Introduction to Employment Practices Liability Insurance

harassment at work

Sexual harassment. Wrongful termination. Discriminatory hiring. Hostile work environment. The number and scope of recent allegations of inappropriate workplace conduct has renewed the focus on the need for proper employee management practices. But even with proper diligence, things can happen, allegations can be voiced, complaints filed, and lawsuits presented. And that’s when it is important that the broadcaster have a solid employment practices liability insurance (EPLI) policy in place and have a good understanding as to the scope of coverage provided. The following is a discussion of some key considerations to keep in mind relative to your EPLI policy.

Non-Standard Coverage Forms

Workers compensation coverage terms are set by statue and do not vary (within any one state) from one insurer to another (with the exception of some minor endorsements). And there is considerable commonality in automobile and general liability insurance policy forms and coverage considerations among insurers. However, due to the relative newness of the coverage and for various other reasons, each insurance company has developed and uses its own, unique EPLI policy forms and endorsements. Although the general intent is the same (coverage for workplace discrimination, sexual harassment, wrongful termination, etc.) the scope and details of coverage can differ dramatically from one insurer to another and from one state/jurisdiction to another.

Claims-Made Coverage

The coverage trigger under general liability, automobile, workers comp, and most media liability insurance policies is the date that the alleged wrongful act occurred regardless of when it is reported (occurrence basis coverage). So if there was a slip/fall incident at a remote broadcast in November, and a lawsuit is not presented until the following May at which point the general liability insurance had already been moved to a new insurer, the claim would be the responsibility of the insurer which provided the coverage as of the date of the November slip/fall. By contrast, EPLI is provided under a claims-made basis for which the policy that is triggered is the policy that is in effect as of the date that the claim is first presented (assuming that the claim occurred subsequent to the policy effective date or retroactive date or that prior-acts coverage has been included). A thorough discussion of key considerations in regards to claims-made vs. occurrence basis coverage is beyond the scope of this article. But a key thing to note is that if you discontinue your EPLI (or do not properly renew it with the current or other insurer) your ability to subsequently report prior wrongful acts for coverage is terminated (unless you purchase an extended reporting period endorsement under the terminated policy). This is not an issue under occurrence basis policies as under such policies there is no expiration date or sunset date on the ability to report claims for coverage.

Limits and Defense Costs

EPLI limits of protection are provided on an occurrence/aggregate basis and are inclusive of covered defense costs. For example, if your limit of protection is $1,000,000 occurrence/aggregate you have a limit of $1,000,000 for each occurrence inclusive of defense costs subject to a policy year aggregate limit of $1,000,000 for all occurrences inclusive of defense costs. Automobile and general liability insurance policies provide for defense costs being covered in addition to the limits of protection (and automobile insurance policies are not subject to an aggregate limit).

Retentions

EPLI is almost always subject to an each occurrence retention which can range from $1,000 for very small enterprises to $100,000 or more for large enterprises ($10,000 or $25,000 are typical retention for mid-sized enterprises). The retention applies collectively to covered defense costs incurred and damages/settlement paid – the first $10,000 (for example) of covered defense costs and damages for each claim are at your expense. There can also be elevated retentions for certain states (policy level retention of $10,000 except $50,000 for California claims) and for certain coverages (policy level retention of $10,000 except $25,000 for wage & hour defense claims).

Wage & Hour Coverage Restrictions

Besides possibly elevated retentions, there typically are other limitations relative to wage & hour claims – claims which seek compensation for unpaid commissions, overtime, loss of wages, unpaid expenses, and the like. The predominant coverage arrangement for wage & hour claims is that a sublimit of protection ($100,000, is common) is provided but that such coverage (and a stated retention) applies only to covered defense costs – there is no coverage for actual wage & hour damages/settlements. And it is not uncommon for insurers to not provide any wage & hour coverage at all for California claims.

Third Party Coverage

EPLI provides protection for the policyholder for claims brought against the policyholder “…by or on behalf of any past, present or prospective employee, executive, or independent contractor…”. Although inappropriate workplace conduct is predominately that of one employee towards another, it can also involve that of an employee towards, say, an outside auditor. Third party coverage broadens the coverage such that the policyholder is provided protection for claims brought against the policyholder by “…any natural person who is a customer, vendor, service provider or other business invitee…” of the policyholder. (As used herein, “policyholder” includes employees, executives, partners, and members when acting in their capacity as such.)

Notice Of Claim

EPLI policies require that the policyholder provide the insurer with notice of a claim as soon as practicable. But what constitutes a “claim”? A claim is, of course, a written demand for monetary damages – a formal lawsuit that is served to the policyholder. But a claim is also a “…formal administrative or regulatory proceeding…commenced by the filing of notice of charges…including but not limited to any Equal Employment Opportunity Commission proceeding”. Although an EEOC complaint/proceeding is often a “low-heat” proceeding, it is nonetheless a “claim” and must be promptly reported to the insurer. Failure to promptly report a claim can result in the claim not being covered or in only partial payment of legal expenses/damages. Also keep in mind that although EEOC findings are generally not admissible as evidence in a formal EPLI claim/litigation, if the employee plaintiff prevails at the EEOC level it often emboldens the employee to then follow-up with a formal, more demanding, lawsuit.

Defense of Claims/Selection Of Counsel

Depending on policy terms and conditions, counsel for the defense of claims is either directly assigned by the insurer or is selected by the policyholder subject to the insurer’s prior approval. Under policyholder selection of counsel, the predominant arrangement is that the policyholder is provided the right to select from the insurer’s list of pre-approved counsel (panel counsel). The policyholder may also seek to have its preferred counsel (non-panel counsel) handle the defense of a claim. In this later arrangement, the insurer’s approval of non-panel counsel will be based largely on counsel’s qualifications and hourly rates charged. But the critical thing is that the policyholder secure the insurer’s approval of non-panel counsel in the very, very early stages of claim development. One of the policyholder’s duties is to do nothing which impairs the insurer’s rights. Using unapproved counsel for the defense could cause an insurer to subsequently assert that its rights have been impaired if the insurer disagrees with the manner in which the claim has been defended. Further, one of the benefits of using panel counsel is that the insurer has pre-negotiated reduced rates, often substantially reduced rates (keep in mind that the deductible applies to defense costs). So if the policyholder uses unapproved counsel at a partner rate of $750 per hour while the insurer could have provided qualified counsel at a partner rate of $450 per hour, the insurer may refuse to pay the $300 difference leaving the policyholder on the hook for such.

“Hammer Clause”

EPLI claims can in some instances take on a very personal tone – the enterprise owner feels that he/she has been a good employer, done everything one can reasonably do for the employee, been generous and fair, and is then shocked to find out that the employee has brought a lawsuit alleging harassment, hostile workplace, and wrongful termination. EPLI policies typically stipulate that the insurer will not settle any claim without the prior approval of the policyholder. But it is commonplace under such policies that a “hammer clause” also applies – the insurer will not settle a claim without policyholder approval but if policyholder approval is withheld the policyholder will then be responsible for a percentage (20%, 30%, etc.) of all defense costs and damages that are incurred above the settlement that the insurer had been able to negotiate. So for policies with a “hammer clause”, the policyholder needs to be aware that there can be additional costs arising out of the policyholder rendering an emotion driven decision on an insurer’s offer to settle a claim.

Conclusion

This discussion is general in nature and is intended as a brief overview of certain EPLI coverage considerations. EPLI policies can be very complex and the coverage offerings can differ substantially from one insurer to another. Consult your policy for details as to your coverage.