Read the Fine Print: Does Your EPLI Policy Cover EEOC Claims?

Really, it’s not too bad, right? You’re facing a discrimination lawsuit. Morale and company image may suffer. But at least your organization carries employment practices liability insurance (EPLI) to cover the “hard costs” of defense and settlement. Or do you? As Cracker Barrel recently learned, your EPLI umbrella policy may actually let some rain in … $2.7 million worth, in this case.

Case in Point: Over a two-year period, 10 employees of Cracker Barrel Old Country Stores filed charges of race and sex discrimination with EEOC. That prompted the EEOC to investigate and file a lawsuit against Cracker Barrel under Title VII of the 1964 Civil Rights Act.

Cracker Barrel notified its EPLI insurance carrier, believing the case was covered under the policy. Eventually, Cracker Barrel settled the case for $2 million. The company also racked up $700,000 in legal defense fees. Total costs: $2.7 million.

policyWhen Cracker Barrel turned to its EPLI insurance carrier to collect the $2 million, the insurer pulled out the policy, pointed to the fine print and denied coverage.

Why? The policy defined a covered claim as one brought by a “previous, current or prospective employee.” The EEOC was not any such “employee.”

Cracker Barrel argued that because employees brought the underlying discrimination claims, the EEOC suit was merely part of the process. No dice. The court said the fact that Cracker Barrel employees brought the original EEOC charges that helped trigger the EEOC lawsuit was “irrelevant.”

Down $2 million, Cracker Barrel next tried to get back its $700,000 in legal fees. Again, the insurer argued that it didn’t have to indemnify Cracker Barrel for a penny of legal costs because the charge wasn’t brought by an “employee.” Again, the court sided with the insurance company.  (Cracker Barrel Old Country Store Inc. v. Cincinnati Ins. Co., M.D. Tenn., 9/21/11.)

3 Lessons Learned … Without Going To Court

1. Buy EPLI. This type of business insurance can save you a boatload of money when it comes to employment-related claims. While it’s good to have a safety net, nothing has a greater return on investment than providing anti-discrimination training in the first place to prevent employment lawsuits. 

2. Read the fine print. As this court pointed out, the policy defined the terms of coverage. It’s your job to figure out what might not be covered and then negotiate for it. (6 Questions to Ask When Shopping for EPLI Coverage.)

3. Confirm EPLI covers the EEOC. Make sure your EPLI coverage includes claims made by the EEOC and all other such federal, state and local agencies. Cracker Barrel argued that the insurance company’s refusal to cover EEOC claims “flies in the face of common sense,” saying such lawsuits were the “very purpose of the coverage.” But the court said it was forced to stick to the plain language of the insurance contract, which clearly covered only claims by “employees.”