Tag Archives: fcra

When Are Background Checks Not Allowed?

The Equal Employment Opportunity Commission (EEOC) has been quite active in challenging employers’ use of criminal background and credit history checks during hiring. There is still significant uncertainty as to the current standards and law about the checks of criminal and credit history. The lack solid guidance makes it difficult for employers to determine how to evaluate their current use of this information, as well as to understand the legal pitfalls and hurdles that the EEOC has placed in front of them.

EEOC Directives

The recent activity emanates from the EEOC’s recent directive and key priority (as per its December 2012 Strategic Enforcement Plan (SEP)) to eliminate hiring barriers. This priority includes challenges to policies and practices that exclude applicants based on criminal history or credit check. The EEOC has a keen interest in this area, as it believes that criminal/credit checks have a disparate impact on African American and Hispanic applicants. As the EEOC pursues the directive, expect the EEOC to scrutinize failure-to-hire claims where a criminal history or background check was conducted. Even if the background check was “facially neutral” and was uniformly given to all applicants, the EEOC may investigate to determine if the check had a “discriminatory effect” on certain applicant(s).

The EEOC asserts that criminal background checks must be “job-related” and “consistent with business necessity.” Employers are advised to consider: (1) the nature and gravity of the offense or conduct; (2) the time that has passed since the offense, conduct or completion of the sentence; and (3) the nature of the job held or sought. The EEOC stresses the need for an “individualized assessment” before excluding an applicant based on a criminal or credit record.

Local/State/Federal Laws

Employers face additional legal hurdles regarding hiring practices because of recent local and state legislative developments. These laws are commonly referred to as “ban the box” (i.e., restrictions on the use of criminal history in hiring and employment decisions). Making matters even more difficult, employers have also been subject to a surge in class action litigation under the Fair Credit Reporting Act (FCRA). The FCRA regulates the use of and gathering of criminal histories through third-party consumer reporting agencies with respect to conducting background checks on applicants or employees.

Legal Actions

In pursuit of its directive, the EEOC has filed several large-scale lawsuits against employers. We expect that the EEOC will continue to file similar lawsuits throughout 2015 and beyond. Most have been brought as failure-to-hire claims. For example, an African-American woman brought a claim alleging that she was discriminated against based on her credit history. This claim started out as a single plaintiff action, but, after the EEOC conducted its initial investigation, the EEOC dramatically expanded the scope of the initial charge, alleging that the employer was engaging in a “pattern and practice of unlawful discrimination” against: (1) African-American applicants by using poor credit history as a hiring criterion and (2) African-American, Hispanic and white male applicants by using criminal history as a hiring criterion.

Reasonable employers complain that the EEOC has placed employers in a Catch 22. Employers have to choose between ignoring criminal history and credit background, exposing themselves to potential liability for criminal and fraudulent acts committed by employees or to an EEOC lawsuit for having used this information in a discriminatory way.

Takeaway for Employers

Claims involving criminal background checks and credit checks are an EEOC priority. At this time, employers have little guidance from the courts or the EEOC as to exactly what “job-related” and “consistent with business necessity” mean and just how closely a past criminal conviction has to correspond with the duties of a particular job for an employer to legally deny employment to an applicant. Moreover, employers continue to witness expanding restrictions dealing with criminal history at the state and local level based on ban-the-box legislation, as well as with an increasing number of class action lawsuits involving background checks as required under the Fair Credit Reporting Act.

Employers are encouraged to work closely with legal counsel as to what they should and should not ask on applicants as well as how and when they can use background information they obtain. Based on this evolving area of the law, we additionally recommend that employers purchase a robust EPL policy that will defend them in the event that the EEOC or a well-skilled plaintiff’s counsel pursues a claim against them for discrimination, or for failure to hire based on criminal or credit background checks.

A Catch-22 on Hiring the Disabled

In the Missouri Court of Appeals' recent decision in Stewart v. Second Injury Fund, the facts were not in dispute: Ms. Stewart worked at Subway for a few months, suffered a moderately severe injury at work and could not return to any type of employment.

Here’s where the story becomes interesting: The claimant qualified for Social Security disability in 1997 — more than 10 years before she started working at Subway. 

Her Social Security disability was awarded based on confirmed medical conditions including arthritis, reflex sympathetic dystrophy, degenerative joint and bone disease and carpal tunnel syndrome. She continued to receive Social Security disability benefits even while she was working at Subway.

