Insuring the Employer Against Lawsuite for Harassment and Discrimination In The Workplace

This article was published in the Spring, 1997 edition of The Successful, a California Magazine for accountants.

Written by David H. Greenberg, Attorney At Law

By nature, business must minimize risk when it can. An obvious way to do this is purchasing insurance.

In our last article in these pages, we discussed employer liability for discrimination and harassment in the workplace. But what of insuring against these risks? By law, all California employers must carry some form of workers' compensation insurance. But this insurance does not cover claims of discrimination and harassment. Recently, insurance companies have been issuing insurance to cover the risks of discrimination lawsuits and harassment lawsuits brought by employees.

This article will describe why this insurance is only recently being sold and what it does and does not cover.

Why Discrimination and Harassment Insurance Has Been Unavailable In California

California Law does not allow insurance companies to sell liability insurance for intentional acts. California Insurance Code Section 533 states:

"An insurer is not liable for a loss caused by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured's agents or others."

What this means is that if a person or business has liability insurance, and becomes liable because of an intentional act, the insurance company doesn't have to cover that person or business for that intentional act. This is standard throughout the country. It reflects the public policy that we don't want people being encouraged to do harm to others; if they are insured, they are more likely to do intentional wrongs. For instance, if the guy on the highway cuts you off, and you intentionally ram him, you aren't covered. But if your insurance would cover that intentional act (and you had a really bad temper) you might be more likely to ram him. The law tries to discourage this sort of behavior by excluding intentional acts from liability insurance.

Generally speaking, discrimination and harassment are considered "intentional" acts. Consider these actions in the workplace. If a manager fires an African-American, it's not necessarily discrimination. But if he fires him because he's African-American, that's discrimination and is against the law. The employer's motivation is the distinction. (For a fuller discussion of these issues, please see my article in the Winter, 1997 issue of this magazine.)

Because it is the employer's motivation which makes the action discrimination, it stands to reason that discrimination is "intentional." As discussed above, this would make discrimination uninsurable. However, because of the way California discrimination statutes are written and interpreted, there are ways for insurance companies to insure these acts.

Legal Bills: Insuring Part of the Problem

One of the largest concerns for employers facing employment discrimination and harassment cases is the cost of hiring attorneys to defend the cases. Defense of these cases can run into the tens and even hundreds of thousands of dollars.

Recognizing this, some insurance companies in the early 1980s began writing insurance to cover these costs only. They didn't insure the liability for the discrimination itself, but they did write policies covering the legal bills incurred as a result of a discrimination lawsuit. Liability policies generally provide coverage for two things: indemnity and defense. Indemnity is payment for actual liability; the cost of settling the case or paying a judgment after a trial. Defense is simply the cost for lawyers to defend the case. The discrimination liability policies weren't written to cover actual liability, because of the "intentional acts" prohibition. Therefore, they were "defense-only" policies, without indemnity. This kind of coverage is still available.

Breaking the Intentional Act Barrier: The Origins of Discrimination Indemnity.

Around 1992 or 1993, the Insurance Commissioner of the State of New York issued an opinion that it was permissible for insurers to offer liability insurance for some types of discrimination cases. The opinion was based on the fact that employers are "vicariously liable" for the acts of their employees.

Vicarious liability means that if an employee does some harm to another, and does it in the scope of his employment, the employer is liable. This theory of liability was not created in the discrimination context. It has existed for literally hundreds of years. A very simple example is this: a pizza-delivery boy gets in a car accident and runs into another car. He was on his way to deliver a pizza. The pizza parlor is liable to the third party the delivery boy hit.

In employment law, it is the employees who are suing their own employers. But they are suing because they were discriminated against or harassed by other employees. Again, the employer is vicariously liable for the discrimination or harassment perpetrated by the employee.

The New York Insurance Commissioner reasoned that because the employers had done nothing "intentional", and were only being held liable because of vicarious liability, they could get insurance to cover this. The individual who actually did the discrimination or harassment could not have relied on his own coverage, because as far as he was concerned, the act was intentional.

This reasoning had already been employed elsewhere in the country. But many in the insurance industry considered this opinion a breakthrough. More and more insurance began to be offered.

Non-Intentional Discrimination - Disparate Impact

There are other means by which an employer can be liable for discrimination without doing anything intentionally. One is the theory of "disparate impact". The type of discrimination discussed above is "disparate treatment", where some person treats another differently on the basis of race, gender, age, or another protected category. "Disparate Impact" is where some type of company policy excluded a certain individuals from the job or from promotions. The policy wasn't designed to exclude them; that was just the unfortunate result.

One example arose in fire departments. These agencies had various strength requirements for job applicants. Women were frequently unable to meet these requirements. In some instances, the requirements were absolutely necessary to ensure the firefighters were qualified. But in many instances, the requirements were simply too high; the were more than was necessary. Qualified women were therefore being excluded unnecessarily. This does not mean the fire departments were necessarily trying to exclude women. That was just the result of their policy; it had a disparate impact upon women. Because the policy wasn't sufficiently job-related (too much strength was required) there was discrimination.

This is an excellent example of how discrimination can occur without an intentional act.

Strict Liability

Strict Liability is another way that an employer can be liable for discrimination even without "intent". Under California Law, when a supervisor harasses or discriminates against an employee, the company is liable, whether or not it knew what was going on. Therefore it can be liable without intent. A recent California case, Melugin v. Zurich Canada, upheld harassment insurance on this very basis, despite the intentional act exclusion.

Insurance companies are now offering discrimination and harassment liability policies that cover the company in these instances. These policies do not cover the individual supervisor who did the illegal acts.

The Reasonable Victim Standard

In the area of harassment, an employer must create a "hostile work environment" to be liable. The environment must be hostile based on a specific protected classification. There is no general "harassment" that is illegal. It must be based on race, gender, or other classification.

The hard part is figuring out whether or not the environment was reasonably hostile. Complementing a woman's outfit on one occasion is not harassment. Making rude remarks on a daily basis about how sexy she looks probably is. In determining whether or not an environment is hostile, the courts now look to the perspective of the victim. For example, in a sexual harassment case, it is not important whether or not a man doing the harassing thought what he was saying was offensive. It matters how the woman viewed it. If she is unreasonably oversensitive, there was no hostile environment. But if her feelings were reasonable, from the perspective of a woman in similar circumstances, there is a hostile environment and therefore harassment.

Though no court has yet addressed this issue, it is possible that there can be "negligent harassment". Under the law, even if the harasser doesn't realize that his conduct is offensive, he can still be liable. Therefore he can be liable without intent. It is possible that insurance could cover such an instance, even for the individual harasser.


Employers will always seek to insure against risk. A growing area of risk is constituted by employment discrimination suits. As employment law has changed, it has opened up new means for insurance companies to offer insurance against this risk. Just how far this insurance can go remains to be seen.

Further Information