Clayton is not about discrimination or harassment–the employment practices areas that grab the headlines when huge corporations are found guilty of intentionally, or perhaps unintentionally, discriminating against a class of employees in areas such as race, gender, disability, age or religion.

It's a case about one employee gossiping to outsiders about what happened to a former employee. Because of a confluence of factors, there's a $1.25 million judgment for which the CGL insurer is liable.

In this case, Janette Clayton was a former motel manager who was fired for allegedly stealing and embezzling funds. After she was fired, individuals called on two separate occasions and asked to speak with her. Both people were told that Ms. Clayton had been fired because she had stolen money or misappropriated funds.

Ms. Clayton sued after criminal charges against her were not prosecuted. She alleged three causes of action against her former employer–malicious prosecution, slander and negligence. The jury returned a general verdict of $1.25 million.

The CGL insurer ended up paying because the details of her termination were not relayed to other employees, nor were they relayed to potential future employers of Ms. Clayton. They were relayed to an acquaintance and to a former business associate. Therefore, the state supreme court affirmed that the suit and subsequent judgment did not fall within the context of an employment-related practice.

The employer in this instance was fortunate that the factors pointed to CGL coverage–with slightly different circumstances the end result could have been different.

CGL insurers do not intend to cover EPL-type claims, especially in light of the expansion of employment-discrimination statutes and escalating employment-practices claims. Owners Insurance certainly didn't–a fact that was shown when it sought a declaratory judgment that the CGL's exclusionary language barred coverage for the Clayton claim.

The employment-related practices exclusion on the Owners Insurance policy for the most part mirrored the one offered by the Insurance Services Office Inc. Both exclude coverage on the CGL for bodily and personal and advertising injury arising out of refusals to employ, employment terminations, and other employment-related practices such as coercion, demotion, harassment, reassignment, defamation and humiliation.

ISO's EPL exclusion was proposed in 1988, simultaneously with the expansion of EPL legislation. Although ISO may not have intended to cover such claims with its CGL form even before then, the new endorsement clarified that intent.

As a result of both increased legislation and lawsuits, as well as the addition of specific exclusions for the CGL form, specialized employment-related practices liability insurance has been developed to fill the gap created.

In addition to writing the coverage, some insurers–and ISO–offer access to a specified amount of human resources risk management services as an add-on to the policy. It's an example of coupling risk transfer with risk management expertise in one package.

Companies that decide not to buy EPL coverage–even more so than those that do buy the insurance–should institute sound EPL risk management strategies.

First and foremost among these are auditing the company's human resources practices and procedures. This should cover areas such as job advertisements, applications and interviewing procedures as well as reviewing employee handbooks.

Every company should institute a policy that encourages employees to report discriminatory activities in the workplace. All such reports should be thoroughly investigated in a consistent manner.

Employers need to adopt and publicize their anti-discriminatory policies, and employees–especially supervisors and managers–need to be trained in these areas.

Job review and evaluation processes also must be reviewed and tailored to specific job responsibilities and requirements. Consistency among all employees is one of the best defenses to claims of unfair or discriminatory employment practices.

One of the most common failings of companies is accepting average or even above-average evaluations of borderline employees. When the need arises to replace such an employee with someone better skilled or more focused, all too often the employee's record provides no legitimate basis for the change.

The human resources services that are offered as value-added resources to EPL insurance coverage can provide much-needed HR expertise in both setting up risk management procedures and in dealing with sticky employee situations when they arise.

For example, some of the packages provide audit and procedure checklists and manuals or several hours of phone consultation to firms that need focused information on a particular employment issue.

Although no company can prevent its employees from simple “gossiping” about their fellow workers, proper training about what can and cannot be said about current and former employees may help prevent other types of employment-related liability cases from arising.

In Clayton, the employer was lucky (and Owners Insurance unlucky) that the court differentiated so clearly between the substance of the defamatory statement and their context. Had that distinction not been so clearly delineated, the outcome could have been reversed and the motel itself left to pay $1.25 million.

Diana Reitz, CPCU, is managing editor of FC&S Online, National Underwriter Company's online source for coverage interpretation and analysis.

“The South Carolina Supreme Court reasoned that the substance of the defamation was employment-related, but that it occurred outside the context of employment.”

Diana Reitz