Denial of Insurance Claim Because of Employer's Failure to Comply With Policy Requirements
Employers can purchase Employment Practices Liability Insurance (EPLI) to protect themselves in the event an employee files a civil lawsuit against them. A recent case, Westrec Marina Management v. Arrowood Indemnity Company, warns us, however, that merely paying the premium and making a claim is insufficient – one must also comply with the terms of the insurance policy in order to take advantage of the benefits.
In this case, a Westrec employee filed a sex discrimination claim with the Department of Fair Employment and Housing (DFEH) and requested an immediate right to sue letter. Her attorney then wrote to Westrec asserting claims and seeking possible early settlement of the matter prior to filing a lawsuit and notifying the employer that a right to sue letter had been issued by the DFEH. The employer did not report either event as a claim to Arrowood, its insurance company, as required by its policies.
The policies’ definition of “claim” included, but was not limited to, “a written demand for civil damages or other relief commenced by the Insured's receipt of such demand” (as in the letter from the employee’s attorney) and a “formal administrative or regulatory proceeding commenced by the filing of a notice of charges, a formal investigative order or other similar document” (as in the notification of the issuance of a right to sue letter). 

The employee filed a complaint against Westrec, alleging employment discrimination and wrongful termination. Westrec notified Arrowood of the action, tendered its defense, and requested indemnity. Arrowood declined to defend or indemnify Westrec in a letter stating that either the complaint to the DFEH or the attorney’s letter, or both, constituted a “claim” as defined in the policy and that Westrec had failed to provide timely notice of the claim.
The court did not specifically hold that the complaint to the DFEH was a “claim” within the meaning of the policies. However, the letter from the attorney contained both a settlement demand and notification that a right to sue letter had been issued. Since the right to sue letter is a prerequisite for filing a civil lawsuit, the employer should have reported the matter to its insurance carrier.
Westrec appealed the judgment, to no avail. The Court of Appeal affirmed the trial court’s ruling that Westrec was not entitled to coverage under the policies because it failed to timely report the claim.
Based on the outcome of this case, our recommendation to employers to assure available coverage is to notify the insurance company immediately upon receipt of any claim, notice, demand or communication that may potentially result in a lawsuit.