Policies, Coverage, and Exposure of EPL Insurance
Employment Practices Liability-What Is It?
Broadly speaking, Employment Practices Liability [EPL] stems from claims by prospective, current, or former employees who allege economic injury and emotional distress as a result of an employer’s acts or omissions. These claims may be based on a variety of allegations, e.g. discrimination, harassment, humiliation, defamation, invasion of privacy, disparate treatment, failure to promote, wrongful termination, or failure to provide a reasonable accommodation.
Claims may have a common law or statutory basis. Given an abundance of legislation and regulations however, claims are usually statutory. The following federal statutes are commonly invoked:
The Fair Labor Standards Act of 1938
The Equal Pay Act of 1963
Title VII of the Civil Rights Act of 1964
Age Discrimination in Employment Act (ADEA) of 1967
The Americans with Disabilities Act (ADA) of 1990
The Family and Medical Leave Act (FMLA) of 1993
In addition, many states have enacted statutes and administrative procedures designed to compliment or enhance federal law.
The sometimes claimant-friendly legal environment, coupled with pervasive economic problems including high unemployment, has lead to increased EPL-based litigation over the past several years. This trend is expected to continue.
In light of the trend, employers should determine whether they have insurance coverage for the EPL exposure and, if not, whether coverage is available and necessary.
INSURANCE COVERAGE FOR EPL UNDER COMMONLY HELD POLICIES
Employers tend to carry Commercial General Liability [CGL] Insurance and Workers Compensation / Employer’s Liability [WCEL] Insurance. In addition, corporations may carry Directors and Officers Liability [D&O] Insurance.
This begs the question; “We have lots of insurance, are we covered for EPL”? The short answer is “probably not”.
CGL Insurance
Standard CGL policies, e.g. ISO CG 00 01, do not exclude coverage for EPL per se. However, most insurers attach an Employment Related Practices Exclusion, e.g. ISO CG 21 47, that eliminates coverage for EPL exposures. This underwriting practice is pervasive because, simply stated, CGL insurers do not want to “take on” the EPL exposure.
Exclusions aside, there is a more basic coverage question; is the CGL policy triggered by EPL-based claims of economic injury or emotional distress? Again, the short answer is “probably not”.
The CGL policy provides two coverage parts;
Coverage A Bodily Injury And Property Damage Liability and
Coverage B Personal And Advertising Injury Liability.
Coverage A is not triggered in the absence of a claim for damages as a result of bodily injury, i.e. physical injury, or property damage. As briefly discussed, EPL claims are based on economic injury or emotional distress, not bodily injury or property damage.
Coverage B provides coverage for damages caused by “offenses” as usually defined in the
policy: false arrest, detention or imprisonment; malicious prosecution; wrongful eviction from,wrongful entry into, or invasion of the right of private occupancy; defamation; or oral or written publication of material that violates a person's right of privacy.
Note that the defined offenses typically do not include the major EPL causes of action, e.g. discrimination, harassment, humiliation, disparate treatment, failure to promote, wrongful termination, or failure to provide a reasonable accommodation. If a defined offense is not alleged, the policy is not triggered.
WC / EL Insurance
Standard WC / EL policies provide two separate coverage parts.
Part One - Workers Compensation Insurance responds to the insured employer's statutory liability for work-related injuries under a workers compensation law. Part Two -Employers Liability Insurance provides coverage for the employer's common law liability, if any, arising out of a work-related injury.
A work-related physical injury or disease is generally required to trigger Part One. A claim that does not allege physical injury or illness and seek statutory benefits will not trigger the policy. The “bodily injury” requirement is also a problem under Part Two. However, if the bodily injury requirement is met, a standard exclusion will likely eliminate coverage:
“7. Damages arising out of coercion, criticism, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination against or termination of any employee, or personnel practices, policies, acts or omissions; …”
As was the case with CGL insurance, WC / EL underwriters do not want to take on the EPL exposure.
D&O Insurance
D&O policies are not standard by any means; generalizing is difficult. That said, EPL claims may not be covered under D&O policies. Depending on the claimant’s allegations, basic, relatively standard policy provisions may bar coverage. More likely, an EPL exclusionary endorsement will be attached to the policy.
Some insurers will endorse the D&O policy to afford coverage for EPL claims, but this approach can be problematic. The biggest disadvantages are potential coverage gaps and increased costs.
EPL claims may target managers, supervisors, and co-workers. These individuals may not qualify as an “insured” under the D&O policy. In addition, the entity itself may be a defendant. It may be possible to provide D&O coverage for the entity and employees other than directors and officers but, additional problems may then be created.
The increase in claims due to the added EPL coverage can lead to higher renewal premiums and fewer insurers willing to write the D&O coverage on similar terms and conditions. More importantly, EPL claims could erode or exhaust the policy's limits, leaving subsequent claims, including pure D&O claims, underinsured or uninsured.
