employment, and the astute business practices of insurance carriers in recognizing an area of demand by employers.

Following the decision in La Jolla Beach and Tennis Club, Inc. v. Industrial Indemnity Co. (1995) 9 Cal.4th 27, employers, as before, were left without insurance coverage to defend and/or indemnify them against suits by employees for a variety of perceived wrongs. Although employment practices liability insurance has been available for many years, most carriers would not write such coverage, and the one that did charged exorbitant premiums due to lack of competition. Faced with the realization that the hoped for coverage under workers' compensation policies had been removed, employers began asking carriers for more, better and affordable coverage.

The dilemma faced by the insurance industry was how to fill this need without violating the apparent prohibitions under Insurance Code section 533. The seminal case in California, J.C. Penney Casualty Ins. Co. v. M.K. (1991) 52 Cal.3d 1009, held, in general, that section 533 barred insurance coverage for the necessarily "willful act" of molesting a child. This decision was extended the next year to hold that section 533 barred insurance companies from defending and/or indemnifying for an employer's willful act in wrongfully discharging an employee. B & E Convalescent Center v. State Comp. Insurance Fund (1992) 8 Cal.App.4th 7. Finally, the issue of sexual harassment claims against an employer were addressed in Coit Drapery Cleaners, Inc. v. Sequoia Insurance Co. (1993) 14 Cal.App.4th 1595.

The court in Coit Drapery, citing the J.C. Penney case and others, determined that section 533 and. . .the public policy it represents, bar the attempt to shift liability for intentional sexual harassment and associated employment related torts (claims of wrongful discharge, infliction of emotional distress, battery, and sexual assault) to an insurer.

(Emphasis added). The Coit decision made it clear that the courts will not allow insurance companies to indemnify employers for liability arising out of "willful" or "intentional" wrongdoing.

In Coit Drapery, the court cited a series of cases barring an insurance company from providing a defense or indemnity for intentional misconduct, including intentional battery [Fire Insurance Exchange v. Altieri (1991) 235 Cal.App.3d 1352]; assault [Studly v. Benicia Unified School District (1991) 230 Cal.App.3d 454]; and wrongful discharge [B & E Convalescent Center v. State Compensation Insurance Fund (1992) 8 Cal.App.4th 7]. In fact, the court quoted language from the J.C. Penney case stating that section 533 of the Insurance Code is "an implied exclusionary clause statutorily read into all insurance policies".

The court, however, did not rule out coverage for defamation, but simply noted that it had not been pled in the current case. The court did speculate, however, that any such conduct which is inseparable from or an integral part of the willful or intentional act would also be excluded under section 533. the Coit decision noted that if the plaintiff had pled negligent or improper supervision, the matter would have been subject to the jurisdiction of workers' compensation laws, but that such a claim would not be insurable in the civil law forum. This, of course, has now been clarified by the decision in the La Jolla case which held that this type of claim is not covered under the terms of workers' compensation policies.

Although speaking in broad terms and apparently leading to the conclusion that insurance coverage will not be available for employer misconduct, the court at the end of the Coit decision indicated that they are only dealing with "quid pro quo" sexual harassment and that such behavior is, by its nature, intentional, and therefore could not be covered. The court's careful reference to the specific type of harassment as "quid pro quo" leads one to suspect that coverage might still be available under employment practices liability insurance policies for negligent harassment. Although the court in Coit questioned whether harassment could ever be negligent, it appears that if left open this possibility for coverage in the area of "hostile work environment". Here again, the analysis would be similar to that utilized by the court in J.C. Penney and in Coit. The court must determine whether or not the acts by the employer were in fact intentional. The court also noted that in cases where an employer had engaged in a patter of harassment of long duration, that it would also be considered intentional. Therefore, even in a hostile work environment-type of claim, coverage would be precluded under section 533.

Following the decision in Coit, a federal court in Northern California held that disparate treatment of individuals based on a protected category was intentional discrimination. However, actions which had a disparate impact upon such protected persons were not necessarily intentional, again raising the possibility of coverage for unintentional acts of discrimination. Save Mart Supermarkets v. Underwriters of Lloyds London, Sphere Drake Insurance PLC, (9th Cir. 1994) 843 F.Supp. 597.

In addition to the issue of whether the misconduct by the employer is intentional or negligent, the courts in many cases have identified additional coverage issues which must be considered by the insurer and its attorneys in employment practices liability cases. Specifically, the courts have noted that the burden is initially upon the insured to establish that coverage exists within the definition of a covered act in the policy. Thereafter, the burden shifts to the insurance company wishing to deny coverage to establish that there is an exclusion, if any, which would preclude coverage. This is separate from the consideration or analysis of preclusion under Insurance Code section 533. If, having established coverage and finding no exclusion, and if not precluded from insurability by section 533, then the next analysis must be whether the insurer must provide merely defense for the wrongdoing, or both defense and indemnity coverage.

In light of the above problems, it is apparent that this area provides difficulties for both the insured and the insurer which must be fully considered by both sides before entering into an employment practices liability contract. For insureds, the questions to be asked include:

(1) What am I really being covered for?

(2) To what extent will I be able to utilize this policy?

(3) What are the costs of this coverage from both a premiums paid and deductible analysis versus the cost to defend these cases without insurance?

On the other hand, the insurer must carefully consider:

(1) What insurance is being provided?

(2) What in fact will constitute "negligent" versus "willful" misconduct and whether or not its adjusters are able to determine the difference?

As in any insurance coverage issue, adjusters and investigators will be necessary to analyze the facts surrounding the claim to determine whether or not there is coverage. As in cases of accident reconstruction, fire analysis, and other specialized areas of insurance work, the area of employment practices liability insurance will require specialized training and education for adjusters being required to render an opinion on coverage. This may be an area which insurance companies have not yet addressed, but will need to look to in the near future in order to adequately and accurately determine the coverage and liability issues.

Any such analysis should, by all reasonable expectations, include the expert opinion of attorneys familiar (not with accident reconstruction or personal injury) but with employment law and the nuances of all the potential claims. These claims may include wrongful termination, breach of contract, implied covenant of good faith and fair dealing, intentional and negligent infliction of emotional distress, a wide variety of discrimination claims, and defamation, as well as a host of other potential claims which plaintiffs and their attorneys have previously proven willing to file.

The increase in the litigation of employment-related claims has grown exponentially in recent years, and there is no sign that this trend will change. As a result, more and more employers are seeking out insurance companies willing to provide coverage at a reasonable cost. With an increase in the number of employment practices policies being written will come an increase in the demand for insurance professionals with specialized training in this field.