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RISKVUE ARCHIVE | INDUSTRY WATCH > EMPLOYMENT PRACTICES LIABILITY (EPL)
The Effect Of Punitive Damages On EPL Settlements
Excerpted from The EPL Book: The Practical Guide To Employment Practices Liability And Insurance
A large number of employment-related claims seeking compensatory and punitive damages are settled before trial. In a settlement, the plaintiff’s lawyer normally will factor in the potential value of the punitive damage claim in determining an acceptable overall settlement for a claim.
If the potential compensatory damages in an employment lawsuit are small and the proposed settlement is large, or if the proposed settlement simply exceeds the potential compensatory award, the insurer usually will argue that some portion of the settlement is attributable to the claim for punitive damages. In such a situation, it is not uncommon for the insured to be asked to contribute to a settlement. However, when the potential compensatory damages are larger than the settlement amount, it is more difficult for an insurer to attempt to allocate a portion of the settlement to the punitive damage claim. In this situation, an insured may be reluctant to contribute to a settlement even when that settlement nullifies a potential punitive damage exposure that is not insured.
These exclusions of punitive damages are highly disadvantageous for employers for several reasons. First, employers may be liable for the intentional acts of their agents and thus can be liable to pay punitive damages even when the entity itself does not act intentionally in any collective sense. In most states, insureds may insure their exposures for vicariously assessed punitive damages. It is rarely the case that an employer (as an entity) acts intentionally; therefore, the punitive exposure almost always is a vicarious one. An exception would be if the board of directors passed a board resolution not to hire members of some particular protected class, a highly unusual prospect.
Second, particularly in those cases where intentional conduct is the primary focus of the law, such as in the ADEA, ADA, “quid pro quo” sexual harassment cases and intentional racial discrimination cases under the civil rights statutes, cases that defendants lose at trial very commonly result in multiple, liquidated or punitive damages. When they are assessed, exemplary damages often are a significant multiple of any compensatory damages awarded.
At first, insurers offered coverage for punitive damages on a limited basis. The amount available to cover punitive damages was frequently only a small percentage of the total limit of liability under the EPL insurance policy, and coverage for punitive damages was available only in those cases where punitive damages were insurable.
It is now common for EPL insurance policies to offer coverage for punitive damages in amounts up to the full limit of liability. Coverage for punitive damages may be incorporated into the basic policy form or added by the attachment of an endorsement.
It also is common for an EPL insurer to agree to pay a punitive damage award if the law of any potentially applicable jurisdiction allows for the insurability of punitive damages. This type of provision is commonly referred to as a “most-favorable-venue” clause.
A typical most-favorable-venue clause provides that the insurer will pay a punitive award if the jurisdiction where (1) the insured is located or incorporated, (2) the insurer is located or incorporated, (3) the wrongful act giving rise to the punitive award happened, or (4) the lawsuit is pending allows for the insurability of punitive damages. Other EPL insurance policies provide that punitive damages will be covered regardless of whether the punitive damages are insurable or uninsurable.
While some insureds have questioned whether or not an insurer could or would pay a punitive damage verdict in a state where punitive damages are uninsurable, punitive damage coverage is still a valuable feature to an EPL policy. For example, in many, if not all states, an argument can be made that there is no restriction on an insurer’s ability to pay a settlement of a punitive damage claim as opposed to a final and non-appealable punitive damage judgment. Since the vast majority of all employment cases seeking punitive damages are either settled before trial or settled before the last appeal is decided, there is plenty of opportunity for the punitive damage claim to be paid. 
ABOUT THE AUTHOR
The EPL Book, a comprehensive resource on employment practices liability insurance, is published by Griffin Communications, Inc. Learn more about The EPL Book.
riskVue | The webzine for risk management profesionals
January 2004
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