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Lawsuit Prevention for Employers

When employers purchase Employers’ Practices Liability (EPL) insurance, they feel protected from workplace lawsuits.  However, this can often prove to be a false sense of security, unless employers have a full understanding of how limited the protection offered by this insurance usually is.

EPL insurance is usually written as a separate coverage in workers’ compensation insurance policies. The EPL policy does not specifically target employment practices, but acts as an extension to basic workers’ compensation coverage by providing coverage where workers’ compensation insurance leaves off.

It covers those relatively rare situations where the employee has the right to bring a civil action against the employer for conduct outside the normal risk of employment, such as violent assault or false imprisonment, or where the employee is not subject to the workers’ compensation law.

Insurance coverage generally involves two distinct types of protection.  The first is commonly understood, and is known as the duty to indemnify, or to cover anticipated risks described in the policy.  The second is the duty to defend, which obligates insurers to provide the insured with a legal defense (lawyers, usually at reduced charge), sometimes even when no duty to indemnify exists.

EPL insurance specifically excludes benefits awardable in workers’ compensation proceedings. The WCAB has exclusive jurisdiction over claims for workers’ compensation benefits and the insurer’s duty to defend is owed under the workers’ compensation part of the policy.

The insurer’s defense obligation under EPL coverage is limited to employment-related claims not covered by workers’ compensation. Therefore, if the claim is compensable under a workers’ compensation policy (even if no such proceedings have been commenced), the insurer owes no duty to defend a civil action based on such claim.

The typical EPL policy obligates the insurer:

“To indemnify the insured against loss … for damages imposed upon the insured as an employer under the laws of the State of California on account of bodily injuries sustained by employees covered by this policy … as a result of suits filed against the insured by such employees … arising out of and in the course of their employment by the insured” (excepting obligations imposed by a workers’ compensation or similar law).

The wording “under the laws of the State of California” means that EPL insurance does not cover claims based on federal law.  Similarly there is no indemnity coverage and arguably no duty to defend under an EPL policy where the only injury claimed is emotional distress for the reason that, absent some physical injury, most courts hold emotional distress alone is not a “bodily injury.”

Because the insuring clause covers only “suits filed against the insured,” there appears to be no duty to defend claims made in administrative proceedings, such as those involving the California Department of Fair Employment and Housing.

An EPL policy designating a corporation as the “named insured” does not automatically cover the corporation’s officers, directors and employees individually.  In one case, the designation of a law firm as the named insured did not extend coverage to the firm’s officers and directors sued individually for wrongful discharge and gender discrimination.

The following major gaps in coverage will surprise most employers. For example, many EPL policies expressly exclude “bodily injury intentionally caused or aggravated by (the insured employer) …” Even without such an exclusion, Insurance Code, section 533 bars indemnification for “loss caused by the willful act of the insured.”

As a result of these principles, claims of sexual harassment, assault and battery and intentional infliction of emotional distress are often not covered under an employers’ liability policy because of Insurance Code, section 533 and the express exclusion for intentional injury.  To illustrate the point, sexual harassment within the meaning of California’s Fair Employment and Housing Act is discrimination in violation of the law and is normally not covered, even if the harassment is not alleged to involve intentional or willful conduct.

The practical significance of this is that punitive damages and other legal remedies that are most devastating to employers are those arising out of allegations of intentional or willful misconduct on the part of employers or, more accurately, their supervisors.  What this means is that the legal exposure most threatening to employers is precisely that which is not covered under EPL policies.

Although claims of wrongful discharge in violation of public policy are not subject to the exclusive jurisdiction of the WCAB, they are often not covered under an employers’ liability insurance policy.  This is because such claims involve inherently wrongful and harmful conduct for which coverage is precluded as a matter of law by Insurance Code, section 533.

Insurance Code, section 533 precludes only indemnification of harm resulting from “willful” acts. It does not bar the defense of an action in which such acts are alleged.  Thus, the insurer may owe a duty to defend its insured in lawsuits alleging employment discrimination, unless the policy otherwise excludes such claims, as many do.

Even if the insurer willingly undertakes the defense of an action for which there is no right to indemnification, employers should be very wary.  This is because, in such situations, the insurer has little or no financial risk in the event of a poor result in court.  Because the insurer invariably reserves the right to select legal counsel when a defense is provided, it is not unreasonable for an employer to question the incentive of an insurer to hire the most effective (read: expensive) legal counsel to defend an action in which the insurer has zero risk.

To extend this discussion, as the above demonstrates, insurers are precluded from indemnifying employers for claims based on allegations of intentional or willful conduct.  This would include virtually every claim seeking an award of punitive or emotional distress damages, which are the most dangerous claims to employers.  Even if the insurer undertakes a duty to indemnify the employer, it does so only to the extent of compensable and other damages allowed by statute, which normally involve only a fraction of the exposure presented by a prospective punitive or emotional distress damages award.

Does this mean that the insurer will be tempted to minimize its outlay in defense costs when exposure for compensatory damages is predictably negligible, despite the employer’s exposure to punitive and emotional distress damages in the millions?

This is a reasonable question to consider, and thus illustrates the importance of employers resisting the temptation to rely solely on insurance to the exclusion of other measures necessary to fully protect themselves.


Jay G. Putnam is a Petaluma labor lawyer who has specialized in representing California employers for over three decades. His practice is devoted to preventing lawsuits against his clients, without sacrificing workplace authority or management prerogatives.

While no one can guarantee a future free of lawsuits, Putnam has compiled a remarkable record of success: Not one employer-client has been sued in 36 years with his system of precautions in place.

For those clients who have arrived with pending lawsuits, Putnam has established an excellent track record of success as well. 

You are invited to visit Mr. Putnam’s website, where you will find in-depth discussion of the most common mistakes made by California employers, and how to avoid them.


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