Employment Practices Liability Insurance – A Quick Study Guide for Employers

Employment Practices Liability (“EPL”) insurance provides protection arising from legal liability exposures created by myriad federal and state statutes, faced by every business, organization and profession – large or small. They include: the Civil Rights Acts of 1964 and 1991, The Age Discrimination in Employment Acts (“ADEA”) of 1967 and 1985, the Americans with Disability Act (“ADA”) of 1992 and the Family and Medical Leave Act of 1993.

Small Companies Can Manage Big EPL Exposures

Smaller companies, with limited resources to preventively address EPL exposures, may ironically be at greater financial risk. EPL insurance provides coverage for defense and indemnification of covered claims brought by former, current and even prospective employees alleging a violation of their legal rights. Insurers underwriting these policies often include complementary risk management resources to assist policyholders to better manage their employment practices risks. EPL coverage may be included within a Business Owner’s policy (“BOP”), as part of a Private Company or Not-for-Profit D&O combination-type policy, or as a ‘stand-alone’ insurance policy. Combination-type policies that include EPL insurance typically share the policy limit with the other coverage grants and the scope of the EPL insurance may not be as broad as what will be available within a stand-alone EPL policy.

Some Employment Practices Insurance Basics

• EPL policies are underwritten on a claims-made basis meaning the claim must be made and reported during the same effective policy period. Importantly, in order to preserve coverage, and avoid a denial of a claim made after the policy’s expiration, employers must also similarly report any circumstances of which they become aware, that may give rise to a claim before the policy expires. Insurers at times may reject these notifications of circumstances unless they contain the level of specificity required by the policy. A perplexing issue arises in connection with the policy application process. An employer’s pre-existing knowledge of circumstances at the time of the EPL insurance application can be enough to void coverage under certain situations. Insurers must be able to prove the policyholder’s knowledge or state of mind by factual evidence. If the applicant discloses knowledge of the circumstances in response to a new or renewal policy application, the insurer will automatically specifically exclude any claims arising from the disclosed circumstances.

In a renewal setting, policyholders should carefully consider reporting circumstances they believe will reasonably give rise to claims, to their incumbent insurer prior to the expiration of the policy period. While the risk of rejection by the incumbent insurer due to insufficiency of notice is a possibility, there is a certainty that the new insurer will exclude coverage for the circumstance-related claims as a result of the applicant’s prior knowledge.

• Most policies contain a “duty to defend” provision that requires the insurer to assign defense counsel and control the defense of the claim. Defense costs paid by the insurer typically erode the applicable policy limit of liability unlike typical Commercial General Liability policies that contain defense coverage “in addition to” or “outside” the policy limits.

• Coverage may be implicated by an administrative proceeding, a written claim, or a lawsuit alleging a policy-defined “wrongful act.”

• Coverage for punitive damages, where insurable, is generally available in a variety of formats. Some insurers carve out a separate sub-limit as a percentage of the policy’s aggregate limit. Other insurers may include punitive damage coverage limits without a sub-limit of the policy’s limit. In any case, punitive damage awards are a significant potential consequence of EPL litigation and purchasers of EPL insurance should familiarize themselves with this provision.

• Intentional acts are universally excluded. It should be noted that even in cases where it is clear that an employee’s acts were intentional, EPL policies typically cover the vicarious liability of the Insured-entity because of its duty to supervise the acts of the employee that caused the loss. The “bad actor”- employee, however, may have an uphill battle securing coverage under the EPL policy if the facts prove the employee’s conduct was intentional.

EEOC Claim Data

The Equal Employment Opportunity Commission reported the following statistics for calendar year 2009:

  • Total Number of Charges Filed: 93,277
  • Harassment charges: 30,641.
  • Americans with Disabilities Act (ADA) and Age Discrimination in Employment ACT (‘ADEA’) charges totaled: 21,451.
  • Race Discrimination charges: 33,579
  • Sexual Discrimination charges 28,028.
  • National Origin Discrimination charges: 11,143
  • Pregnancy Discrimination charges: 6,196
  • Religious Discrimination charges: 3,386
  • Equal Pay Act charges: 942
  • Title VII charges filed in 2009 totaled 68,710, of which 33,613 claimed some form of retaliation.

