Why You May Need EPLI and What to Look For When Buying EPLI
Employment practices liability insurance, also known as EPLI, covers your litigation costs and liability for claims brought against you in relation to your employment practices – even claims that are false, fraudulent, or frivolous. With employers being forced to cut back on their labor force (which often correlates to a rise in employment discrimination claims) and the expansion of the legal definition of disability, employers are currently facing ever increasing exposure to claims related to their employment practices. EPLI covers this exposure.
Benefits of EPLI
EPLI policies are written specifically to address employment-related liabilities. The policies typically cover the full range of potential employment-related claims, from wrongful disciplinary actions to harassment to retaliation. In addition, since claimants generally can pursue their claims (including meritless ones) in both the administrative and judicial forums, a major advantage of EPLI is coverage for all legal fees, from administrative proceedings through lawsuits in state or federal courts. However, keep in mind that legal fees are typically included within and thus reduce the policy limits.
While you could purchase employment coverage endorsements to your existing GL or D&O policies, the endorsements may leave gaps in coverage, such as not covering certain types of employment practices or not covering the company’s employment practices. (An employment coverage endorsement to an existing policy should not be confused with an insurance package that contains separate coverage sections.) In addition, having a separate EPLI policy ensures that GL policy limits will not be eroded by employment-related claims.
Tips when procuring EPLI
When procuring an EPLI policy, you should of course review the policy to ensure that the coverage you seek is being provided. Particular attention should be paid to the following:
- Claims-made policy
Most EPLI polices are written on a claims-made (not occurrence) basis. This means that the policy will provide coverage only if the claim is made and reported during the policy period. For instance, if an employee files suit in 2013 because of a demotion in 2011, the policy that covered the 2013 period will respond to the claim. However, you should review whether the policy contains extended reporting period or retroactive date provisions. An extended reporting period provision extends coverage for claims made and reported during the extended period, so long as the claim is related to a wrongful act that occurred during the policy period. On the flipside, a retroactive date provision eliminates coverage for wrongful acts that occurred during the retroactive period, even if the related claim is not made until after policy period inception.
- Definition of “insured”
You should make sure that the policy’s definition of “insured” includes the company, the directors and officers, managers or supervisors, and all the types of employees that make up your workforce. For instance, if you utilize full-time, part-time, temporary, seasonal, leased, and/or loaned employees, then they should be included in the definition of “insured.” You may also wish to have the policy cover independent contractors, third parties such as your clients or customers, or your spouse or family if your company is a partnership or sole proprietorship.
- Definition of “claim”
Most EPLI policies require a “claim” be made to trigger coverage. Thus, a broad definition of “claim” will increase the likelihood that the policy will respond. The definition of “claim” should be broad enough to include filings in judicial, civil, administrative, regulatory, alternative dispute, or arbitration proceedings, as well as informal written demands for both monetary and non-monetary relief. Note that policies often exclude proceedings pursuant to collective bargaining agreements from the definition.
- Definition of “wrongful act”
Most EPLI policies provide coverage only for claims made for a “wrongful act” or “wrongful employment act/practice.” Thus, the definition of “wrongful act” should include all the types of employment practices that have the potential of resulting in liability. Lesser considered, but equally important, wrongful acts include wrongful deprivation of a career opportunity, negligent supervision, and negligent failure to implement/enforce employment policies.
- Definition of “loss”
Most EPLI policies will only pay for a “loss.” Accordingly, the definition of “loss” should be broad and include damages, settlements, judgments, defense costs, and front and back pay.
While it may be tempting to purchase a policy with a high deductible for a reduced premium, consider that many employment-related claims are resolved for a relatively small dollar amount. A higher deductible may prove especially regrettable if the policy provides that there is no duty to defend until the deductible is exhausted.
- Choice of counsel
It may be highly beneficial if the policy contains a provision for you to choose your defense counsel. This will allow you to choose counsel who is familiar with the issues, practiced in employment law, and understands your business. Otherwise, the policy may require you to choose from a pre-determined (by the insurer) list of law firms.
- Settlement procedure
Many EPLI policies give the insurer the right to settle a claim. Usually, you must provide prior written consent; however, if consent is not given, the policy will often not pay for any settlement or judgment that exceeds the refused settlement offer.
- Major exclusions to keep in mind
It would be best if the policy does not include a “prior acts” exclusion, which, similar to the retroactive date, eliminates coverage for wrongful acts that occurred or were known by the insured prior to the policy. Bodily injury to an employee is typically excluded, but there should be an exception for mental anguish or emotional distress. Claims under federal statutes, such as ERISA, NLRA, and OSHA, are typically excluded, but there should be an exception for retaliation or whistleblower claims by employees exercising their rights under such statutes. Claims made pursuant to employment contracts are typically excluded, but there should be an exception for liability that would attach even in absence of such contract. Claims where the insured committed fraud or profited from the wrongful act are typically excluded, but the exclusion should clearly state that coverage is precluded only if and when there is a final adjudication of such fact (otherwise, a baseless allegation of fraud may preclude coverage).
EPLI could be a major asset in your insurance portfolio, if you understand the areas of potential risk exposure and procure a policy that will cover those risks. Saxe Doernberger & Vita, P.C (SDV) is adept at assessing a company’s risk exposure and strategizing solutions for risk transfer. In the case of established insurance programs, SDV can assist in ensuring that insurers promptly and fully respond to policyholders’ right to coverage.
Tracy Alan Saxe is a founding partner of Saxe Doernberger & Vita, P.C., a Connecticut-based law firm dedicated to the representation of policyholders in insurance coverage disputes. Ling Ly is an associate with the firm. Tracy Alan Saxe and Ling Ly can be reached at (203) 287-2100 or firstname.lastname@example.org.