Vendors, Customers Can Allege Discrimination, Harassment

Vendors, Customers Can Allege Discrimination, Harassment

By Aileen Marchese

Companies of all sizes today need to protect against employment practice liability claims filed by employees, but legal action also can come from third parties who might not ever even see the defendant company face to face.

Employees of the company’s customers and vendors, the company’s own leased workers and independent contractors--indeed any individuals or groups that come in contact with the business or its employees--are all potential plaintiffs in a third-party EPL lawsuit.

All that’s needed is a charge of harassment, coercion or discrimination; no employment relationship needs to exist. An employee writes a threatening note or forwards an offensive or sexually explicit joke to a customer or vendor.

A third-party EPL lawsuit ensues.

Typical third-party EPL complaints are based on allegations of discrimination and harassment based on race, sex, religion or ethnicity, causing emotional distress--and these types of complaints from all parties are on the rise.

Employment-related cases, summarized by the U.S. Equal Employment Opportunity Commission on its Web site, serve to demonstrate the trends.

According to the EEOC, the number of sexual harassment charges filed with the agency increased by 37 percent between 1992 and 2002. Monetary benefits (excluding litigation) for sexual harassment charges grew from $12.7 million to $50.3 million during the same period.

In that same period, the EEOC reports monetary benefits for employment-related race discrimination (excluding litigation) grew from $31.9 million in 1992 to $81.1 million in 2002.

Third-party EPL claims also can be brought under public access and accommodation laws. These are similar to employment discrimination laws, but have distinct and separate categories relating to federal laws such as the Fair Housing Act, public accommodation and fair lending laws. Third-party plaintiffs have brought several high-profile lawsuits in recent years based on these categories and involving large defendants and verdicts reaching six and seven figures.

Sometimes even the EEOC is called into third-party EPL claims, as in cases where non-employees file charges alleging that the company aided and abetted discrimination. These situations typically arise in cases where temporary employees have been found to be employees of both the temporary agency and the company they are placed to work with.

Obviously, large companies and brand-name or consumer-name companies may garner more publicity and larger lawsuits, but smaller, less well-known businesses are equally vulnerable.

In a beauty salon in New York, a client was given an "inappropriate" massage and subsequently filed an EPL lawsuit.

Basically any business with many employees or frequent dealings with the general public can be vulnerable to such actions.

Just because a company has EPL coverage doesn’t mean it is covered for third-party EPL, since third-party coverage is not automatic under standard EPL policies. Some insurers include it in their policies, while others specifically underwrite the exposure as a stand-alone coverage enhancement, determine whether to offer the coverage based on a number of criteria, and then decide the appropriate terms and conditions.

Under such enhanced EPL policies, coverage is broadened to include coverage for third-party claims brought by customers, vendors or their employees, as well as independent contractors, for discrimination and harassment.

Pricing for enhanced third-party EPL coverage differs from insurer to insurer. Generally the cost is about 10 to 15 percent of the EPL premium, but it can add as much as 50 percent or more.

Third-party EPL limits may be lower than the policy’s overall EPL limits, self-insured retentions may be higher than for non-third-party EPL claim retention, and certain classes of "high risk" business are excluded or offered limited forms of coverage.

Insurers writing third-party EPL organize classes of business by their relative exposure to third-party liability claims. Although all businesses can face a third-party EPL claim, some businesses are at a higher exposure than others.

Classes of business that have restricted forms of third-party EPL coverage or third-party EPL claim exclusions and are considered "high risk" include, but are not limited to: the retail industry, the hospitality industry, the restaurant industry, financial services, health care and real estate. Companies with a large number of employees and a large customer base are also generally in the "high risk" category.

Insurers writing third-party EPL coverage require potential policyholders to fill out a supplemental questionnaire and provide detailed information on previous loss history on third-party claims, business mix and customer base. They also ask potential insureds to confirm that their facilities comply with the Americans with Disabilities Act. In addition, they ask whether there is a formal customer service policy in place, what percentage of employees are paid on commission, and whether the company has written policies and procedures prohibiting improper conduct.

Companies not in a "high risk" class that have solid risk management techniques in place will pay lower premiums reflecting their lower exposures to third-party EPL claims. This includes sound written policies and procedures that clearly prohibit discriminating and harassing customers and vendors--physically, verbally, in writing, by e-mail or on the telephone.

Employers must ensure that these policies are disseminated to all employees, and that the employees fully understand the scope and ramifications of discrimination and harassment.

Businesses must also establish a set procedure to handle customer or vendor claims and complaints, including prompt investigation and response. Providing customers or vendors with a contact and telephone number where they can report claims is a good way to streamline the process.

All businesses should make sure their facilities comply with the ADA, including but not limited to entrances and exits, restroom accessibility, etc.

And when choosing vendors, businesses should ensure that the bidding process is conducted fairly to avoid litigation. Careful background and reference checks on all potential employees before hiring can assist in avoiding or mitigating third-party negligent hiring claims.

Although today’s litigious climate would seem to suggest that third-party EPL lawsuits will inevitably increase, external factors may affect claim frequency and severity. For example, amendments to federal class-action law currently under consideration may impact exposure to third-party claims.

But until then, wise businesses should use the combination of sound risk management techniques and a solid supplemental insurance policy to protect themselves against the threat of a third-party EPL lawsuit.

Aileen Marchese is assistant vice president at Hartford Financial Products in New York City, a unit of The Hartford Financial Services Group, and an expert in employment practices liability coverage.

Reproduced from National Underwriter Edition, June 16, 2003. Copyright © 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.