According to the EEOC: “The total number of charge receipts resolved under all statutes enforced by EEOC (Title VII, ADA, ADEA, and EPA)” in 2009 were 85,980, with resolutions amounting to $294.2 million. Very importantly, the EEOC states its statistics “Does not include monetary benefits obtained through litigation.”

In 2009, the EEOC filed 314 lawsuits of which 281 were ‘merits’ lawsuits. Of the total number, 188 suits involved Title VII violations, 76 lawsuits involved violations of the Age Discrimination Act and 26 suits alleged violations of the Americans with Disabilities Act.

Some Questions EPL Insurance Purchasers Should Ask

• Definition of Insured Person: Are part-time, leased, seasonal and temporary employees included? Are volunteers included? What about coverage for independent contractors?

• Duty to Defend: Does the insurer permit the retention of an Insured-preferred, pre-qualified attorney?

• Co-insurance: Does paying a percentage of the loss in the form of co-insurance make economic sense?

• Definition of Covered Loss: In addition to defense costs and damages, are pre- and post judgment interest and court-awarded attorney’s fees covered?

• Definition of Wrongful Act: Do the covered wrongful acts adequately align with the enterprise’s EPL risks?

• The “Settlement Hammer” provision: Insurers offer various approaches to resolve situations where the Insured refuses to consent to a plaintiff’s proposed settlement that is agreeable to the insurer.

• Intentional Acts Exclusion: Can this exclusion be applied on the basis of an unproven allegation or is an adjudication required?

• Bi-lateral Extended Reporting Period Option: Does the policy contain this provision and what is the associated cost of exercising this option?

• Third-party Coverage: Does the policy afford coverage for claims brought by non-employee third-parties alleging discrimination?

Third-Party Employment Practices Coverage

Increasing competition for EPL insurance premium dollars resulted in the introduction of a new variety of coverage under the Employment Practices Liability insurance banner.

Third-party EPL coverage is in large measure a misnomer. Instead of protecting the policyholder against claims brought by employees, its coverage protects against claims brought by third-party non-employees who have business contact with the Insured entity such as customers and vendors. Business enterprises with a high degree of contact with the public, such as: retail establishments, the hospitality industry, medical and assisted living facilities, real estate agencies, country clubs, automobile dealers, and restaurants are more susceptible to this risk, and need to carefully consider purchasing this coverage option.

Coverage is typically triggered by claims alleging policy-defined wrongful conduct such as: discrimination, harassment or coercion caused by the Insured entity or its employees.

The Third-Party EPL coverage option is also available for reverse harassment situations, such as, when a third-party harasses an employee of the Insured entity. One example of reverse harassment would be a server being sexually harassed by the customer of a bar or restaurant. Alternatively, an example of a traditional third-party EPL claim might involve an Insured entity’s employee-delivery person making repeated sexual advances to a client’s office receptionist. These situations present factually distinct scenarios, yet both could result in emotional distress claims alleging the Insured entity allowed a hostile work environment to exist.

Other examples of non-employee third-party claims include claims brought under the Americans with Disabilities Act for failure of a retail establishment to grant public access to patrons with physical disabilities. These public access situations are particularly dangerous for retail chains. An aggrieved person can initiate litigation against the retail chain as a representative class plaintiff on behalf of all those similarly situated patrons that have also been disallowed access.

These types of lawsuits often seek non-monetary or injunctive relief. Insurance purchasers should evaluate the policy’s definition of “claim” to determine to what extent the policy may respond to claims for non-monetary relief.

The Dual System-State Administrative Agencies & The EEOC

Every state has an administrative agency that oversees initial employment-related complaints brought under state law. State administrative agencies have responsibility for investigating the complaint and making a probable cause determination.

Since these state agencies are typically overburdened, they almost automatically issue a “right-to-sue” letter to the claimant, thereby clearing the way for a lawsuit. What is most ironic is that even in those instances where the agency has not determined probable cause exists, it still must issue a “right to sue” letter. Therefore, employers are heading to courthouse either way.

The U.S. Equal Employment Opportunity Commission (“EEOC”) has jurisdiction in every U.S. state for all employment-related complaints covered by federal law.

