Reasonableness for Free: Why Buy Employment Practices Liability Insurance when Eeoc.Gov Gives Protection Away?

Author:Glenn Kramer

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    B.A. History, B.A. Economics, Emory University (May 2000). J.D. candidate Benjamin N. Cardozo School of Law (June 2005). Editor-in-Chief, Cardozo Public Law, Policy, and Ethics Journal. I want to thank the editors and staff, especially Daniela Nanau and Molly Guptil, of the Cardozo Public Law, Policy, and Ethics Journal for their hard work on this note and on all of Volume 3.

"In effect, insureds are paying more and receiving less in return."1

"In recent years, the EEOC has issued regulatory and subregulatory guidance to assist in interpreting and applying the laws which it enforces .... These documents are easily accessed through our website at, and I urge you to take advantage of them when useful."2

I Introduction

Federal civil rights and employment laws impose liability for wrongful employment practices and support employees' interest in a workplace free of discrimination and harassment,3 but compliance withPage 460 these laws can become a stifling expense.4 Employers can insure against the risks of non-compliance so they can grow without fear of expensive litigation. By 2001, one-fifth of all jury verdicts in employment litigation were over $1,000,000 with a median jury award of $218,000.5 Employment Practices Liability Insurance (EPLI) protects employers from suits under civil rights and employment statutes and attempts to achieve the balance between employee protection and employer growth.6 EPLI plans actively encourage employers to abide by pertinent laws to lower their risk.7 Unfortunately, not all employers can afford the benefit of such coverage and they struggle to comply with civil rights laws without overspending.8 Insurance providers and their lawyers emphasize the necessity of EPLI, regardless of a company's budget, to increase their customer base. However, employers must have cheaper alternatives to protect themselves and stay in business. A company cannot purchase insurance for every possible exposure; it must select what liabilities to shield. This note argues that when deciding about purchasing insurance, many companies would best be served by cutting EPLI from its budget because the Equal Employment Opportunity CommissionPage 461 (EEOC) provides guidance to help an employer achieve judicially created safe harbors from liability.

A low-budgeted company does not have to purchase EPLI to limit risk under federal civil rights statutes.9 As the federal agency overseeing employment claims and promulgating discrimination regulations,10 the EEOC posts many helpful documents such as employment practice guidances, regulations, and fact sheets on its website that aim to help employers follow federal law.11 These documents, most written for non-lawyers, can help an employer achieve the safe harbor that the United States Supreme Court announced in the 1998 companion decisions Faragher v. City of Boca Raton12 and Burlington Industries v. Ellerth13 The Court showed how certain practices can absolve a company from vicarious strict liability for harassment by employees.14 Furthermore, in Kolstad v. American Dental Association,15 the Court articulated a good faith exception to avoid punitive damages for wrongful acts by managerial employees.16 The EEOC has used these cases to define discrimination and teach employers how to prevent discrimination in the workplace. With due diligence, a company can search the EEOC's website and take reasonable steps to limit many employment practice litigation risks, thereby eliminating the need for EPLI insurance.17

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This note will explain the development of employment law and EPLI. Their growth, it will be argued, has created a legal liability that can only be fully defended with an expensive insurance policy. These companies must turn to cheaper alternatives like EEOC materials. Next, this note will analyze some key EEOC documents to show how the commission interprets the law in an understandable way that can allow companies to limit liability without an EPLI policy. EEOC materials are sufficient to help companies stay within the Supreme Court's safe harbor and good faith exceptions concerning harassment and can help them understand the definition and problems of discrimination, thus eliminating many benefits of purchasing EPLI.18

II Background and Legal History
A Employment Law

Modern employment law is mostly a creature of statute and generally lacks a common law background.19 The Civil Rights Act of 1964 (1964 Act),20 building on the Equal Pay Act of 1963,21 addressed employment practices and discrimination. Title VII of the 1964 Act outlawed discrimination in the workplace based on race, color, religion, sex or national origin.22 The Age Discrimination in Employment Act of 1967 (ADEA)23 and the Americans with Disabilities Act of 1990Page 463 (ADA)24 have expanded employer liability by prohibiting discrimination based on age and disability, respectively. Employment law is still evolving, making the area complicated and uncertain.25

1. The Civil Rights Act of 1991

The Civil Rights Act of 1991 (1991 Act)26 updated the rules of employment law. After its enactment, employment claims could be tried in front of a jury instead of a judge.27 The plaintiff-employee often has an easier time proving her claim in front of a jury because many people relate to being an employee and may feel animosity toward their own employers.28

The 1991 Act also provides compensatory and punitive damages for intentional discrimination or for violations of the Civil Rights Act of 1964 and the ADA.29 Punitive damages make potential liability unpredictable and create a financial incentive to comply with employment laws.30 This additional uncertainty, which is generally insurable for vi-Page 464carious transgressions, makes EPLI more desirable for employers to buy and riskier for insurance companies to provide.

In the fall of 1991, Anita Hill's allegations during Clarence Thomas' Supreme Court appointment hearings31 brought the term "sexual harassment" into America's living rooms.32 Suddenly, Americans were informed of their rights in the workplace and they were willing to file complaints against discriminating employers.33 Employment claims increased dramatically in the early 1990s, and have since leveled off at around 80,000 per year for discrimination and 13,000 per year for harassment.34

In the late 1990s, the Supreme Court focused on issues regarding employment practices liability. Faragher v. City of Boca Raton35 and Burlington Industries, Inc. v. Ellerth36 set the standard for employer vicarious liability and created an affirmative defense. In Kolstad v. American Dental Association37 the Court announced a new standard for punitive damages, which scholars and practitioners had debated since the passage of the 1991 Act.

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2. Faragher v City of Boca Raton

In Faragher v. City of Boca Raton, the plaintiff was a college student who worked periodically as a municipal lifeguard in Boca Raton, Florida.38 The district court found that her supervisors created a sexually hostile environment through various episodes of touching, propositioning, making sexual comments, and performing sexual simulations.39 The district court assigned liability to the city under three different theories: (1) the harassment was pervasive enough to impute constructive knowledge to the city; (2) applying agency principles, the supervisors were acting as the city's agents when harassing Faragher; and (3) Faragher told a supervisor about the inappropriate conduct, which was sufficient to alert the city of the illegal acts.40 The Supreme Court upheld the trial court's decision. The thrust of the Supreme Court's argument focused on the trial court's second theory of employer liability. The Court emphasized agency law principles and found that the employer was responsible for the supervisor's tortious actions.41

3. Burlington Industries, Inc v. Ellerth

In Burlington Industries, Inc. v. Ellerth,42 the plaintiff, a saleswoman, was subjected to a supervisor's sexual comments and gestures.43 On three occasions, the supervisor threatened to terminate the plaintiff if she did not comply with his sexual requests, though he never followed through on his threats.44 Earlier Supreme Court decisions classified these actions as quid pro quo harassment.45 Originally, the district court granted the employer summary judgment.46 The district courtPage 466 found that the threats did not result in a tangible employment action and, although they were severe and pervasive enough to create a hostile environment on their own, the employer had no actual or constructive notice.47 The Seventh Circuit reversed, but issued eight different opinions.48 Although this case was classified as hostile environment harassment instead of quid pro quo harassment, the Supreme Court saw an opportunity to distinguish these two offenses.49 The Court explained: (1) that discriminatory tangible employment actions were subject to a strict liability standard while hostile environment harassment was subject to a negligence standard; and (2) that an employer could assert affirmative defenses for hostile environment claims based on the reasonableness of the employer...

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