Is A Company Liable If an Employee Harasses a Customer?

Employers are generally aware of the risks associated with harassment and discrimination claims. If one of your employees believes he or she has been treated unacceptably on the basis of race, sex, or another protected class, expensive litigation can follow. It’s why many employers invest in employment practices liability insurance. But what if a lawsuit accuses an employee of harassing a customer?

Claims involving harassment or discrimination against customers, clients, vendors, and other nonemployees are called third-party liability claims. Increased societal awareness of harassment and discrimination issues has meant these lawsuits are a growing concern. It’s important to review your third-party liability insurance coverage to ensure you’re protected.

Key Takeaways

• Claims that a company’s employee harassed or discriminated against a customer, client, vendor, or other non-employee are called third-party liability claims.
• These claims can affect businesses in any industry, including ones whose employees only occasionally interact with outsiders.
• Commercial general liability policies generally do not cover harassment or discrimination claims, even when the claimant is a customer.
• Employment practices liability insurance (EPLI) may cover third-party claims, but the coverage is often a separate insuring agreement and may carry its own limit.
• A policy with a $1 million EPLI limit does not necessarily provide $1 million for third-party claims, because sublimits are common.
• Reviewing your policy language now, before a claim, is the most reliable way to find out whether you have a gap.

Third-Party Liability Claim Scenarios

Third-party liability claims can impact employers in any industry. Consider the following scenarios:

• A woman delivers raw ingredients to a food manufacturing company every Tuesday. The man who signs for the delivery frequently comments on her appearance. These comments become ever more inappropriate, even though she makes it clear she does not appreciate the remarks and would like to keep things professional. She complains to the receptionist, but the receptionist doesn’t pass on the message. When the inappropriate behavior does not stop, she files a lawsuit against the company.
• A Black man goes to a jewelry store to buy an anniversary present for his wife. The store is not understaffed, but no one offers to help him. Then, a white man enters the store and receives help immediately. When the Black man complains, the store employees accuse him of causing trouble on purpose and ask him to leave. He files a lawsuit alleging racial discrimination.
• A woman goes to the grocery store. Since she can’t find her membership card, she uses her phone number. The next day, the clerk texts her to ask her out on a date. As the woman did not give the clerk permission to contact her, she sues the company for misuse of his personal information and harassment.

How Can a Customer Sue a Company Over an Employee’s Behavior?

In general, businesses can be held responsible for what their employees do on the job, and customers can bring claims under federal and state anti-discrimination laws that apply to businesses open to the public, along with other legal theories such as negligence or invasion of privacy. The exact claims available vary by state and by the facts, so this is a question for legal counsel. The practical point for business owners is the same everywhere: a claim can be filed whether or not the allegation turns out to be true, and defending it costs money either way.

Insurance Coverage for Third-Party Liability Claims

According to IRMI, commercial general liability insurance policies generally do not provide coverage for harassment and discrimination claims filed by third parties (such as customers, clients, and vendors) because those policies do not cover harassment or discrimination losses. However, employment practices liability insurance may provide this coverage. When included, it is often found under Insuring Agreement B. As it is a separate coverage, it may be subject to a separate limit.

Customer Lawsuits Alleging Harassment and Discrimination

Real-life examples of third-party liability claims show that these lawsuits are a real threat.

According to Chron, a customer filed a lawsuit against Target seeking $100,000 in actual damages and $500,000 in punitive damages. The lawsuit claimed the store workers racially discriminated against him and falsely accused him of theft.

Third-party liability lawsuits can be even more expensive. According to NPR, a man was awarded $4.4 million in a lawsuit alleging racial discrimination. The lawsuit, which occurred in Oregon, alleged that the customer was racially profiled and harassed while shopping.

Check Your Third-Party Liability Coverage

Don’t wait until you’re hit with a lawsuit. Check your employment practices liability insurance policy to verify you have sufficient coverage in place. For more on how EPLI exposures are changing, see our post on employment practices liability trends affecting small businesses. In our experience, most business owners are surprised to learn that their EPLI policy protects them against claims by employees but says little, or nothing, about claims by customers. The third-party language is often the first thing we check in a policy review.

• Does your employment practices liability insurance policy provide coverage for third-party liability claims filed by customers, clients, or vendors? Not all policies contain this provision, although many do. Check under Insuring Agreement B. If you don’t see anything there, it may be in another part of the policy terms or you may not have coverage.
• What are your limits for third-party liability claims? If you have a $1 million limit for employment practices liability claims, you do not necessarily have this limit for third-party liability claims. Separate sublimits are common, so find out what yours are.
• What exactly does your policy cover? Your policy may exclude certain types of losses. Identify the types of claims it covers as well as any exclusions.
• Do you need more coverage? Any company can face a third-party liability claim. Even if your workers do not interact directly with customers on a regular basis, they probably work with vendors, janitorial staff, and other individuals who are not employees of your company. You may trust your workers to avoid discrimination and harassment, but it’s always possible that a third party could misinterpret a situation or bring an unfounded claim against your company. Whether you win or lose, litigation can be expensive.

Is Your EPLI Policy Ready for a Customer Claim?

Will you have the coverage you need if an employee is accused of harassing or discriminating against a customer? The answer is in your policy language, and it’s easier to check now than after a lawsuit. Heffernan can help you review your coverage, including whether your EPLI policy includes third-party liability and what limit applies.