The “insured v. insured” exclusion may also be problematic. This exclusion, commonly included in D&O policies, excludes coverage if one insured sues another insured. For example, if a terminated officer or director filed suit against one or more of the company's remaining officers or directors, the exclusion would bar coverage.
Coverage Under Commonly Held Policies – Conclusion
As is evident from the brief macro analysis above, EPL exposures are not easily covered under CGL, WC / EL or D&O policies; significant uninsured exposures likely remain.
Fortunately, there is a policy specifically designed to cover these exposure, the
Employment Practices Liability Insurance policy. This is the solution we generally recommend. A broad, very general overview of the policy follows.
EMPLOYMENT PRACTICES LIABILITY INSURANCE [EPLI]
Covered Persons and Organizations
The policy will cover all named insureds as included in the policy declarations. In addition, most EPLI policies define "covered organization" to include organizations that have been acquired or formed by the named entity within a specified period of time. This assumes certain policy conditions have been met.
The insured organization’s joint ventures and partnerships can also be covered but, in most cases, these entities must be specifically named as insureds.
EPLI forms may also cover “insured persons”, often defined to include executive officers, directors, partners, and employees of the covered entity. However, some forms do not include employees as insureds. Others cover only certain categories of employees, e.g. managerial or supervisory employees.
Covered Acts
Each EPLI policy defines the scope of covered employment-related acts. There is no standard definition; each policy must be reviewed to determine the extent of the coverage, including an analysis of the policy exclusions.
Most policies provide coverage for four major categories of employment-related offenses: discrimination, harassment, wrongful termination, and "all other" workplace torts, again as defined by the policy and as subject to the exclusions.
Here is a representative listing of commonly covered “all other” workplace torts:
Coercion
Constructive discharge
Retaliation
Defamation, Employment-related misrepresentation
Infliction of emotional distress or mental anguish
False arrest or false imprisonment
Invasion of privacy
Wrongful discipline, demotion, humiliation
Negligent hiring, retention, training, supervision
Negligent/wrongful evaluation
Wrongful failure to hire or promote
Failure to enforce company policies and procedures
Covered Damages
There is limited uniformity among EPLI policies in terms of covered damages. Most types of compensatory damages can be covered. Punitive damages may be covered if allowed by the jurisdiction in question.
Some types of damages are commonly not covered. Reasons for lack of coverage may include damages uninsurable as a violation of public policy, or damages arising from an uninsurable business risk, e.g. breach of contract. In addition, EPLI policies typically exclude the cost of complying with federal laws, such as the ADA.
Other examples of damages that may or may not be covered include amounts payable as wages for services rendered, amounts payable under an employee benefits plan, fines and penalties, costs resulting from labor disputes, and costs of complying with an order for injunctive relief.
Here is a sample policy definition:
Damages" means the monetary portion of any judgment, award or settlement, including punitive damages where allowable by law, because of a Wrongful Employment Practice, but does not include: (1) loss of use or destruction of tangible or intangible business or personal property; (2) medical expenses for physical injury to a person's body; (3) compensation awarded or settlements determined to be owing for services rendered by an employee under a written contract of employment; (4) an express obligation to make payments, as severance pay or otherwise, in the event of termination; (5) the costs of complying with an injunction; or (6) the cost of providing reasonable accommodation under the Americans with Disabilities Act or similar state or local laws, including but not limited to, the construction or modification of facilities
Defense and Settlement
The insured may choose between a "duty to defend" and a "duty to indemnify” form.
Under a "duty to defend" policy, the insurer has the duty to defend any claim alleging a covered act under the policy. The insurer usually has the right to choose defense counsel and control the defense.
Indemnity policies require the insured to defend claims and the insurer to pay the defense costs. The policyholder has the right to control the defense of the claim, including the right to select counsel, usually subject to the insurer’s litigation guidelines.
Settlement of claims generally requires the insurer’s consent. If the insured settles without the insurer’s consent, the insurer may be able to avoid payment because the insured breached policy conditions.
Similarly, the insured may have the right to refuse to settle for an amount proposed by the insurer. However, if the claim settles at a later date for more money, the insured may be responsible for all or part of the excess amount.
CONCLUSION
The EPL exposure is real and is likely increasing. Uninsured claims are potentially very expensive, especially if a jury is involved.
The EPL exposure is at best covered in limited part, or not covered at all in the worst case, under typically held policies, e.g. CGL, WC / EL, D&O.
EPLI is designed to cover the EPL exposure and therefore provides the broadest available coverage. We recommend EPLI to all employers. A Seitlin agent will be happy to review your current insurance program and provide recommendations for enhancing your existing coverage.
Seitlin will be hosting a Webinar regarding EPL coverage on Tuesday, August 24, 2010 at 10:00 EST. If you would like to register for this webinar, please contact Cristy Leon at 305.717.6054 or cleon@seitlin.com.
For more information on Employment Liability Insurance and other policies, contact:
Grant Schuetz
Vice President
Claims & Risk Management Services
Mobile: 561.445.5847
gschuetz@seitlin.com
