Employment Practices Liability: Discrimination Claims Alleging Disparate Treatment Employee Theft Coverage: Two Questions From Readers

The two topics this month concern employees. The first examines aspects of coverage for employment practices discrimination claims by employees and the second deals with employee theft.

Employment Practices Liability Insurance: Coverage for Discrimination Claims Alleging Disparate Treatment

“I’m being sued for discrimination.” That’s the astounding message I received from my daughter. She and all the other board members of her food coop were being sued by an employee who claimed religious discrimination motivated them to fire her. My first reaction was astonishment. The second, of course, was “Do you have insurance?” They didn’t—I know, shoemaker’s children.

The incident popped into my head this month as I was working on a consulting client’s renewal. The broker advised us that, in addition to an increase in premium, the insurer was going to introduce an exclusion of claims alleging employment practices discrimination based on disparate treatment.

(Discrimination claims can be based on one of two theories: disparate treatment or disparate impact. Disparate treatment refers to an alleged action against a specific employee or employees. For example, “You fired me because I’m old.” Disparate impact refers to an apparently non-discriminatory act that disadvantages members of a protected group. For example, requiring all bank tellers to be over 5’ 10” will mean that more men than women will be eligible for the job. Height is not a necessary factor to perform the job, so the requirement’s impact is discriminatory.) The coverage situation is complicated in New York. When insurers first began marketing employment practices liability insurance, the New York Insurance Department’s position was that coverage for any discrimination claims of any type was not permitted. In 1996, the New York Insurance Department (now part of the Department of Financial Services) issued a circular permitting coverage for acts of disparate impact and for vicarious liability but not for disparate treatment.1

Many insurers now limit the coverage they provide to New York insureds for disparate treatment claims. Here’s one example: “If any of the (employment practices claims) are based on discrimination, coverage will only be provided if the discrimination is based on disparate impact or vicarious liability and not disparate treatment based on that person’s race, religion, gender, sexual orientation, age, disability, physical impairment or any other status that is protected pursuant to any federal, state or local statutory law or common law.”

Based on this wording, the insurer might refuse to even defend the insured if the claim involves only discrimination based on disparate treatment. Here’s one that might provide some coverage for the person accused of the act: “…[W]ith respect to Claims subject to New York Law, the Insurer shall not be liable to make any payment for Loss in connection with a Claim made against an Insured for any intentional discrimination in violation of any law, rule or statute of New York, if a final adjudication (emphasis added) determines that such intentional discrimination by such Insured actually occurred; provided, however, that the Employment Practices Violation(s) of any Insured(s) shall not be imputed to any other Insured for the purpose of determining the applicability of the foregoing exclusion.” Under this wording, the accused would be entitled to a defense until a final court decision. Such wording might induce the insurance company to make a payment to the claimant to settle the claim on the insured’s behalf without a final adjudication in order to avoid further defense expense; the overwhelming majority of claims settle without there ever being a final adjudication.

Coverage that does not specifically exclude disparate treatment claims is available to New York Insureds from non-admitted insurers and even some admitted insurers use forms that don’t contain the exclusion. However, many of these policies contain Conformity to Statutes provision such as the following: “The terms of this policy that are in conflict with the statutes of the state of New York are hereby amended to conform to such statutes”

An insurer might argue that this voids coverage for disparate treatment claims. Even in the absence of a conformity provision, an insurer might argue that public policy bars coverage.

Warning: Some policies don’t mention disparate treatment or disparate impact because they exclude all discrimination claims.

Learning Point: There’s no perfect solution, but some forms are better than others. I prefer one that specifically offers at least defense coverage for disparate treatment claims up to the point of final adjudication.

What’s Your Problem?

(An occasional discussion of coverage and loss questions posed by readers.)

Does the Owner of a Building Managed by a Third Party Need Employee Theft Cover?

An agent at the Westchester E-Day in March posed this question: “The insured owns an apartment building that’s managed by a real estate management firm. The management firm collects all the rents and pays all the bills. The building owner has only one employee, the superintendent, who has almost no access to cash transactions. Does the apartment owner need its own employee theft insurance or can it rely on its real estate manager’s coverage?”

Let’s assume that the superintendent doesn’t have any way to steal funds directly. He still may be able to steal by conspiring with suppliers to either overcharge or under-deliver with a share of the theft going to the super. He might also be able to steal tools, supplies, etc. However, this exposure may be small, so the owner can just depend on the real estate manager’s coverage, right? Maybe not. First, whenever you’re relying on someone else’s insurance, there’s no way you can be sure that the insurance is actually in force. Second, if the theft involves more than one property that the firm manages the loss may exceed the amount of coverage. The apartment owner might be reimbursed for only a portion of its loss. It might even not be reimbursed for any of its loss, if the managing agent wants to favor other clients. Finally, and most importantly, will the embezzler be a covered employee? If the firm is operated as a sole proprietorship, partnership, or limited liability company, the firm’s principal may not be an employee at all and therefore any theft by him or her will not be covered by employee theft coverage.2

In the case of a corporation, if the principal is active in the business, he or she will usually be an employee. But there can be a problem even in that situation. Employee theft insurance defines an employee as someone whom the insured has the right to control. Insurers have argued, and courts in some cases have agreed, that the corporation is the controlling stockholder’s alter ego and that it’s the stockholder who controls the corporate insured and not the other way around.3

The bottom line: The safe course is for the apartment building owner to have its own policy and name the real estate management firm on an agent’s rider. This can be done with ISO form number is CR 25 02. It provides: The Definition of “Employee” is amended to include each natural person, partnership or corporation you appoint in writing to act as your agent in the capacity shown in the Schedule while acting on your behalf or while in possession of covered property… Each such agent and the partners, officers and employees of that agent are considered to be, collectively, one “employee” for the purposes of this insurance.

