RISKVUE ARCHIVE | INDUSTRY WATCH > EMPLOYMENT PRACTICES LIABILITY (EPL)

EPLI: Worth Another Look

By Daniel J. Sheran, Lindquist & Vennum PLLP

Employment practices liability insurance (EPLI) draws more attention as the volume of employment litigation increases. EPLI was relatively obscure until a decade ago when more businesses learned their general liability insurance and directors and officers insurance did not provide coverage or defense for employment-­related claims. Even though in recent years deductible and premium amounts have increased, EPLI is viewed as a necessary cost of doing business to avoid the decimating impact of litigation against small companies and the impact of class action suits against large employers.

Match Policy Terms To Business Concerns

Your EPLI policy should meet the special needs and employment history of your business. EPLI providers will seek information before providing a policy quote. Be prepared to answer detailed questions regarding your prior claims history, your HR claim forms, claims procedures, claims handling and investigation; your EEO policy; your sexual harassment policy; personnel training and procedures; your company handbook or manual; the number of employees and turnover rate; and, your employment review and appraisal processes.

The nature and scope of coverage and defense can vary from policy to policy. Consequently, the human resources department, your risk manager and insurance coverage counsel should review policies under consideration. The individual signing the application should do so only after a careful review of the data to ensure its accuracy. Misrepresentations of material facts on the application may result in claim denial.

Timely Claims Notices Are Critical

Though the terms of the EPLI policy may vary, some general observations can be made about most policies. EPLI policies tend to be claims made policies. Consequently, your notice of the claim to the insurer should be completed before the policy term expires. HR must be knowledgeable with respect to events leading up to both a potential claim and the actual claim. Sometimes notice is required when you know of a claim or should have known of a potential claim. To avoid denial of a claim due to untimely notice, inquire of your insurer what options are available to increase the claims reporting period, and what your rights are to repurchase the policy. Some insureds provide the insurer with an expansive laundry list of potential claims shortly before the known term expires.

Basic And Negotiated Coverages

The basic covered perils in most EPLI policies are employment discrimination, wrongful termination and sexual harassment. Additional coverages are available and should be discussed with your insurance broker. For instance, sexual harassment coverage may not necessarily include coverage for “work place harassment” — creation of an intimidating, hostile or offensive work environment. The definition for wrongful termination may or may not include constructive discharge, wrongful discipline, negligent evaluation or wrongful demotion. Several policies exclude breach of employment contract coverage; however, some businesses have successfully negotiated coverage for contracts of a specific duration or “implied” contracts. Many policies specifically exclude coverage for wage and hour claims, but coverage may be negotiated to include claims involving the Equal Pay Act - equal pay for equal work. Because coverage is generally confined to claims asserted by the work force, openly discuss extension of coverage for third party claims, especially where claims by customers are a distinct possibility.

Common Exclusions

Common exclusions include workers’ compensation, personal injury, property damage, battery, downsizing, closings, strikes, lock­outs, COBRA, WARN, NLRA, OSHA, RICO, pollution claims and prior or pending claims, and claims previously known by the insured. If, however, a policy excludes willful violations, obtain assurances that the insurer will provide a defense until such time as a judge or jury determines as a matter of law that a willful violation has occurred.

Punitive damages may be excluded. Nevertheless, consult your insurance counsel and determine whether you can buy back punitive damages coverage. Some states preclude insurability of punitive damages. If so, you may wish to negotiate additional language to your policy so that coverage remains available in accordance with the jurisdiction most favorable to the insurability of punitive damages based on where the damages are awarded, where the underlying acts or events occurred, where the insured is incorporated or has its principle place of business, or where the insurer is incorporated or has its principle place of business. For a more detailed discussion on this topic, see “The Insurability of Liability for Punitive Damages,” by Paul A. Banker, published in riskVue’s sister publication The Risk Management Letter, Vol. 23, Issue 5 (2003).

Clarify Key Terms

Carefully analyze the key terms of the policy and make certain that ambiguous terms are clarified to your satisfaction. For instance, does the definition of the term “claim” include any demand, or a written demand only? Does the insurance agreement to defend a claim include the insurer’s agreement to provide representation at court proceedings only, or does the duty to defend extend to arbitrations, mediations, administrative proceedings, and/or alternative dispute forums. If you already have in-­house counsel or other attorneys familiar with your operations and employment practices, negotiations regarding your right to select counsel may be significant. Likewise, before you agree to a policy, determine whether the costs of defense are applied to the aggregate limit of liability and the deductible. Determine whether the definition of “insured” includes the business entity, directors and officers, partners, managers, employees (past, present and future), volunteers, independent contractors, newly acquired entities, and entities to be acquired. Note, however, an expansive definition of “insured” may result in having the policy limits shared by more individuals. Some policies contain broad “insured” definitions while others exclude certain employees, including part-­time workers, temporary or leased employees.

Some insurers offer standalone EPLI policies; others offer EPLI coverage only as an endorsement to an existing insurance policy. Experienced insurance counsel can review your current policies and determine what appears best for your business. Combining Comprehensive General Liability (CGL) and EPLI coverages can be complicated because CGL policies tend to be occurrence policies, whereas EPLI policies tend to be claims made policies. Director and officer policy limits, on the other hand, are often exhausted by the employment claims. An EPLI standalone policy may present higher costs to the business when compared to other insurance options.

ABOUT THE AUTHOR

Dan Sheran is a partner in the Employment and Labor Law practice of Lindquist & Vennum PLLP, Minneapolis, Minnesota. He can be reached at 612-371-3261; e-mail dsheran@lindquist.com.

riskVue | The webzine for risk management profesionals
July 2003

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