It all started innocently enough. J.Q. Employee was having problems on the job (tardiness, excessive absences, performance, personality issues, etc.). You, the conscientious corporate executive and fair-minded person, gave the employee a warning. Things did not improve. J.Q. actually developed an "attitude," and the conduct continued. Another warning. Nothing. Tired of the problems, you terminated J.Q. You conducted the termination exactly as counsel advised and diligently documented everything.
Then things got ugly. You received a letter from Rippem, Gippem and Bleedem, attorneys at law. The lawyer claims: You discriminated against J.Q.; you breached some sort of covenant (whatever covenants are--well, you breached 'em!); you breached the employee's contract (you guaranteed J.Q. a job for life, with annual increases, bonuses, and a piece of the company--don't remember? Well, J.Q. does and swears to it!); you defamed J.Q. (and his family, his unborn children, and his dog (that cat joke will cost you)); you caused J.Q. to suffer a loss of consortium
---although J.Q is not specific who he consorts with (spouse, significant other, insignificant other, etc.--and, since we don't want to get sued for sexual orientation discrimination, we won't ask). The letter ends by telling you that it is now time to pay for your outrageous conduct.
According to Bleedem, $xxxxxxxxxxx is the precise amount calculated to set things right (an amount determined by multiplying Warren Buffet's average annual income by the number of years left in J.Q.'s life (approximately 100) and then adding the mandatory punitive damages (after all--not only did you discriminate, you did it with nefarious intent!), interest, medical expenses, costs, and, last but certainly not least, legal fees (calculated to allow Bleedem's grandchildren to retire comfortably--Rippem's and Gippem's grandchildren having been provided for by the last employment case).
Increase in Employment-Related Lawsuits
Sound farfetched? As some of you know, the number of employment-related lawsuits has dramatically increased in the last few years. So have the settlement and judgment amounts. The number of sexual harassment complaints lodged with the Equal Employment Opportunity Commission jumped from 6,883 in 1991 to 15,889 in 1997 (remember, the EEOC also receives, investigates, prosecutes, and adjudicates many different types of discrimination complaints in addition to sexual harassment complaints). On February 12, 1998, a jury awarded $80.7 million to a former UPS employee who said she was punished for accusing a co-worker of poking her in the breast. In another recent case, Astra U.S.A. recently settled a sexual harassment lawsuit for $9.85 million.
Although discrimination and unjust terminations do occur, more often than not discharges, demotions, and other personnel actions are the result of legitimate business decisions. Many of the claims and lawsuits are frivolous and, although employers often win their cases, such suits are costly to defend. Costs include officer and employee time, energy and distraction, lost production, business disruption, and legal fees.
You may think you have coverage for such claims; however, you probably do not. Generally, commercial general liability (including umbrella policies), workers' compensation, employers' liability, and directors' and officers' liability do not provide such coverage. However, employment practices liability policies do provide such coverage.
General Policies
Insurance companies often deny coverage under general policies. They generally rely upon three types of exclusions when trying to deny coverage.
- First, they argue that the employment claim does not constitute a covered "occurrence" or "accident."
- Second, they argue that coverage for employment claims is barred by the "employment" exclusion.
- Third, an insurer may argue that the typical policy's "employment practice" exclusion bars coverage for such claims.
Workers' Compensation and Employers' Liability Policies
Workers' compensation and employers' liability policies serve related needs. Standard workers' compensation indemnifies a company for payouts under the applicable statute for work-related injuries. Employers' liability coverage is designed to fill coverage gaps that may arise from an employee's injury claim to the extent that employee's immediate family makes a claim for loss of consortium or related claims.
Directors' and Officers' and Employment Practices Policies
Directors' and officers' errors and omissions insurance policies are designed to protect officers and directors sued personally and to provide a mechanism to pay the legal fees for their defense (in case of a potential conflict). An employment practices liability insurance (EPL) policy specifically provides coverage for employment claims (including gender, age, race, religious, or national origin claims, as well as sexual harassment and violations of the Americans with Disabilities Act claims). EPL policies are rapidly gaining popularity with business owners.
What to Look for in an EPL Policy
An employer must look at a variety of issues when selecting an EPL policy, including:
- who is insured
- limits of liability
- deductibles
- defense provisions
- definition of a claim
- reporting provisions
- covered acts
- settlement provisions
- exclusions
Cost
EPL coverage is available from a number of well-established underwriters and, depending upon the coverage you select, the apparent annual cost of this coverage is a tenth of what it was five years ago and is currently in the $50 to $100 per employee range.
Although insurance is not a substitute for a well-trained staff and a workplace free from discrimination and harassment, we view EPL coverage as very important in today's business environment.