It was recently announced that Wells Fargo prevailed in an age discrimination lawsuit. The claimant was convicted of a crime in 1963 but apparently was not found in the initial background check, but subsequently found when Wells Fargo implemented a new system at which point they fired the employee. The employee turned around and sued Wells Fargo on the basis of age discrimination. Wells Fargo won on the basis that federal law bars banks from employing people who have been convicted of crimes involving dishonesty. More on the case can be found here.
Even though Wells Fargo won the case, the case went to trial so the legal bills were most likely quite large. Because it was a discrimination claim their employment practices liability insurance policy (Wells Fargo may not have this type of policy but we will assume they did) should have responded and paid the legal fees after the deductible/retention was met.
How could this have played out differently from an insurance perspective? The most common mistake we see with claims is late reporting, particularly when an insured believes their case is rock solid. The insured will decide not to report the claim or report it after legal fees start to mount which could jeopardize coverage. Late reporting can be grounds for a claim denial in the worst case scenario. A delay in reporting a claim also means the insured incurs more legal fees that will not be reimbursed by the insurer. The insurance carrier typically does not count any past legal fees against your deductible until the claim is reported. For example, if you spent $10,000 on legal fees before reporting the claim and your deductible is $10,000 you would have to spend another $10,000 before the deductible is met and the insurance company starts footing the bill. Most insureds are worried that their “rate” will go up for reporting a claim so they caution on the side of not reporting claims, but in actuality if the claim turns out to be nothing you insurance rate should not be adversely impacted.
What most insureds also do not realize is that their policy is set up as a “duty to defend.” This means that the carrier is responsible for defense counsel and ultimately has control on how to proceed with the case. “Duty to defend” is more common for private companies and can be a very sensitive situation when an insured feels they are right and do not want to settle. The problem is that even when the insurance company agrees that an insured’s case is strong it could still determine that would be more economical to settle the case and move on. This of course does not sit always sit well with clients, but the policy terms can be amended so that the insured has more of a say in how to defend a claim. Often times there is a “hammer clause” in the policy as well, which further compels the insured to defer to the insurer. The “hammer clause” is also something that can be amended. The important thing is that you as an insured are aware of these coverage conditions so there are no surprises if you have a claim.
Wells Fargo being a large company and most likely having a large retention would not have “duty to defend” language in their policy which is part of the reason this case may have made it all the way to trial. If there had been “duty to defend” language it may have never made it as far as it did, and probably would have settled a long time ago. Just because an insured believes they are in the right and the case against them is frivolous does not mean the insurance company will defend it all the way to trial. Remember, insurers are for-profit companies and their objective is to make money so they will be looking at it from an economic standpoint and what puts them in the best position to be profitable. This is why it is so important to make sure the terms and conditions are understood and that your broker works to tilt the policy in your favor as much as possible.