EEOC Mediation Process

The EEOC offers parties a free Mediation Process as an alternative to the traditional investigative or litigation process.

• This informal, confidential process is conducted before an experienced, neutral third party mediator.

• The mediator has no authority to impose decisions, and their sole function is to facilitate a voluntary, negotiated resolution of a charge of discrimination.

• Both parties must agree to the mediation.

• Legal representation is not mandatory.

• Participants must have settlement authority.

• There’s no determination of guilt or innocence.

• Normal investigation process commences if mediation is unsuccessful.

Closing Thoughts

Commercial enterprises, professional services firms and not-for-profit organizations that do not currently have Employment Practices Liability insurance are unnecessarily exposing themselves to real economic risk. The cost associated with defending just one employment practices liability claim may often outweigh the insurance premium required to provide both defense and indemnification protection. The cost-benefit analysis is compelling. Companies that currently purchase EPL insurance should have an expert evaluation of their operational exposures to ensure the policy they have in place will be responsive to their particular business risks.

Get Your Employment Contract in Black and White

Employment law stipulates that both verbal and written employment contracts are binding. Non-written contracts will automatically take effect when work commences by the employee. For employers who wish to ensure that they protect their business as well as acting in a responsible manner towards their employees they should always opt for a written employment agreement.

A contract of employment is an agreement that is set out between the employer and the employee. Employers can detail the terms and conditions of that employment looking at the rights, duties and responsibilities of the employee. Even though an employment contract does not need to be in writing an employer must supply a written statement detailing what has been agreed if the employee requests it within the first two months of commencing work.

An employment law specialist will always advise to keep all employment contracts documented. It pays to have terms and conditions detailed in black and white to protect the company from possible disputes in the future.

The contract binds both the employer and employee to the terms and conditions until the end of the contract date which will have been agreed between them. If either party wants to end that contract they must provide notice. It is also possible to end the contract if mutual consent is given to amend the terms.

Contract terms and conditions can also be included in the staff handbook or on the company notice board and some employers also detail some conditions in the offer letter. Employment law professionals can advise you as to the best format for your terms and conditions and help with employment contract drafting. There are certain terms that are required by law. For example employers must pay the minimum wage.

Self Employed Liability Insurance – Extra Protection For Your Business

In today’s ever changing economy, lawsuits are filed by dissatisfied customers and disgruntled contractors on a regular basis. Civil lawsuits are often filed against unprotected, ill-prepared, small business owners. In many situations, these business owners are just self employed individuals operating a company of one. While these lawsuits are often frivolous, not every self employed business owners can afford to hire lawyers or defend against legal charges. For those who constantly fear expensive legal battles, self employed liability insurance provides independent contractors with a way to protect themselves and their assets.

Business liability insurance policies may be purchased by any individual who seeks additional legal protection. These policies are offered by most major insurance providers, but many self employed individuals are unaware of the option for additional protection. In spite of insurance companies often marketing liability insurance to large companies, any individual operating their own business has the option of purchasing liability coverage. Once purchased, a business liability insurance policy can be used to protect the holder from a variety of legal situations. Self employed liability insurance can protect an independent contractor, or small business owner, from lawsuits and legal actions involving a business’s work-site, product, service, or the actions of an employee.

Business liability is a broad subject which covers any action a company or its representatives may be considered legally responsible. Self employed individuals who work as contractors with small businesses, or other individuals, should always remember that they might be held legally libel for business practices. Though self employed individuals often believe no one would find suing them worthwhile, it is impossible to tell when a well-paying customer might choose to escalate a simple contract disagreement. Having a self employed liability insurance policy is one preventative measure that all small business owners can take.

When choosing a self employed liability insurance policy, it is important that the policy chosen provides the legal protection that best suits the policy holder’s professional field. Just because a business liability policy offers coverage in case of accident to an employer, does not mean all small business owners need such coverage. For example, self employed individuals who work from home writing gossip columns may need protection against lawsuits brought against them for libel or slander. Choosing the best liability policy might seem daunting, but taking the time to research the best way to insure a business can save self employed worker’s future stress and heartache.