After her work injury in 2009, she filed for workers' compensation benefits, claiming that she was permanently and totally disabled.

Was the claimant permanently and totally disabled before her injury at Subway? Apparently not, because she was able to obtain that job and perform the duties associated with that job. In the absence of her injury, she would have presumably been able to continue working. 

Why would she be entitled to Social Security disability benefits if she was able to compete in the open labor market? If she was disabled in 1997, should she be entitled to more benefits when she was injured at a job that she should not have been able to obtain?

What if Subway had told the claimant during her initial job interview that she could not be hired because of her multiple disabilities? She could have sued Subway under the Americans with Disabilities Act, arguing that Subway was discriminating against her. Subway, not wanting to be sued, could have been forced to hire the claimant only to face the prospect of being liable for permanent total disability after only a few months of work.

I’m not attempting to disparage the claimant. She obtained benefits that are legally provided. My question is this: Is it fair to place employers in no-win situations where they face litigation if the employee is not hired, yet still face litigation if the employee IS hired?

This situation arises because of the myriad of state and federal laws that regulate every facet of the workplace. Every employer must wade through an alphabet soup of overlapping laws every single day (ADA, FMLA, COBRA, EFCA, EAD, ERISA, FLSA, FCRA, INA and a host of others). 

One cannot swing the proverbial dead cat without hitting five politicians giving a speech focused on creating jobs. Yet, can jobs be created by strangling the very companies that create these jobs?

Another Reason to Consider Cyber Insurance

Here a breach, there a breach, everywhere a data breach.

Verizon’s most recent 2013 Data Breach Investigations Report remarks that “[p]erhaps more so than any other year, the large scale and diverse nature of data breaches and other network attacks took center stage” this year.1 And no organization is immune from a breach. The last two years have seen some of the world’s most sophisticated corporate giants fall victim to some of the largest data breaches in history. It is clear that cyber attacks — including data breaches — are on the rise with unprecedented frequency, sophistication and scale. They are pervasive across industries and geographical boundaries. And they represent “an ever-increasing threat.”2 The problem of cyber risks is exacerbated, not only by increasingly sophisticated cyber criminals and evolving malware, but also by the trend in outsourcing of data handling, processing and storage to third-party vendors, including “cloud” providers, and by the simple reality of the modern business world, which is full of portable devices such as cellphones, laptops, iPads, USB drives, jump drives, media cards, tablets and other devices that may facilitate the loss of sensitive information.

While data breaches and other types of cyber risks are increasing, laws and regulations governing data security and privacy are proliferating. In its most recent 2013 Cost of Data Breach Study, the Ponemon Institute reports that U.S. organizations spend on average $565,020 on post-breach notification alone.3 Companies may also face lawsuits seeking damages for invasion of privacy, as well as governmental and regulatory investigations, fines and penalties, damage to brand and reputation and other negative repercussions from a data breach, including those resulting from breaches of Payment Card Industry Data Security Standards. The Ponemon Institute’s recent study reports that the average organizational cost of a data breach in 2012 was $188 per record for U.S. organizations ($277 in the case of malicious attacks) and that the average number of breached records was 28,765, for a total of $5.4 milion.4 The study does not “include organizations that had data breaches in excess of 100,000” records,5 although large-scale breaches clearly are on the rise. In the face of these daunting facts and figures, it is abundantly clear that network security alone cannot entirely address the issue; no firewall is unbreachable, no security system impenetrable.

Insurance can play a vital role in a company’s efforts to mitigate cyber risk. This fact has the attention of the Securities and Exchange Commission. In the wake of “more frequent and severe cyber incidents,” the SEC’s Division of Corporation Finance has issued guidance on cybersecurity disclosures under the federal securities laws. The guidance advises that companies “should review, on an ongoing basis, the adequacy of their disclosure relating to cybersecurity risks and cyber incidents” and that “appropriate disclosures may include” a “[d]escription of relevant insurance coverage.”6

