Now more than ever, employers are facing an onslaught of employment litigation. The statistics are staggering: More than one fourth of the civil cases clogging our courts are employment related; the number of discrimination and harassment claims filed with the EEOC have more than doubled in the last five years; the average jury award for employment claims is approaching a half million dollars.
In this litigious environment, employers have become increasingly fearful of taking even the most rudimentary personnel action. To make matter worse, employers find it more and more difficult to keep up with the ever changing employment laws. In the last few years alone, employers have been faced with new laws like the Family and Medical Leave Act, Age Discrimination and Employment Act, the Americans with Disabilities Act, and the Civil Rights Restoration Act. And there is no end in sight. Even the most sophisticated and well-intentioned employers find it a daunting task to comply with the law and avoid lawsuits when the rules are always changing.
When the inevitable occurs and employers receive that dreaded Notice of Complaint from the EEOC or DFEH or perhaps worse, get served with a Summons and Civil Complaint, employers predictably turn in desperation to their general liability or directors and officers insurance policies to determine whether the claims are "covered." Unfortunately, in too many instances, no relief is available. Many commercial general liability policies contain specific exclusions which eliminate coverage for employment-related litigation. For example, these policies will typically exclude coverage for "intentional acts" which, in the employment setting, can eliminate the majority and most significant claims. The policy may also contain an "employment practice" exclusion. Essentially, this exclusion provides that coverage does not apply to employment-related claims or any claims by an employee "arising out of and in the course of employment by the insured." A company's directors and offices insurance policy may also be unavailing. In addition to similar exclusions, a D&O policy will typically provide coverage only for the named individuals and exclude coverage for the entity itself. The net result, of course, is that employers are often left unprotected.
In response to the increase in employment litigation and the business community's demand for better coverage, many insurance underwriters have recently begun offering employers protection through a relatively new form of coverage called employment practices liability insurance ("EPLI"). EPLI was first introduced as a stand alone policy in approximately 1990. Since then, different underwriters have offered a variety of coverage options which now typically include a whole host of employment claims such as wrongful termination, breach of contract, discrimination, and harassment. Since the EPLI market is still relatively new, there is a tremendous disparity among policies. Accordingly, employers considering such coverage would be best served to ask some key questions.
What is Covered?
Some policies on the market contain significant and dangerous gaps in coverage by their definition of "insured event." The definition may be limited to violations of certain listed federal or state employment laws. This type of provision would exclude any law not specifically listed as well as any local ordinance which may provide employees with broader protections. In addition, some EPLI policies contain an "intentional acts" exclusion. In addition to the most common employment claims such as wrongful termination, discrimination, breach of contract, and harassment, it is important to know whether additional claims are covered such as failure to promote, retaliation, defamation, invasion of privacy, etc. Employers should also ask whether the policy will cover not only defense costs and judgments, but prejudgment interest, non-monetary relief, bonds, appeals, and in some states, even punitive damages.
Who is Covered?
In searching for the broadest form of coverage, pay particular attention to who is covered by the policy. Is coverage provided only to the company and certain named individuals, or does it cover all managers, supervisors and employees? Some policies are now available which extend coverage beyond the typical boundaries and include former employees, temporary employees, partners, applicants, volunteers and even independent contractors.
What is the Deductible?
In the last couple of years there has been a significant drop in the amount of deductible required by the underwriters. Some of the larger carriers now offer EPLI coverage with deductibles as low as $25,000. Since the amount of the deductible can have a large impact on the premium, employers should carefully review their claims history to determine the most prudent deductible amount. In addition, ask whether the deductible must be paid for each separate claim.
How Much Coverage Does The Company Need?
The amount of coverage a company needs depends a lot on the number of facilities, the number of employees, the type of business and the states in which it operates. Keep in mind that the policy limit typically represents the maximum amount an underwriter will pay out during the policy period and therefore will including all defense costs, fees, settlements and judgments. It is not uncommon for underwriters to offer limits up to $25 million, with higher limits available if needed. However, companies should carefully review their particular needs to determine the appropriate level of coverage for their business.
Can The Policy Be Canceled?
Some EPLI underwriters carefully and obscurely reserve the right to cancel the policy in certain circumstances such as when a certain number of claims are made or a certain amount of payments are made. Obviously, this can be a shocking development and leave your company without protection when it needs it most. Other policies provide that it is cancelable during the policy period only if the company fails to pay the premiums. In addition, some underwriters are now offering multi-year policies which can be a significant advantage and also result in discounted premiums.
Who Selects Defense Counsel?
When you consider that most employment-related claims seek past and future wage loss, benefits, emotional distress, punitive damages, attorneys fees and the like, the potential exposure can be enormous. Retaining competent and experience employment counsel can make the difference between a successful and disastrous outcome. Accordingly, maintaining control over the selection of defense counsel can be critical. Some EPLI policies provide that the insurance company retains the sole right to appoint counsel. Unfortunately, some carriers are more concerned with a firm's fees than their experience and expertise in handling employment litigation. Other policies allow for the selection of counsel upon mutual consent. Regardless of the type of policy, make sure that your employment counsel, or other highly qualified and experienced employment counsel will be approved.
Is A Risk Management Program Included?
Along with employers, underwriters are now learning that many employment claims can be avoided by implementing risk management programs. Carefully drafted employment policies, procedures, applications, handbooks and other documentation can provide employers with protection to avoid or successfully defend against the most common types of employment claims. In response, a few underwriters and even the nation's largest risk and insurance services firm, J&H Marsh & McLennan, now offer a risk management program as part of their EPLI programs. "The concept is simple," says William Pratt, Senior Vice President for J&H Marsh & McLennan "through a risk management program we are bringing the underwriters a better risk and in return they are offering a broader form of coverage at a lower premium."
An EPLI policy can provide a company with protection against the ever-increasing threat of employment litigation. However, employers should be aware that the policies available on the market today vary greatly. Careful consideration should therefore be made in selecting the type of policy which best fits the needs of the company.