In their article Employment Practices Liability Insurance and Ex Post Moral Hazard, Erin Meyers and Joni Hirsch argue employers should not be able to fully avoid employment discrimination liability through employment practices liability insurance (EPLI) when the liability results from employer-facilitated discrimination. The authors suggest full coverage under EPLI triggers ex post moral hazard–“[too little] care in reacting to wrongful employment acts” (P. 973) –and improperly lessens the deterrence employment discrimination liability promises. Their legislative solution would mandate employers pay part of the liability and allow public entities “the power to issue uninsurable fines” (P. 985) for liability stemming from employer-facilitated discrimination. The conditions would not apply to liability for employment discrimination by low-level employees for which the employer is vicariously liable.
The article is fascinating. Though it is as much an insurance article as an employment discrimination article, the definition of employer-facilitated discrimination is at the article’s core. The authors define employer-facilitated discrimination to include discrimination stemming from behavior the employer knew about but declined to address, and discrimination resulting from “a business’s failure to set up a reasonable reporting system for wrongful employment acts.” (Pp. 950-51.) That definition of employer facilitation is reasonable, but will necessarily cause employment-discrimination mavens to ponder if it is over-inclusive or under-inclusive. That is much of the article’s charm.
The relationship among liability insurance, moral hazard, and deterrence is at the heart of this article. Liability insurance arguably triggers ex ante moral hazard – the willingness to engage in risky behavior that might cause loss because such loss would be covered by insurance. EPLI coverage might trigger risky behavior by an employer, which might lead to employment discrimination liability, effectively negating employment discrimination law’s deterrent effect. Meyers and Hersch note EPLI does not appear to lead to ex ante moral hazard more than typical liability insurance, but they conclude it may cause ex post moral hazard – the refusal to address identifiable discrimination that may yield additional future employment discrimination liability because the future liability will be covered.
Using Harvey Weinstein’s (Weinstein) conduct and The Weinstein Company’s (TWC) reaction as an example, the authors argue a high-level executive’s long-term discriminatory behavior that is known to the company involves employer-facilitated discrimination, the liability from which EPLI should not fully cover. TWC’s lack of response to Weinstein’s ongoing discriminatory conduct reflects the ex post moral hazard EPLI incentivizes. Even though TWC appeared knowledgeable about and complicit in Weinstein’s behavior, TWC’s EPLI insurers offered to fully cover TWC’s employment discrimination liability stemming from Weinstein’s behavior. Meyers and Hersch argue an employer should not be allowed to use EPLI coverage to completely avoid liability for such conduct, suggesting full coverage under EPLI may yield coverups that risk additional employment discrimination, rather than investigations and an end to discriminatory conduct.
If Meyers and Hersch limited employer-facilitated conduct to behavior known to the employer, the article would still be interesting, but they also include behavior unknown to the employer due to an employer’s failure to create a reasonable system for reporting discrimination. The proper scope of employer-facilitated conduct is subject to debate. Discriminatory conduct by a high-level executive that likely would have been discovered and stopped if the employer had a reporting system in place arguably is employer-facilitated discrimination. If the primary way discriminatory behavior by high-level executives is brought to a company’s attention is through a reasonable reporting system, the failure to install a reasonable reporting system is a short step away from affirmatively refusing to address that discrimination. Further, reporting systems are common enough that declining to implement one arguably suggests indifference, implicitly inviting discriminatory behavior to continue. If the authors merely intend to suggest an employer’s ignorance of a high-level executive’s discrimination will not be a defense to limited insurance coverage in a case where a high-level executive has engaged in a pattern of discriminatory behavior that would have been uncovered if a reporting system had been in place, their approach is a sensible adjunct to their treatment of Weinstein’s behavior.
However, some might argue the employer facilitation should cover more territory, or less territory. If lack of a reporting system that leads to an employer’s ignorance of discrimination should be deemed employer facilitation in some cases, it could be deemed employer facilitation in all cases. Whether the perpetrator is a high-level executive, a mid-level manager, or lower-level employee, the employer could be deemed responsible for its lack of knowledge. This approach is sensible, but it may conflict with the authors’ suggestion that an employer’s negligent behavior can be fully covered by EPLI. (P. 950.) Unless the employer’s refusal to install a reporting system is an attempt to forestall reporting, its behavior appears negligent. However, if that is so for lower-level employees, it arguably could be so for higher level employees like Weinstein. This is a conundrum.
This Jot does not suggest the authors’ solution is lacking. Rather, it notes the difficulty in distinguishing between situations where an employer should or should not be allowed to fully insure against liability – that is, where discrimination occurred on its watch, versus where it facilitated the underlying discrimination. Meyers and Hersch argue employers should be partially financially responsible for discrimination they facilitate, but readers may disagree about where to place the boundaries of employer facilitation. That makes the article such an interesting read for those steeped in employment discrimination law.
More broadly, the article encourages the reader to think more deeply about corporate responsibility. There is much more to this article that cannot be addressed in this brief Jot. Read the article and you may have even more fun than I did.