While some companies carry policies that are specifically designed to afford coverage for cyber risk, most companies have various forms of traditional insurance that may cover cyber risks, including Insurance Services Office (ISO)7 standard-form commercial general liability (CGL) policies. There may be significant coverage under CGL policies, including for data breaches that result in disclosure of personally identifiable information (commonly termed “PII”) and other claims alleging violation of a right to privacy. For example, there is significant potential coverage under the “Personal and Advertising Injury Liability” coverage section (Coverage B) of the standard-form ISO CGL policy, which currently states that the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury.’”8 “Personal and advertising injury” is defined to include a list of specifically enumerated offenses, which include “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy.”9 Coverage disputes generally focus on whether there has been a “publication” that violates the claimant’s “right of privacy”—both terms are left undefined in standard-form ISO policies, and courts generally have construed the language favorably to insureds and have found coverage for a wide variety of claims alleging misuse of customer information and breach of privacy laws and regulations.10 There may also be coverage under the “Bodily Injury and Property Damage” section of the standard CGL form (Coverage A), which states that the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’” that “occurs during the policy period.”11

As courts have found coverage for various types of cyber risks, however, ISO has added limitations and exclusions purporting to cut off CGL lines of coverage. For example, in response to a number of cases upholding coverage for breach of the Telephone Consumer Protection Act, the Fair Credit Reporting Act and other privacy laws, the current ISO standard form contains the following exclusion, which is applicable to both Coverage A and Coverage B:

This insurance does not apply to:

Recording And Distribution Of Material Or Information In Violation Of Law

“Personal and advertising injury” arising directly or indirectly out of any action or omission that violates or is alleged to violate:

  1. The Telephone Consumer Protection Act (TCPA), including any amendment of or addition to such law;
  2. The CAN-SPAM Act of 2003, including any amendment of or addition to such law;
  3. The Fair Credit Reporting Act (FCRA), and any amendment of or addition to such law, including the Fair and Accurate Credit Transactions Act (FACTA); or
  4. Any federal, state or local statute, ordinance or regulation, other than the TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments and additions, that addresses, prohibits or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information.12

Insurers have raised this exclusion, among others, in recent privacy-breach cases.13

More sweepingly, as part of its April 2013 revisions to the CGL policy forms, ISO introduced an endorsement, titled “Amendment Of Personal And Advertising Injury Definition,” which entirely eliminates the key “offense” of “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy” (found at Paragraph 14.e of the Definitions section of Coverage B):

With respect to Coverage B Personal And Advertising Injury Liability, Paragraph 14.e. of the Definitions section does not apply.14

And the latest: ISO has just filed a number of data-breach exclusionary endorsements for use with its standard-form primary, excess and umbrella CGL policies. These are to become effective in May 2014. By way of example, one of the endorsements, titled “Exclusion – Access Or Disclosure Of Confidential Or Personal Information And Data-Related Liability – Limited Bodily Injury Exception Not Included,” adds the following exclusion to Coverage A:

This insurance does not apply to:

Access Or Disclosure Of Confidential Or Personal Information And Data-related Liability

Damages arising out of:

(1) Any access to or disclosure of any person's or organization's confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information; or

(2) The loss of, loss of use of, damage to, corruption of, inability to access or inability to manipulate electronic data.

This exclusion applies even if damages are claimed for notification costs, credit-monitoring expenses, forensic expenses, public relations expenses or any other loss, cost or expense incurred by you or others arising out of that which is described in Paragraph (1) or (2) above.15

The endorsement also adds the following exclusion to Coverage B: This insurance does not apply to:

Access Or Disclosure Of Confidential Or Personal Information

“Personal and advertising injury” arising out of any access to or disclosure of any person’s or organization's confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit-card information, health information or any other type of nonpublic information.

This exclusion applies even if damages are claimed for notification costs, credit-monitoring expenses, forensic expenses, public relations expenses or any other loss, cost or expense incurred by you or others arising out of any access to or disclosure of any person's or organization's confidential or personal information.16

ISO states that “when this endorsement is attached, it will result in a reduction of coverage due to the deletion of an exception with respect to damages because of bodily injury arising out of loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data” and that “[t]o the extent that any access or disclosure of confidential or personal information results in an oral or written publication that violates a person's right of privacy, this revision may be considered a reduction in personal and advertising injury coverage.”17 While acknowledging that coverage for data breaches is currently available under its standard forms, ISO explains that “[a]t the time the ISO CGL and [umbrella] policies were developed, certain hacking activities or data breaches were not prevalent and, therefore, coverages related to the access to or disclosure of personal or confidential information and associated with such events were not necessarily contemplated under the policy.”18 The scope of this exclusion ultimately will be determined by judicial review.

