INSURANCE COVERAGE OF EMPLOYMENT CLAIMS:  A GROWING TREND  

Most business owners have insurance against fire, theft, floods and other calamities.  But what about insurance against employment claims?  If an employee files suit alleging claims such as sexual harassment, age discrimination, wrongful termination, and defamation, can the employer turn to its insurer to pay the costs of defending the claim?  Too often, the answer is “no.”  Indeed, more and more business policies expressly exclude employment-related claims.  This presents a genuine dilemma for business owners, because even a meritless claim can be very costly to defend.   

For this reason, more and more employers are seriously considering Employment Practices Liability Insurance  (EPLI).  Should your business purchase EPLI?  The answer depends on many factors.  No two businesses are alike.  In making that decision, though, the first step is to understand what EPLI is and what protections it offers if and when you are faced with an employment claim.   

Insurers began offering EPLI coverage in the early 1990’s.  There are now about 50 insurers (including, for example, Chubb, Reliance, Lexington, and Fireman’s Fund) trying to carve a niche in this market.  As a result, the cost of coverage has dropped.  While policy language has become more standardized, there are still key differences among the coverages being offered.  This means that you (or your broker) should shop carefully for the product that provides you the best coverage at the best price.  

Most EPLI insurers offer “claims-made” coverage.  Under these policies, coverage is triggered by when the lawsuit is filed, not when the alleged wrongful employment action occurred.  As such, if you were to purchase a policy covering the 1999 policy period, coverage would be limited to lawsuits filed in 1999.  The year in which the alleged misconduct occurred would not matter.  

Most EPLI policies include defense costs within the limit of liability.  This is an important consideration.  Suppose, for example, that the limit is $100,000 per claim.  If a former employee files an age discrimination claim, and you incur $80,000 in defense costs, the insurer will only pay another $20,000 to settle the case or pay a judgment.  After that, you are on your own.   

Among the types of claims typically covered under an EPLI policy are sexual harassment, discrimination, wrongful termination, adverse employment actions in violation of whistle blower statutes, personal injury claims (such as false arrest, libel, slander or other defamation, invasion of privacy, and assault or battery) and negligent hiring, supervision, promotion or retention.  

EPLI policies often expressly exclude criminal, fraudulent and intentional wrongdoing.  Indeed, as a matter of public policy, most states forbid an insurer to insure against such misconduct.  This is significant, because many employment claims, especially discrimination claims, involve allegations of intentional misconduct.  Therefore, if a jury were to conclude that your business intentionally discriminated against a former employee, your EPLI policy would not indemnify you for the loss.  The good news is that EPLI policies often pay defense costs until a jury makes that finding and sometimes during any appeal as well.  In employment cases, defense costs can often exceed a plaintiff’s actual damages.  Therefore, this duty to defend can be worth its weight in gold.   

Other major exclusions and limitations in EPLI policies include retaliation claims, bodily injury, property damage, fines, punitive damages, equitable relief, ERISA, COBRA & WARN Act claims, strikes & lockouts, workers’ compensation laws, and contractual liabilities.  “Prior acts” (i.e., acts that occurred before the policy period but where the claim was made during the policy period) are typically covered so long as the policyholder did not have prior knowledge of the alleged wrongful acts.  In other words, just as you cannot buy fire insurance for your barn while you watch it burn to the ground, you also cannot insure against a “known” employment loss.   

In purchasing EPLI coverage, you also need to consider how much control you will retain over the defense of a claim where the insurer has accepted coverage.  Can you select your own defense counsel? If you have counsel you trust who knows your employment practices, you may not want the insurer to appoint counsel for you.  In addition, you need to consider how much control you will have if the claim is settled.  The insurer’s and employer’s interests do not always coincide in this regard, because while settlement may make financial sense, an employer may have personal or professional reasons not to want to settle.   

Is EPLI coverage for you?  Again, it depends.  EPLI policies are not a panacea but do provide businesses with some level of protection in the increasingly complex employment arena.  Ultimately, of course, whether or not you have EPLI coverage, the best “insurance” is to have sound policies and practices in place, educate yourself about employment issues and consult with employment counsel early and often when potential issues do arise.  As always, an ounce of prevention is worth a pound of cure.