Employers can be subject to a wide array of employment-related claims and often purchase employment practices liability insurance (EPLI) to ensure that they have broad coverage if and when they face such claims. For example, employers that purchase EPLI would expect that their insurer would provide coverage for any wrongful termination or retaliation claims that employees might assert.
Securing such coverage in California can be challenging, however. Employment practices liability insurers in California frequently contend that Section 533 of the California Insurance Code precludes any coverage whatsoever for wrongful termination or retaliation claims under EPLI policies, even under policies that include terms that expressly provide coverage for these claims.
Policyholders should take specific steps to respond effectively when an insurer asserts that Section 533 precludes coverage for a wrongful termination or retaliation claim, namely: 1) understand the terms of the EPLI policy; 2) review the bases for the insurer’s denial; and 3) identify the flaws in the insurer’s position and forcefully demand that coverage be provided consistent with the terms of the EPLI policy and applicable law.
EPLI Coverage Terms
Most EPLI policies provide express coverage for wrongful termination and retaliation claims. For instance, a form policy used by numerous employment practices liability insurers provides coverage for “wrongful discharge or termination of employment, whether actual or constructive” and “retaliation, including retaliation for exercising protected rights, supporting in any way another’s exercise of protected rights, or threatening or actually reporting wrongful activity of an insured such as violation of any federal, state or local ‘whistle blower’ law.” Other EPLI policies use variations of these terms, but regardless of the precise language used, most EPLI policies explicitly include wrongful termination and retaliation claims within the scope of coverage promised to the insured.
Insurer Arguments Against Coverage
Insurers that contend that EPLI policies never provide coverage for wrongful termination and retaliation claims in California base their argument on Section 533 of the California Insurance Code. In part, Section 533 provides that an “insurer is not liable for a loss caused by the willful act of the insured.” Relying on this brief code provision, insurers argue that any wrongful termination or retaliation claim must arise from an insured’s “willful act” and thus can never be covered. Specifically, insurers argue that: 1) any wrongful termination or retaliation claim must arise from an insured’s willful decision to terminate or otherwise act against an employee; 2) such claims are thus unavoidably caused by an insured’s willful act; and 3) coverage for these claims is therefore always precluded under Section 533, regardless of whether the policy’s terms include express coverage for wrongful termination claims.
In support of their position on this argument, insurers may cite a handful of California rulings. For instance, insurers may point to a federal trial court decision under California law stating that wrongful termination and retaliation claims “necessarily implicate willful and intentional conduct on the part of the insured,” and thus are precluded from coverage under Section 533. Or insurers may cite a California state appellate court decision holding that “termination of employment for which a tort action will lie” is an “intentional and wrongful act,” and therefore cannot be covered in light of Section 533.
A policyholder facing a coverage denial on these grounds may feel that the insurer’s position is contrary to the plain wording of its EPLI policy, inconsistent with the policyholder’s reasonable expectations, and patently unfair, but may be unsure how to respond, especially when the insurer is citing case law that appears to support the denial.
Policyholder Arguments in Favor of Coverage
Despite the force with which some insurers assert that Section 533 precludes coverage for wrongful termination and retaliation claims, a policyholder presented with such a coverage denial should be aware that these arguments are in fact contrary to established law regarding the interpretation of insurance policies. A policyholder confronted with these arguments should be prepared to give the following four responses to their employment practices liability insurer.
First, a policyholder should note that the cases an insurer may cite to support its position all flow from a 1992 decision where the court held that Section 533 would preclude coverage for a wrongful termination claim only “in the absence of any contrary provisions in the policy.” Thus, Section 533 does not preclude coverage where an EPLI policy expressly provides coverage for wrongful termination or retaliation claims. In making this argument, a policyholder should also remind the insurer that California law requires Section 533 to be read narrowly, as courts have consistently held that Section 533 is treated as an exclusionary clause, and that the insurer bears the burden of proof to show that this section precludes coverage.
Second, a policyholder should highlight that, under the reading of Section 533 advanced by the insurer, the coverage expressly provided in EPLI policies for wrongful termination and retaliation claims would be rendered illusory. Put differently, even though an EPLI policy expressly states that wrongful termination and retaliation claims are covered, that coverage can never in any circumstances be available due to Section 533. Such a reading would be contrary to any reasonable policyholder’s expectations and would take coverage that the policy explicitly provided and render it illusory, in contravention of well-established California law regarding insurance contract interpretation.
Third, a policyholder should point out that the insurer’s position would improperly read certain language out of the EPLI policy. Most EPLI policies explicitly exclude coverage for claims involving certain willful conduct—namely any “dishonest, deliberately fraudulent or criminal act”—but only if there is a final adjudication against the policyholder with respect to that conduct. However, the insurer’s proposed application of Section 533 would render this policy provision meaningless as it would preclude coverage for any deliberate act—including any dishonest, deliberately fraudulent, or criminal act—irrespective of any final adjudication. Reading the policy in a way that nullifies one of its terms would be contrary to well-settled California law concerning insurance contract interpretation.
Finally, if a wrongful termination or retaliation claim against a policyholder also includes allegations of unintentional employment-related misconduct, this may obligate an insurer to defend the entire lawsuit, as many EPLI policies provide that the insurer must pay to defend the entire claim once at least one allegation in a lawsuit is covered.