Not all D&O policies specifically address employment-related wrongdoings within the basic policy form; however, specific exclusions and exclusionary endorsements are becoming common. Even in the absence of a specific employment practices liability (EPL) exclusion, coverage would not usually be available for direct actions against the organization unless the D&O policy provides some form of entity coverage.

Even when claims based on wrongful-employment practices are not specifically excluded, the question of whether employment-related claims are covered is not always easy to answer. As with many other issues surrounding D&O insurance policies, the courts often are required to sort out such matters. It is difficult to make generalizations regarding specific decisions and how they might apply under any given set of circumstances. Coverage for employment-related claims cannot be assumed simply because the policy does not contain a specific and obvious exclusion. On the other hand, even when seemingly straightforward exclusions exist (such as insured-versus- insured and regulatory exclusions), the courts sometimes have overruled the exclusions in favor of the insured.

When evaluating employment-practices related coverage where a specific exclusion is not readily identifiable, keep in mind that even seemingly unrelated exclusions could be interpreted to preclude coverage for employment-related claims. The following parts of D&O policies may contain language that could, in certain instances, restrict or limit employment-related practices coverage.

     The definition of wrongful act: Policy definitions that limit wrongful act to “negligent acts” may preclude employment-related claims when the insured individual acted or was alleged to have acted with intent. The use of the term negligent in the definition implies that such actions must be unintentional, which is often a complicated issue. An insured individual may have acted with intent in terminating an employee, but the resulting injury to the employee may have been unintentional. Deletion of the adjective negligent from such a definition always is desirable.

     Also, some D&O insuring agreements and many definitions of wrongful act limit coverage to conduct which is solely in the capacity as a director or officer. It may not always be clear whether alleged acts of sexual harassment took place within the scope of the director's or officer's duties. Sexual relationships between the director or officer and claimant may have pre-existed employment and not fall within the scope of coverage. (Also see Wrongful Act.)

     Insured-versus-insured exclusion. Some D&O insurers will expand the definition of individual insureds to include employees or other persons who are not directors or officers. While this might appear to be an expansion of coverage, it also can preclude coverage for claims by employees for wrongful-employment practices because the scope of the insured-versus-insured exclusion is broadened correspondingly. This problem normally can be corrected by attachment of an endorsement clarifying that the insured-versus-insured exclusion does not apply to claims made by employees who are not officers or directors. (Also see Insured Versus Insured.)

     Failure-to-maintain-insurance exclusion: This previously common policy exclusion, if liberally interpreted, conceivably could preclude coverage when the insured individuals could have purchased employment practices liability insurance but chose not to. Because coverage for employment- related claims may be available to the corporation and its executives for certain employment-related offenses (such as wrongful termination, discrimination and sexual harassment), the failure-to-maintain-insurance exclusion conceivably could be used as an argument for excluding at least some types of employment-related claims. Also see Failure to Maintain Insurance.)

     Regulatory agency exclusion: Regulatory agency exclusions, which once were limited to bank and savings-and-loan regulators, now sometimes are broadly written to encompass claims by any state or federal regulatory authorities. The agencies excluded might include the regulators of the Fair Labor Standards Act, federal and state occupational safety and health acts, the federal Age Discrimination in Employment Act and the Americans with Disabilities Act. Historically such laws dealt with liability of the corporation as an employer, but now the courts increasingly are interpreting the firm's directors and officers as the “real” employer and holding them personally liable. (Also see Regulatory Exclusions.)

     Willful-violation-of-laws exclusion: These exclusions preclude coverage not only for the willful violations of laws, but often are extended to include willful violation of rules and regulations as well. The term regulation generally implies that it contains the force of law behind it. Rule, on the other hand, can mean a rule or prescribed standard of conduct established by a company or other insured entity. If such an exclusion contains the word rule, it implies that willful violations of corporate policy, such as rules governing employment practices, may be sufficient to preclude coverage even when no law or government-imposed regulation is violated. (Also see Dishonest, Fraudulent and Criminal Acts.)

     Bodily-injury and personal-injury exclusions: These exclusions vary among D&O policy forms. The normal practice is for the insurer to exclude from coverage the types of claims that would be covered by a general liability policy by listing the specific injuries excluded. Sometimes excluded injuries include mental anguish, emotional distress, humiliation, defamation etc., which frequently are alleged in connection with employment-related claims. When a D&O policy excludes personal injury but does not define the term, a liberal interpretation of personal injury also could exclude a wide range of employment-related claims. (Also see Bodily Injury/Personal Injury/Property Damage.)