There are a variety of insurance policies and coverage on the market today for organizations; worker’s compensation, business, employee’s, vehicles, etc. You can insure just about anything (within reason). What about business insurance for a what if situation related to discrimination? Does insurance like this exist? What is employment practice liability insurance (EPLI)? EPLI is a specialized insurance designed for organizations to protect against losses incurred in litigating and settling wrongful employment practice liability claims. This insurance provides protection against a what if scenario; discrimination, breach of contract and wrongful discharge lawsuits. Many times, these lawsuits are not covered under general business liability insurance. EPLI is generally structured as gap insurance for the organization. “Directors’ and officers’ liability insurance only protects the individual and not the company itself. EPLI is most commonly designed to fill this gap in coverage. It generally provides reimbursement for the costs incurred in defending a lawsuit but does not cover reimbursement for any penalties suffered.” [i]
The four factors of employment practice liability insurance:
- Cost of EPLI: This will be dependent upon the size of the organization, type of industry/business and other risk factors; previous issues, employment practices, etc.
- Relevancy to Organizations: EPLI continues to grow in popularity as employment lawsuits have also grown in popularity and filing charges with agencies has become much easier with the advent of the Internet and through social media communications. Organizations are not prepared to absorb the risk of loss from such lawsuits, claims and settlements. Don’t assume, “this can never happen to our organization.”
- Evaluation of Policies: Organizations should work with current insurance providers to review the scope of coverage and adequacy of limits. “They should understand who controls the claims handling process-the insured or insurer. Selection of an appropriate policy for your company’s needs can be difficult and should be carefully considered.”[ii] Do your homework and be prepared to ask questions and fully understand the EPLI policy and processes involved, if a claim is filed. Your organization will be paying the premium, you need to fully understand what you are paying for and how this insurance will impact the organization in relation to a what if scenario.
- What Will Insurance Companies Look For: Many insurance companies will not insure a company unless there are basic and sound employment practices in place. “Employee handbooks, post-incident investigation practices, and arbitration or mediation policies are some of the major items that insurance companies expect an employer to have when applying for an EPLI policy. You should be prepared for the insurance company to scrutinize all of the HR functions. Also, recent employment lawsuits, size of company, geographic location, and type of business or industry all affect the availability and cost of insurance.”[iii]
Insurance is there, in the event we have a need or a claim. Is it worth taking a risk and not having Employment Practice Liability Insurance? Our goal as leaders should be to eliminate the need for the EPLI. This does not mean not purchasing an insurance policy; simply put, we need sound employment practices and consistency throughout the organizations. Do your research and fully understand what your organization needs in EPLI coverage. Look at more than one insurance provider and seek out multiple quotes. Work with a team and/or board of directors to ensure the best decision is made. If you have questions, seek guidance. Insurance is complex and employment lawsuits/settlements can have a major impact on organizations of any size.
Recognizing that smaller companies now need this kind of protection, some insurers provide this coverage as an endorsement to their Businessowners Policy (BOP). An endorsement changes the terms and conditions of the policy. Other companies offer EPLI as a stand-alone coverage.
EPLI provides protection against many kinds of employee lawsuits, including claims of:
- Sexual harassment
- Discrimination
- Wrongful termination
- Breach of employment contract
- Negligent evaluation
- Failure to employ or promote
- Wrongful discipline
- Deprivation of career opportunity
- Wrongful infliction of emotional distress
- Mismanagement of employee benefit plans
10 Important Facts about Employment Practices Liability Insurance
1. Wrongful acts (as defined by the policy) are typically included for coverage. Intentional acts are generally excluded from EPLI coverage.
2. Wage and hour damages are excluded from EPLI unless they are explicitly endorsed for inclusion. Even so, there is a sub-limit for defense cost coverage for wage and hour claims, which is usually not more than $100,000.
3. Punitive damages, which generally exceed simple compensation and is awarded to punish the defendant, can be considered as part of optional coverage under EPLI. However, it is important to note that coverage of punitive damages is subject to state law. In states such as California, for example, EPLI insurance does not typically cover punitive damages. It is important to review the exact policy wording to be used.
4. The insurance company is usually responsible for selecting the attorney who will defend the lawsuit on behalf of the employer. The attorney is typically chosen from a pre-selected panel of approved attorneys, all of whom specialize in employment law, specifically liability insurance (EPLI). In some cases, the employer’s counsel may be selected if the choice of counsel was approved by the carrier beforehand.
5. EPLI policies typically include self-insured retention (SIR) instead of a deductible. A SIR is an amount that the policyholder will have to pay out-of-pocket for defense costs and losses during the early stages of an employment liability insurance claim before the insurer is required to pay anything. The SIR differs from the deductible. A deductible is subtracted by the insurer from its total claim payment, which then becomes the responsibility of the policyholder.
6. An EPLI claim is usually initiated by a written demand for relief, or when charges are brought before an agency such as the EEOC. Claims may also be initiated by the serving of a summons or a lawsuit, or as part of a regulatory investigation. If a claim is not reported when it is first initiated–or within the time frame specified in the policy–there may be a denial of the claim for coverage.
7. Employment practices liability insurance policies often include a provision known as a “hammer clause”. This clause states that if the insured does not agree to the first settlement opportunity recommended by the carrier, the carrier’s liability may be capped at the amount for which the claim could have been settled. The defense costs up to the date of the settlement opportunity will also be included in the liability.
8. Breach of contract is usually excluded from coverage unless it is related to other allegations. The reason for this is that there is an assumption that the terms will be carried out if and when the insured enters into a contract. If the terms are not carried out, the assumption is that the company violated the contract intentionally.
9. The policy form will indicate “claims made” instead of “occurrence”. This means that the policyholder is only eligible to receive benefits if they are covered at the time the claim is filed with the insurance carrier.
10. It is advisable to notify the carrier of any facts that have surfaced that may require the filing of a future practices liability insurance (EPLI) claim, but for which no claim currently exists. Putting the carrier on notice of an unrealized possibility of a claim does not typically affect the cost of the policy renewal. However, such a notice can secure important protections under the policy in the event that an employment practices liability insurance (EPLI) claim is made at a future date. (Vantreo)
[i] https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/whatisemploymentpracticesliabilityinsurance.aspx
[ii] https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/whatisemploymentpracticesliabilityinsurance.aspx
[iii] https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/whatisemploymentpracticesliabilityinsurance.aspx
BURR CONSULTING, LLC 