Although it may take some time for the new (or similar) exclusions to make their way into general liability policies, and the full reach of the exclusions remains unclear, they provide another reason for companies to carefully consider specialty cyber insurance products. Even where insurance policies do not contain the newer limitations or exclusions, insurers may argue that cyber risks are not covered under traditional policies. The legal dispute between Sony and its insurers concerning the PlayStation Network data breach highlights the challenges that companies can face in getting insurance companies to cover losses arising from cyber risks under CGL policies. Sony argues that there is data breach coverage because “[t]he MDL Amended Complaint… alleges that plaintiffs suffered the ‘loss of privacy’ as the result of the improper disclosure of their ‘Personal Information’ [which] has been held to constitute ‘material that violates a person’s right of privacy’.”19 However, the insurers seek a declaration that there is no coverage under the CGL policies at issue, among other reasons, on the basis that the underlying lawsuits “do not assert claims for … ‘personal and advertising injury’.”20 The Sony coverage suit does not represent the first time that insurers have refused to voluntarily pay claims resulting from a network security breach or other cyber-related liability under CGL policies. Nor will it be the last. Even where there is a good claim for coverage, insurers can be expected to continue to argue that cyber risks are not covered under CGL or other traditional policies.

As far as data breaches are concerned, cyber policies usually provide some form of “privacy” coverage. This coverage would typically provide defense and indemnity coverage for claims arising out of a data breach that actually or potentially compromises PII. By way of example, the AIG Specialty Risk Protector specimen policy21 states that the insurer will “pay … all Loss” that the “Insured is legally obligated to pay resulting from a Claim alleging … a Privacy Event.” “Privacy Event”22 includes:

  1. any failure to protect Confidential Information (whether by “phishing,” other social engineering technique or otherwise) including, without limitation, that which results in an identity theft or other wrongful emulation of the identity of an individual or corporation;
  2. failure to disclose an event referenced in Sub-paragraph (1) above in violation of any Security Breach Notice Law; or
  3. violation of any federal, state, foreign or local privacy statute alleged in connection with a Claim for compensatory damages, judgments, settlements, pre-judgment and post-judgment interest from Sub-paragraphs (1) or (2) above.23

“Confidential Information” is defined as follows:

“Confidential Information” means any of the following in a Company’s or Information Holder’s care, custody and control or for which a Company or Information Holder is legally responsible:

  1. information from which an individual may be uniquely and reliably identified or contacted, including, without limitation, an individual’s name, address, telephone number, Social Security number, account relationships, account numbers, account balances, account histories and passwords;
  2. information concerning an individual that would be considered “nonpublic personal information” within the meaning of Title V of the Gramm-Leach Bliley Act of 1999 (Public Law 106-102, 113 Stat. 1338) (as amended) and its implementing regulations;
  3. information concerning an individual that would be considered “protected health information” within Health Insurance Portability and Accountability Act of 1996 (as amended) and its implementing regulations;
  4. information used for authenticating customers for normal business transactions;
  5. any third party’s trade secrets, data, designs, interpretations, forecasts, formulas, methods, practices, processes, records, reports or other item of information that is not available to the general public[.] 

There are numerous specialty cyber products on the market that generally respond to data breaches. A policy offering the privacy coverage will often offer coverage for civil, administrative and regulatory investigations, fines and penalties and, importantly, will commonly offer “remediation coverage” (sometimes termed “crisis management” or “notification” coverage) to address costs associated with a security breach, including:

•     costs associated with post-data breach notification

•     credit-monitoring services

•     forensic investigation to determine cause and scope of a breach

•     public relations efforts and other “crisis management” expenses

  • legal services to determine an insured’s indemnification rights where a third party’s error or omission has caused the problem.

Cyber insurance policies offer other types coverages, as well, including media liability coverage (for claims for alleging, for example, infringement of copyright and other intellectual property rights and misappropriation of ideas or media content), first party property and network interruption coverage, and cyber extortion coverage. The cyber policies can be extremely valuable. But selecting and negotiating the right cyber insurance product presents a real and significant challenge. There is a dizzying array of cyber products on the marketplace, each with their own insurer-drafted terms and conditions, which vary dramatically from insurer to insurer—even from policy to policy underwritten by the same insurer. Because of the nature of the product and the risks that it is intended to cover, successful placement requires the involvement and input, not only of a capable risk management department and a knowledgeable insurance broker, but also of in-house legal counsel and IT professionals, resources and compliance personnel—and experienced insurance coverage counsel.