EPL Insurance for Restitution Claims?

To avoid frustration with EPL insurance, business owners want to understand?foundational insurance principles. One of those principles is that liability insurance requires a claim for actual loss or damage. A claim for restitution or other nonmonetary claims is not enough.

Most?EPLI ?policies expressly require a claim for “loss” or “damage.” That is, the employee must allege that he or she suffered detriment as a result of the employer’s “wrongful act .”

In some cases, the employee is not actually claiming loss or damage, but is simply seeking to be restored to employment, or to receive funds already due before the employer’s alleged wrongful act. Normally these restitution-type claims are not covered by EPL insurance, or by any other liability insurance.

Most courts addressing the issue have adopted some form of the rule that restitution claims do not constitute “damage” or “loss”?for insurance purposes. There is no damage if the claimant (the employee) is simply seeking to be restored to some prior?status quo?– the “status quo ante” as attorneys like to say. See?Employment Practices Liability, Second Edition , Chapter 1 (National Underwriter) for a detailed analysis.

In a frequently-cited Texas case, the Court explained why restitution is conceptually distinct from damages. “An insured … does not sustain a covered loss by restoring to its rightful owners that which the insured, having no right therein, has inadvertently acquired.”?Nortex Oil & Gas Corp. v. Harbor Insurance Co., 456 S.W.2d 489, 494 (Tex. Ct. App. 1970) .

More recently, the Seventh Circuit Court of Appeals applied this principle to Directors and Officers (D&O) insurance. In?Level 3 Commc'ns Inc. v. Fed. Ins. Co.,?272 F.3d 908, 911 (7th Cir. 2001) , the Court found that a claim to return the value of the plaintiffs’ wrongly-purchased stock did not state an insurable “loss.” The claim was in essence a restitution claim, and restitution is not the same as loss or damage. “An insured incurs no loss within the meaning of the insurance contract by being compelled to return property that it had stolen, even if a more polite word than ‘stolen’ is used to characterize the claim for the property's return.” D&O insurance is conceptually similar to EPL insurance, and the same reasoning applies to “loss” under EPL policies.

Therefore, the employer should carefully examine the remedy sought by the employee. Not all employment-related claims?are covered. The employee must claim that the wrongful act caused the employee “loss” or “damage.” Claims to restore the employee to the?status quo ante?are generally not insured.

For a comprehensive analysis of EPL coverage issues, as part of a larger risk-management strategy, consider an?EPRM webinar ?for your managers.?