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.

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