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Employment practices liability insurance — Federal

Just as employment litigation has become more prevalent, there has been a corresponding growth in the number of employers who have purchased employment practices liability insurance (EPLI) in order to protect themselves from some of the financial risk of employment litigation. A good EPLI policy can supplement other liability policies, providing additional coverage for discrimination, sexual harassment and wrongful discharge. There are pros and cons to purchasing employment practices liability insurance and this chapter will discuss some of the factors that employers should consider in deciding whether to purchase insurance and what type of coverage to purchase. Employers should consider such factors in deciding whether employment practices liability insurance coverage is right for them and what type of coverage to purchase.

Conditions to obtain coverage

Before an employer is able to purchase employment practices insurance and before insurance companies will quote premiums to employers, it is common that insurance companies will require that the employer submit information to the insurer regarding its past employment claims history and its employment practices, including handbooks and policies and training. There may also be requirements that employers maintain training programs during the policy period. Employers must be careful, of course, to ensure that all representations to insurers are accurate, as incorrect statements could be a basis for insurers to deny coverage or to seek other damages from the employer. If the employer painted a rosy picture of its human resources practices to the insurance company in order to obtain coverage at more favorable rates, the employer’s exaggeration of its practices will certainly become apparent during the defense of employment litigation against the company, which of course is precisely the time and circumstances for which the company purchased the insurance coverage.

What is covered

 Most EPLI policies list the employment practices, wrongful acts or violations that are covered by the policy. Employers need to review proposed employment insurance policies very carefully to determine exactly what is covered and what is not covered. The definitions in employment insurance policies are sometimes complex. Companies should choose an EPLI policy that covers discrimination, sexual harassment, retaliation and other intentional acts. Companies should also consider a policy that covers claims for breach of express and implied employment contracts. Written demands and EEOC charges are claims that should be included in policy coverage.

Employers should also explore coverage for individual supervisors and managers if claims are asserted against them. Such claims are often not addressed in insurance policies and are therefore not covered.

It is advisable for an employer to have the insurance policy reviewed by counsel so that the employer is aware of exactly what it is purchasing in deciding whether or not to purchase the employment insurance coverage.

Policy limits and deductible amounts

The amount of protection for the company and the cost of the insurance will depend largely on the deductible amount of and the policy limits. The lower the deductible and the higher the policy limits, of course, the more expensive the insurance coverage will be because, of course, much more insurance coverage is being purchased. Many companies use high deductible amounts to keep the cost of the premiums modest and use the insurance to protect them from large liability claims only. That is similar in theory to catastrophic medical insurance coverage.

Employers’ right to select counsel and control litigation

As is typical of many insurance policies, employment policy language often gives the insurance company the right to select the attorneys who will be retained to defend any claims against the employer and the right to decide whether and on what terms to settle claims up to the policy limits. In employment litigation, those issues can be very important to the employer.

Whether an employer settles or litigates an employment claim often has more far-reaching implications for the employer than simply the risk of liability and the cost of defense for the one claim that has been asserted. Insurance companies typically focus on the risk of liability and cost of defense as factors that determine whether they settle cases. Employers have many more factors to consider. For instance, settling one employment claim may cause many more employees to bring similar claims. Settling cases may cause supervisors and managers to feel that the company does not support them or back them up when they make a responsible decision to performance manage and ultimately terminate a substandard employee. Settlements may therefore cause supervisors to be lax in enforcing performance standards because they may feel that it is not worth the trouble, particularly if the company ends up settling the cases and not supporting the management decisions to separate underperforming or misbehaving employees.

On the other hand, there are times when an employer will want to settle cases, particularly if the litigation will have detrimental effects on customer relationships or harmful publicity for the company. In many situations, the employer may have a different set of considerations and different interests than an insurance company regarding whether and on what terms to settle a case. Moreover, the company’s insurance policy will be discoverable in litigation and the plaintiff’s knowledge about the company’s insurance coverage can affect settlement negotiations. The authority of the employer or the insurance company to decide whether a case is settled or litigated is, therefore, an important factor for the company to consider in obtaining employment practice liability coverage.

Similarly, the right to select counsel to defend employment claims is important. If the employer has a close relationship with its regular employment counsel, it may want that same counsel to handle litigation because they are familiar with the employer’s long-term management objectives, they have a long-standing relationship with the company and have demonstrated their commitment to the company’s interests. An attorney selected by an insurance company owes attorney-client duties to the employer, but may not have a continuing or meaningful relationship with the client. The teamwork and long-term goals of the employer may therefore be harder to establish and maintain in the handling of litigation than if the case is handled by the company’s regular employment counsel.

Some insurance policies allow the company the right to select counsel and some insurance companies will be flexible in cooperating with the company in jointly choosing counsel. Employers should consider obtaining a “special handling” endorsement offered by many insurance companies that allows employers to choose their own defense counsel. Without such an endorsement, all control over the defense of employment claims will rest with the insurer under the typical “duty to defend” EPLI policy. At times arrangements are achieved under which the insurance company will agree to allow the company to use its regular counsel with the company paying the difference between the attorney’s regular rate and the lower amounts typically paid by insurance companies for the insurance defense counsel they retain.

The dynamics of the rights of the employer or the insurance company to decide upon the selection of counsel or the settlement of a claim may also be influenced by the amount of the deductible. For instance, if a company has a $50,000 deductible amount, until the combined costs of a settlement and attorneys’ fees exceed $50,000, the employer is bearing 100% of the costs of defense. Employers may be more assertive and insurance companies may be more cooperative in allowing the employer to make the decisions if only the employer’s money is being used for settlement or for defense in the early stages of a case.

How claims are reported

Employers should review each policy to determine what triggers a duty to report an occurrence that  is considered to be an employment claim. In many policies, claims include lawsuits, charges of discrimination, demands for payment or even internal complaints of possible discrimination. Most policies will require the prompt reporting of claims by the employer to the insurer. If employers purchase employment practices liability insurance, they need to be sure to give timely notice to the insurance company of claims in order to trigger the insurance company’s obligation to defend the employer.