Every now and then, I run across a case that makes me stop and say, “What?” I had that experience recently when I read the September 21, 2011 opinion of Middle District of Tennessee Judge John T. Nixon in an insurance coverage dispute involving Cracker Barrel Old Country Store, Inc. In the opinion, which can be found here, Judge Nixon held, applying Tennessee law and based on the policy language involved, that an EEOC lawsuit brought following employees’ discrimination charges was not a “Claim” within the meaning of the EPL insurance policy at issue.



Between December 1999 and March 2001, ten of the company’s employees filed charges alleging sexual or racial discrimination against the company with the Illinois Department of Human Rights and the EEOC. The company later provided notice of these charges to its EPL insurer. Thereafter, the EEOC brought suit against the company for multiple alleged violations of federal civil rights laws. The EEOC’s lawsuit arose from allegations of harassment and discrimination against former and current employees of the company, including the original ten charging parties. The company provided its EPL insurer with notice of claim relating to the EEOC lawsuit. The company later entered into a settlement decree with the EEOC, which designated $2 million to be placed in a settlement fund. The company incurred over $700,000 in defending the EEOC lawsuit.


The company sought coverage from its EPL insurer in connection with the EEOC lawsuit, seeking inter alia, reimbursement for its defense expenses. The carrier — in reliance on the Policy’s definition of the term “claim” as “a civil administrative of arbitration proceeding commenced by service of a complaint or charge, which is brought by any past, present or prospective employee(s) of the ‘insured entity’ against any ‘insured’” – took the position that the policy did not cover the EEOC lawsuit. The company filed a declaratory judgment action and the parties filed cross-motions for summary judgment.


The September 21 Opinion

In his September 21 opinion, Judge Nixon granted the carrier’s summary judgment motion and denied that of the company. The carrier had argued that the EEOC lawsuit was not a “claim” within the meaning of the EPL policy because it was not brought by a past, present or prospective employee of the company. The company argued that the definition should be understood to mean that the proceeding must merely be commenced by a complaint or charge by an employee.


In ruling for the carrier, Judge Nixon found that the definition of “claim” in the carrier’s policy is
“not ambiguous” and that “the definition of a ‘claim’ has a clear meaning that a covered proceeding must be brought by an employee.” Even though the EEOC lawsuit followed from the employees filing of charges, the EEOC lawsuit “was not ‘commenced by the service of’ a charge, according to the plain meaning of that language, even though it may have arisen because of previous administrative charges.” The fact that “the EEOC charges on which the EEOC partially based its decision to bring a lawsuit were brought by Plaintiff’s employees is irrelevant.” Judge Nixon held that because “the EEOC lawsuit was not brought by an employee,” the lawsuit is “not a ‘claim’ under the Policies.” Accordingly, he ruled that the carrier did not have a duty to indemnify the company for the settlement amount or for the company’s costs of defense.



I think most readers’ initial reaction to this ruling will be surprise (at a minimum). The general expectation would be that the possibility of an EEOC lawsuit is among the very reasons companies buy EPL insurance. Indeed, as Judge Nixon noted in his opinion, the plaintiffs in this case argued that the insurance companies position that an EEOC lawsuit is not a covered claim “flies in the face of common sense,” as the company had purchased the EPL insurance “to protect itself from exactly the type of liability that results from EEOC actions,” which is, the plaintiff contended the “very purpose” of the coverage.


But what may seem like a surprising outcome may be nothing more that a reflection of the unusual wording in this policy. In his opinion, Judge Nixon noted that he had reviewed the language of EPL policies involved in other cases and that he had “found no instances where the relevant definition restricted claims to those ‘brought by an employee.’”


Indeed, my own quick review of the EPL policies of several other carriers show that many policies do not, as Judge Nixon noted, limit who must bring an otherwise covered claim. Other policies specifically include actions brought by the EEOC within the definition of claim, while yet others include the EEOC within the definition of a “claimant” whose action represents a “claim” under the policy. Many policies also allow that a claim may be brought “by or on behalf of” an employee. Judge Nixon found that in the absence of these kinds of provisions in the policy here, he could not interpret the provision as if it included that type of language, and that he “cannot find ambiguity where none exists merely because plaintiffs did not bargain for coverage that is expected.”


If nothing else, this outcome underscores the critical importance of policy wording. Where coverage for something as basic to EPL insurance as an EEOC lawsuit depends on the presence or absence of crucial words, policyholders must take steps to protect themselves, and in particular policyholders must enlist in their acquisition of insurance knowledgeable and experienced insurance professionals capable of ensuring that the policy language is matched to the policyholders’ needs and expectations. And while you wouldn’t think it would be necessary, it looks as if one item that should be attended to with particular care is to make sure that the EPL policy’s terms encompass EEOC lawsuit within the scope of covered claims.


More than once, I have suggested that part of the obligation of those who counsel insurance buyers is to develop a sort of league table for carriers’ claims handling practices. The carriers’ awareness of the maintenance of league tables might possibly encourage the carriers — in considering whether or not to assert a particular coverage position — to consider not only whether or not a particular position is analytically justified, but also consider how it might look to the insurance marketplace if the carrier were to take that position. Insurance professionals that maintain a claims handling practices league table may find it highly relevant that the carrier in this case was willing to take the position it took in this case.


An October 2011 memo from the Lowenstein Sandler law firm discussing this case can be found here.


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