Fail To Fully Follow FCRA? You’d Better Check Your EPLI (This Case Shows Why)

Key Takeaways for Employers and Insurance Professionals

The MA Appeals Court has ruled job applicants can sue for background check form violations even without harm. Employers may have uninsured risks from non-compliant disclosure forms. Insurance agents can alert commercial clients – Flawed forms may have no EPLI coverage, leading to uncovered damage and attorney fee awards.

Non-compliance with the Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) is a federal law that regulates how consumer reporting agencies collect, use, and share information about consumers. The FCRA also imposes certain obligations on employers who use consumer reports for employment purposes, such as conducting background checks on job applicants.

One of these obligations, under 15 USC 1681b(b)(2)(A), is to provide a clear and conspicuous disclosure to the applicant, in a document that consists solely of the disclosure, that the potential employer may obtain a consumer report on the applicant for employment purposes. The employer must also obtain the applicant’s written authorization to procure the report on that stand-alone document.

But what happens if an employer fails to comply with these strict requirements? Does the applicant have a right to sue the employer for violating the FCRA, even if the applicant does not suffer any concrete harm due to the violation?

The Massachusetts Appeals Court recently addressed this question in the Kenn v. Eascare, LLC case. In that case, the court held that Nicole Kenn had standing to sue her former employer, Eascare, under FCRA for using a noncompliant disclosure form to obtain her consumer report despite her alleging no concrete harm.

The Kenn decision carries implications for employers and insurance professionals. It recognizes that persons in Massachusetts have a right to sue for technical violations of the FCRA’s stringent disclosure and authorization requirements, opening businesses up to substantial litigation risks and potentially uninsured losses.

FCRA remedies open the door for uninsured losses

The FCRA allows plaintiffs to recover actual or statutory minimum damages between $100-$1000 for willful violations of the act. In almost all cases, a defendant using a non-compliant disclosure form will result in a ruling the statutory violation was “willful.” If a plaintiff recovers even minimum damages, they can recover costs and attorney’s fees. The attorney fees awarded to a successful plaintiff, even for nominal damage claims, can be substantial and uncovered by insurance.

The threat of FCRA lawsuits presents a possible uninsured risk for employers. Most Employment Practices Liability Insurance (EPLI) policies contain exclusions for penalties and liquidated damages and do not include an award of attorney fees against an insured as a covered loss. Ultimately, paying a plaintiff’s legal fees after paying one’s legal defense costs could quickly become a very expensive proposition, even for seemingly trivial violations.

Overview of the Kenn Case

Eascare provided Kenn with a combined disclosure and liability waiver form when she applied for a job. After Kenn left Eascare because of alleged unredressed sexual harassment, she sued. Among other claims, she claimed that Eascare’s FCRA form contained extraneous information beyond the allowed statutory disclosure, and, thereby, Eascare willfully violated 15 USC 1681b(b)(2)(A) by procuring her consumer report without proper authorization.

A federal court initially dismissed Kenn’s claims by importing Article III’s “concrete harm” standing requirements. However, on reconsideration, the federal court remanded Kenn’s suit back to Massachusetts state court, since federal justiciability limitations did not apply to state courts. Nonetheless, a Superior Court judge again dismissed Kenn’s case for lack of standing.

The Appeals Court reversed this decision. It held that based on the plain language of the FCRA, which creates liability for willful procedural violations regardless of harm, Kenn had sufficiently alleged injury under the statute and could proceed with her claims.

Based on the Appeals Court finding Eascare’s form noncompliant, Kenn would have the right to recover statutory damages and her attorney fees. Although the statutory damages are limited, the potential attorney fees awarded as a matter of public policy are not limited. In a given case, they could be exponentially higher than the mandatory minimum damages required under FCRA.

Suggestions for insurance professionals

In light of this decision, insurance agents may wish to advise their commercial clients who routinely conduct FCRA background checks on new hires about reviewing their disclosure and authorization forms with their attorneys. Forms must consist of “solely” the FCRA disclosure and authorization without any other content.

In the Kenn case, the front of Ms. Kenn’s signed form seems to have been compliant. The form, however, had a second side that made it non-compliant. The back of the form had additional exculpatory language and provisions for the company that would do the background check for Eascare.

Clients should understand that using noncompliant forms could result in burdensome litigation and potentially uncovered losses. An FCRA noncompliant form is a no-brainer for an aggressive plaintiff employment lawyer to use in funding a lawsuit. After the Kenn case, every employment lawyer representing employees will add a checkbox to their case intake form to look for non-compliant FCRA documents in an employer’s files.

To put this advice another way, a word-to-the-wise from a trusted insurance advisor could go a long way in alerting commercial clients about avoiding this potential uncovered risk by having any FCRA disclosure form they use checked and corrected if needed.

Owen Gallagher

Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists

Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.

Connect with me directly, by calling me at 617-598-3801.