Employment Practices Liability Insurance Considerations
In response to an increasing number of employers facing litigation arising from their employment practices, the insurance industry began offering Employment Practices Liability Insurance (“EPLI”) in the 1990s. While EPLI policies vary, most include basic protection for employers facing lawsuits alleging discrimination or wrongful termination. Although rare, such lawsuits can result in significant liability to an employer. Nevertheless, EPLI can be an important tool to manage employment litigation risks.
When deciding whether EPLI is appropriate and, if so, which policy would be best, employers should consult departments within the organization (e.g., human resources, in-house legal counsel, accounting) and with external employment law counsel to evaluate the employer’s experiences and potential risks. The goal of this article is to provide employers who are considering EPLI with an overview of some of the key considerations that should factor into that decision-making process: Risk management, policy coverage, case control/selection of counsel, and protection.
Consideration 1: Risk Management
In determining whether or not to procure an EPLI policy, an employer should initially focus on its internal policies and procedures to assess its risk. An employer should audit its policies and practices; assess the quantity and quality of its training programs; review its claims history and recordkeeping; and consider the history and number of plaintiffs’ verdicts, the size of the awards, the jury climate, and the risk of punitive damages. Having strong anti-harassment, anti-discrimination, and accommodation policies and procedures, an established complaint and investigative procedure, and an employee handbook describing the at-will employment relationship, are essential steps prior to considering or obtaining an EPLI policy. Employment claims may be dramatically decreased or significantly controlled through careful policy development and decision-making, thereby reducing or eliminating the need for EPLI.
Consideration 2: Policy Coverage
EPLI policies differ significantly with respect to policy definitions, exclusions, conditions, and limitations on coverage. Employers must understand what the policy covers, including the insureds, claims covered, and policy exclusions. For example, many policies will not pay for punitive damages, severance, or claims arising from a violation of the Fair Labor Standards Act (“FLSA”), the National Labor Relations Act (“NLRA”), the Occupational Safety and Health Act (“OSHA”), the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), the Employee Retirement Income Security Act (“ERISA”), the Worker Adjustment and Retraining Notification Act (WARN”), state wage payment statutes, and class actions. Likewise, some policies do not cover front pay, liquidated damages, or retaliation claims. Nor does EPLI typically cover legal advice related to the activities that ultimately may lead to the litigation. Unfortunately, many employers do not scrutinize these coverage issues until after a claim is presented and are surprised to learn they do not have the coverage they thought they purchased.
Consideration 3: Case Control and Selection of Counsel
EPLI policies vary greatly with regard to who has the right to select legal counsel and the duty to defend. When EPLI is involved, an employer’s management may no longer have the final determination about how a claim will be handled; the insurance company often retains the right to select defense counsel and make defense decisions. The legal counsel selected by the insurance company may or may not have experience litigating employment cases. The policy may preclude the employer from using a law firm or attorney of the employer’s choice. As most employers know, retaining the right to have experienced employment attorneys who are familiar with the employer is crucial in potential or realized litigation. Prior to entering into a specific policy, therefore, an employer should negotiate for its right to choose counsel and then ensure that such counsel is approved to defend claims under the policy for the duration of the policy. The ability to negotiate choice of counsel after a policy is in place is almost non-existent.
In some cases, the insurance company may retain the right to determine whether a settlement is appropriate. An employer can negotiate as part of its EPLI policy that the insurer will not settle without the consent of the insured. However, many policies include a “hammer clause,” which caps the insurer’s coverage when the insured refuses to consent to settlement.
Another concern with an insurer having significant control over settlement is when a terminated employee agrees to accept less in terms of a monetary settlement in exchange for being reinstated. Understandably, insurance companies prefer to settle cases for as little as possible (although some understand that reinstating a terminated employee may lead to additional claims at a later date). Therefore, an employer considering EPLI should be certain to retain control over the reinstatement decision.
An additional consideration arises when there is a high deductible. The insurer may push for a quick resolution, thereby decreasing its coverage responsibility even though the employer may prefer to proceed with litigation. Similarly, while high deductibles ensure coverage of substantial losses, they leave an employer practically uncovered against smaller claims.
Consideration 4: Protection
The major advantage of EPLI is the protection it affords (assuming the policy limits are sufficiently high) against what could otherwise be a catastrophic claim that results in an employer’s bankruptcy. Fortunately for all involved, those claims are far more rare than the media suggests. The level of exposure varies from state to state. Organizations with employees in California, New York, Texas, Illinois, or other highly-populated states, or in highly-litigious states, may face increased odds of suffering a catastrophic claim. However, the converse is also true in less populous or less litigious states where an employer may be better served focusing its resources on improving its ability to prevent claims.
Ultimately, companies exploring EPLI should conduct a thorough cost-benefit analysis based on all of the factors outlined herein. Employers should also carefully assess: 1) the deductible level and whether the deductible is per claim or per policy period; 2) the limits of liability that the insurance company is obligated to pay during a given period for any claim or suit; 3) whether there is an aggregated limit over a given time period; 4) whether the EPLI policy provides reimbursement of defense costs only at the end of litigation, leaving the employer with a considerable cash flow obligation throughout the case; and 5) whether the policy is a self-liquidating or “burning limits” policy (i.e., every dollar spent on defense reduces the amount available to settle or otherwise resolve the claim by one dollar).
EPLI may serve as a great addition to internal risk management measures if an employer cannot eliminate significant potential exposure to the types of employment claims covered by EPLI. Nonetheless, EPLI is not necessarily appropriate for every organization.
An employer that decides to obtain EPLI should shop around for policies and then review the terms of the policies with their employment attorney to ensure that the policy meets the employer’s needs and coverage expectations. The employer should also work with its employment attorney and insurance broker to understand the policy’s costs, exclusions, benefits, disadvantages, and conditions. If necessary, the employer should be prepared to negotiate the right to select counsel, the duty to defend, and the right to make defense decisions, while keeping the amount of the deductible in mind.