Car Insurance and Loan Considerations for the Self Employed Person

First let’s consider car insurance for a self-employed person. For the self-employed person, automobile insurance can involve factors that are not present in normal personal situations. For example, if the car is driven for business purposes additional coverage may be required. Normal personal auto insurance may not necessarily cover losses incurred when using the car for self-employed business purposes. So contacting the insurance company to get a quote for car insurance which covers vehicle use for the self-employed may be a good idea.

Some self-employed people opt to import cars from other countries into their home country. In these cases, imported car insurance can be helpful to the self-employed person in meeting their insurance needs. Many insurance companies will offer imported car insurance quotes when asked. Typically the insurance company will need to know specifics about the year make and model of the vehicle being imported in order to offer an imported car insurance quote.

Now let’s consider loans for the self-employed person. Being self-employed you can be an exciting and yet challenging experience. When you are self-employed, you don’t always have the ability to rely on a steady paycheck like you do when you are working for someone else. For example, when working for someone else you might receive a paycheck for about the same amount of money every week. However, when you are working for yourself, you might pay yourself only when you make a sale or get paid for a large contract. For instance, if you just spent three months working as a consultant on a company’s new website, and they don’t make progress payments but rather pay you the full amount at the end, you might have cash flow issues until you receive the payment. So in these cases loans for self-employed people can help fill in payment gaps.

Self-employed loans can also be helpful if a car insurance payment is due, but you have not received payment from your last customer yet. Generally use of the vehicle is still required, and of course, it is not a good idea to drive the vehicle without proper insurance coverage. So obtaining a self-employed loan can help make the payment for the car insurance policy, then the loan can be repaid when your customer pays you.

In conclusion, we’ve taken a look at some particular considerations for self-employed people when it comes to car insurance and loans.

Hiring an Outside Screening Company to Perform Pre-Employment Screening

Many employers that are required by law to perform background screening on their employees employ either an in-house screening team or, in most cases, an outside screening company. Although partnering with a reputable outside screening service to handle their background check requirements is standard practice for many employers, still others, large and small, wonder if it’s a good idea.

Pre-employment screening can be expensive. For this reason, smaller employers wonder if they should handle their own background screening. For the most part, simple reference checks are easily handled by an organization’s HR department. However, more extensive screening may be best handled by a professional. Just as an employer won’t generally handle their own drug screening needs, they probably shouldn’t handle their own criminal records screening either.

There are several reasons why it’s a good idea to hire an outside screening company, not the least of which is the fact that a reputable screening service will be far more aware of the laws that govern pre-employment screening than the average employer.

So, what should employers look for in a screening partner?

• First, a screening agency should be reputable. Employers can check with the Better Business Bureau and ask for references from screening companies they are considering. It’s also a good idea to check with business associates and other reliable sources for recommendations.

• Second, a screening service should be experienced. Inexperienced screening services may include information that unfairly influences an employer’s decision or may fail to include pertinent information that an employer needs to know. Partnering with an experienced agency is a great way to ensure that information is complete.

• Third, a screening company should be thorough. A reputable agency assures an employer that they see the process through from start to finish. They not only guarantee that they comply with all state and federal laws but that they handle the administrative work involved in the process such as getting applicant permission, providing notices, and preparing reports.

• Fourth, a screening agency should provide information about their services. When considering any screening service, an employer should receive information about the company, the services it provides, how it complies with the legal aspects of the process, how it handles the administrative aspects of the process, and what guarantees it provides to the employer.

With workplace violence and the legal liabilities such incidents generate on the rise, employers can’t be too careful in making sure they make the best hiring decisions possible. Partnering with a reputable employment screening service can take a lot of the worry out of complying with state and federal laws, properly administering the process, and accessing a proper and thorough report. Even a small oversight in an employer’s do-it-yourself attempt at a criminal background check can leave that employer open to more legal liability than bargained for. In the long run, it may be wise to hire a reputable employment screening agency to reduce the risk of hiring the wrong person.

Employment at Will and Unemployment Compensation Claims

One of the most challenging aspects of working in employment in an “at will” state like Texas, especially in a company with numerous locations (i.e., numerous managers who hire and fire), is dealing with unemployment compensation claims.

