General Liability Coverage and Discrimination

Pregnant businesswoman in an office
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If your business is sued for discrimination, will the claim be covered by your general liability policy? This article will answer that question.

Example

Business is booming at Pete's Plumbing Supplies. Sales increased so much last year that Pete had to hire two new account managers. Pete also promoted Jane, a long-time employee, to a new management position. Pete is pleased with the personnel changes and assumes that his workers are as well.

Thus, he is stunned when he is served with a lawsuit for employment discrimination.

Susie, the plaintiff, has worked at Pete's as an account representative for several years. Susie claims that she is better qualified than Jane for the management position. Susie alleges that when Pete chose Jane for the promotion, he discriminated against Susie based on her pregnancy (Susie was pregnant last year). Susie demands $40,000 in compensation for the difference between her current pay and benefits, and those she would have received had she been promoted.

General Liability Coverage

Pete's business is insured for general liability under a policy issued by the Reliable Insurance Company. Pete has read the policy but cannot find any exclusions related to discrimination. He concludes that the claim must be covered and forwards it to Reliable. Pete is dismayed when the insurer promptly denies coverage. Why isn't the claim covered?

There are two main reasons why Susie's claim isn't covered. First, Susie's lawsuit is seeking damages for economic losses like back pay, loss of future earnings and lost benefits. To be covered under a general liability policy, a claim must seek damages for bodily injury, property damage or personal and advertising injury.

Since Susie's lawsuit has not alleged any type of covered injury, the suit is not covered.

Some discrimination suits filed by employees seek damages for mental anguish, mental injury, emotional distress and other types of psychological injury. While some liability policies cover certain mental injuries via their definition of bodily injury, these injuries are typically covered only if they result from a physical injury. More importantly, bodily injury claims against employers by employees are excluded under a liability policy via the employers liability exclusion.

There is a second reason why Susie's claim is not covered. General liability policies cover injury or damage that results from an occurrence (accidental event). Most discrimination claims stem from intentional acts committed by employers. Since they don't result from accidents, such claims aren't covered by the policy. In the above scenario, Susie's suit is based on Pete's actions (promoting Jane rather than Susie). His actions were intentional, not accidental.

Discrimination Exclusions

The standard general liability policy form does not specifically exclude claims arising from discrimination. Even so, many insurers attach a separate exclusionary endorsement.

Discrimination is typically excluded as part of an employment practices liability exclusion. Many insurers utilize a standard ISO endorsement that eliminates coverage for discrimination and other employment practices under both Bodily Injury and Property Damage Liability and Personal and Advertising Injury Liability coverages. Other insurers have developed their own exclusionary endorsements.

Discrimination Unrelated to Employment

Small businesses can be sued for discrimination by people other than employees. Examples are customers, suppliers, contractors and other business associates.

For example, suppose that a prospective customer of Pete's Plumbing Supplies requests a meeting with a company sales representative. David, one Pete's sales reps, travels to the customer's office for a sales meeting.

David has a personal prejudice against the ethnic group to which the customer belongs. After calling the customer a racial slur, David tells him that "Pete's doesn't do business with people like you". The customer later sues Pete's Plumbing Supplies for racial discrimination.

Discrimination Coverage Under Umbrella Policies

Coverage for certain types of discrimination is available under some commercial umbrella policies. If discrimination is covered, it is included under Personal and Advertising Injury Liability, not Bodily Injury and Property Damage Liability. Moreover, coverage generally applies only to discrimination that is unrelated to employment.

Some state laws prohibit insurance that covers discriminatory acts. Thus, an umbrella may state that it covers discrimination only to the extent such insurance is permitted by law.

Besides discrimination, other acts or injuries may be covered by an umbrella via the definition of  personal and advertising injury. Examples are mental anguish, mental injury, humiliation and shock.

Employment Practices Liability Coverage

Claims arising from discrimination and other employment practices are insured under employment practices liability (EPL) coverage. A small amount of EPL coverage (typically about $10,000) is included in some package policies sold to small businesses. If your policy does not include EPL coverage, your insurer may offer it via an endorsement or a separate policy.