There’s also an endorsement to add the superintendent’s spouse and family to the policy as employees for little or no additional cost (ISO form CR 25 11 05 06).

If a building owner nevertheless decides to rely on the property manager’s insurance, it can be named as a loss payee on the manager’s insurance. There are two loss payee ISO endorsements available: CR 20 14 10 10 (makes the loss payable solely to the loss payee) and CR 20 15 10 10 (makes the loss payable jointly to the loss payee and the insured). They are better than nothing, but these forms do not give the same degree of protection that a real property mortgagee receives under a property policy.

The crime loss payee endorsements have the following shortcomings:

• Only the insured (the management firm) can make claim on the policy. It may not want to make claim on behalf of your client for a number of reasons: the management firm may have lost funds in the same occurrence and its loss may use up the coverage limit; it may wish to favor other clients; your client and the management firm may have a hostile relationship at the time a claim has to be made, etc.

• Your client will not receive notice of cancellation or non-renewal of the policy

• Your client does not have the right to pay the premium to avoid cancellation for non-payment if the insured does not pay the premium

• Any policy defenses available to the insurer against the insured, e.g. misrepresentation in the application for coverage, can void coverage for your client as well as the insured. My short answer: The building owner should carry its own policy.

Discovery Period for Employee Theft

An email from a Rockland County agent posed the second employee theft question of the month. By misusing a corporate credit card for personal purchases, a client’s employee stole $330,000 (and counting) from the client, a small technology company that I’ll call T-Wiz.

Like so many other embezzlement victims, T-Wiz doesn’t have adequate employee theft insurance. The only available coverage for T-Wiz is a $10,000 employee theft provision in its BOP policies. The theft took place over a period of two years. The first year of coverage was provided by insurer ‘A” and the second by the current insurer “B.” T-Wiz submitted claims to both companies. Insurer “A” denied coverage. Its declination quoted the following provisions:

“A” first quoted the discovery period wording:

Extended Period to Discover Loss We will pay for loss that you sustain prior to the date this insurance terminated or is cancelled which is discovered by you no later that one year from the date of that termination or cancellation. However, this extended period to discover loss terminates immediately upon the effective date of any other insurance obtained by you replacing in whole or in part the insurance afforded hereunder, whether or not such insurance provided coverage for loss sustained prior to its effective date. “A” then quoted the proof of loss requirement:

Employee Theft …This Crime Additional Coverage applies only if you provide us with detailed sworn proof of loss within 120 days after you discover a loss or situation that may result in loss to which this Crime Additional Coverage applies. Insurer “A” really wanted to be certain that this claim stayed in its coffin. It’s not covered because coverage under the policy ends as soon as coverage is replaced with another insurer. If coverage wasn’t replaced, the insured only has one year to discover the loss. What’s more, there’s no coverage because the insured didn’t provide a proof of loss within 120 days.

The questioner wrote that he wasn’t aware of these limitations. They are standard provisions in employee theft loss-sustained forms. The same or similar language appears in the ISO form.4

The requirement that the insured file a proof of loss within 120 days is troublesome. The ISO property policies require the insurer to request a proof of loss from the insured before the time limit (60 days in property policies) begins to run. In the crime form, the period begins to run with no further notice to the insured.

In many cases, the insured does not immediately report the claim to its broker or insurer. Since insureds are seldom (“never” might be more accurate) aware of the 120-day deadline, much of the time may have expired before the loss is even reported. Given that many employee theft claims appear to be small when first discovered, but grow larger as embezzlement is investigated and are frequently quite complex, preparing a proof of loss for the insurer can be difficult even when the full 120 days are available.

In most cases, when the producer learns of the loss, the insured should be advised to ask for an extension of time to file a proof. The chances are that the insurers will extend the period, if the 120-day time limit has not yet expired. If the insurer won’t extend the time limit, the insured may need to consult an insurance coverage attorney. Courts in many states enforce policy time limits; New York’s courts may be the strictest.

Short Answer: I think the insurer is correct; there’s no coverage under the T-Wiz’s first policy.

Learning Points:

1. Adequate limits for employee theft are difficult to determine, but $10,000 is almost never enough. Try to get the insured’s accountant involved in the discussion of how high the limit should be.

2. Read the policy. Chances are you don’t handle employee theft claims very often. When you get one, check to be sure that you’re aware of policy requirements. “I didn’t know that” isn’t a good defense.

1 State of New York Insurance Department Circular Letter No. 6 (1994) May 31, 1994

2 Partners can be added as employees to employee theft coverage using ISO form CR 25 03 08 07. Members, but not the manager, of an LLC can be added asemployees to employee coverage theft using ISO form CR 25 04 08 07. However, this is infrequently done.

3 Conestoga Title Insurance Co. v. Premier Title Agency, Inc., et al., 746 A.2d 462 (Sup.CT. N.J. 2000)

4 Somewhat different provisions govern when the coverage has been renewed with the same insurer, but the result would be the same. The question of whether loss sustained limits can accumulate from year to year when insurance is renewed with the same insurer has been the subject of numerous lawsuits. Insurers say no and tweak the language every time a court says yes. It’s the reason insurers like the “discovery” form of employee theft. The discovery form only covers claims discovered during the policy period and reported promptly, but no more than 60 days after expiration or cancellation. I like the discovery form because it focuses the insured on its total exposure and it covers losses that may have occurred at any time back to the inception of the insured’s business, even though the insured didn’t carry employee theft coverage then. The insurer can attach a retro-date endorsement to shorten the “look-back” period, but I’ve seldom seen that done.