The employment at will doctrine states that any hiring is presumed to be “at will” which means that the employer is free to terminate individuals “for good reason, bad reason, or no reason at all,” and the employee is equally free to quit, strike, or otherwise cease work. In Texas, there are exceptions such as public policy (e.g. serving on jury duty) and statutory (e.g. refusing to commit illegal acts). Statutory exceptions also include the federal anti-discriminatory laws (i.e., age, gender, national origin, race, etc.) that started to be implemented in the mid-60s. It should also be mentioned that an employer, even in employment at will states, must follow his own policies and procedures when it comes to terminations. Of course, collective bargaining and other types of employment agreements can abrogate the employment at will status in specific employment situations.

However, in those employment situations when employment at will does apply, which is the vast majority, it becomes interesting because it is a legal concept and does not define operational policies and procedures which impact unemployment claims. From a practical standpoint, a company of just about any age or size should have formal policies and procedures that define employee-related practices. These can be in the form of an employee handbook or a supervisors manual, or both. Basically, these items should define everything that impacts employment with the company – from hire… to fire. I use the word “everything” loosely because something new will always come up.

In my experience, supervisors and managers generally make a good faith effort to document issues with employees. You know, lates to work, excessive absences, poor performance, etc. But let’s face it, most supervisors and managers are focused on getting some form of production “out the door”. Their livelihood and the company’s depends on it. So at the eleventh hour (i.e. the employee is about to be terminated or has just been terminated), you (i.e., HR or higher level managers) get a call from the manager asking for help.

Here’s how it goes: You ask why the person was terminated – lates to work. You’re OK there. It states clearly in your Employee Handbook excessive lates are grounds for termination. You ask if the person was given any warnings – yes. You’re OK there. You ask if the warnings were written – no. That may be a problem. The Employee Handbook says progressive discipline, including written warnings, will be used unless the infraction(s) is egregious. You ask if other employees have been terminated in this same department for the same or similar level of infraction – yes. That is good. You request a write up of the termination interview and any documentation related to the lates to work. (Sometimes this information will have to be created post-termination…)

You now pull the employee’s personnel file. The employee is a 52 year old high performing minority female who has been with the company for seven years. Any red flags there? Well, yeah…, aged 42 (protected class), high performing, minority (protected class) and maybe the female part. Here’s when you have to keep the exceptions to employment at will in mind (e.g. statutory), but you don’t let them stop you from doing what is right. In other words, if the employee was terminated because she was late so often, warned, but didn’t do anything about it and she was treated like others with the same problem, you’re going in the right direction. If any of that other stuff (i.e., protected classes…) came into it, you’ve got a problem.

The terminated employee goes to the Texas Workforce Commission (TWC) and files an unemployment claim. The TWC takes a very simple-minded approach to investigating unemployment claims. If at all possible, they are going to pay the terminated employee’s claim unless that individual quit the job. (… and in some cases they will pay even when the employee quits…) To avoid paying unemployment claims, you should follow your policies, have good written documentation leading up to the termination, and terminations should be based on some form of policy infraction (i.e. misconduct) and/or poor performance. Short of these things, they are likely to pay your former employee’s claim.

That’s the key. Employment at will allows most employees to be terminated essentially without cause. Not paying unemployment compensation almost categorically requires that the employee was terminated for cause and you can prove it. So often, employers think they can terminate for any reason or no reason, until an employee files an unemployment claim and their former employer gets the TWC questionnaire… Then the employer tries to backtrack, recreate history, etc. simply because they didn’t follow their own policies as far as documenting poor performance, poor attendance and so on.

The bottom line is… put your policy and procedure “ducks in a row”. Develop your Employee Handbook, your Supervisors Manual, train your employees and supervisors. (One of the most important things you can put in these manuals is a re-statement of the employment at will doctrine) Ensure that your supervisors understand the importance of documenting employee issues and policy infractions. It is also a good idea to become well-acquainted with the TWC’s website. It has numerous resources for employers (and employees) that are very worthwhile, especially the item entitled “Appeals Policy & Precedent Manual”.

As a friend of mine in HR said, ‘putting procedures in place and training your supervisors on them could save you some big unemployment claim dollars down the road’. Long story short, think and act now, don’t pay later.