How to Buy Employment Practices Liability Insurance

Introduction

Consider these events:

-An employee claims to have been harassed by a supervisor and threatens to sue.

-A customer service clerk who is discharged for chronic performance deficiencies claims age discrimination.

-An unsuccessful job applicant alleges racial discrimination.

-An employee claims that her supervisor ignored her reports of sexual harassment.

Any of these could cost you big dollars in defense costs and, perhaps, an award by the court. None are covered by standard commercial liability insurance. In most cases, they would be covered by an employment practices liability insurance policy (EPLI).

Who Should Read This

This special report is designed for anyone interested in learning how to get the right employment practices liability insurance policy. I have included hints, tips, and strategies that will help you find the right coverage for you. You’ll learn the strategies you need to get the best policy at the best price.

There are a thousand articles on EPLI on the Internet. I’ve read many of them. Most are focused on the policy and explaining the features. All are either from insurance companies or agents, insurance regulators or web portholes advertising a directory of insurers. They are trying to sell you a policy. In this report I focus on how to buy the right coverage for you.

I come at this subject from a different perspective from most insurance people you’ll run into. I don’t sell insurance. I never accept fees or commissions from insurance agents of companies. I don’t even let them buy me lunch. I have been in the insurance business since 1979 and have been involved in all aspects of the business. My whole career has been spent helping business people find the right insurance. I’m confident that this guide will help you.

Thumbnail Sketch of the Coverage

The policy is designed to address liabilities that come out of the employment relationship. Coverage is generally included for harassment, discrimination, wrongful discharge, failure to hire, and failure to promote. The cost to defend lawsuits is also included in the protection. Workers’ compensation, employee theft, issues involving unemployment insurance and ERISA are excluded.

Coverage Considerations

As there are no standard EPLI policies, each policy and proposal must be evaluated on its own merits. Every insurer uses his or her own policy forms, terms, and conditions. Here are some issues that should be considered:

Claims-Made Coverage Trigger

Most liability insurance policies (general liability, automobile, workers’ compensation) pay for events that occur during the policy period. For example, an auto insurance policy will pay for an accident that occurs while the policy is in force.

EPLI policies, however, pay for lawsuits filed during the policy period; the wrongful act could have occurred years before. Claims-made policies respond only when a suit is filed, or when a strong threat of a suit exists.

Claims-made policy: Pays based on the date of the lawsuit.

Occurrence policy: Pays based on the date of the accident or occurrence.

The downside of a claims-made policy comes if the policy is canceled. Example: An EPLI policy is put in force January 1, 2005, and is renewed in 2006 and 2007. In 2008, however, the organization decides to end the coverage, because the premium has increased. Six months later, a letter from an attorney arrives announcing a lawsuit for discrimination in hiring that occurred in 2007.

No coverage.

Although the policy was in force at the time of the alleged discrimination, the policy was not in force when the suit was filed. The solution to this problem is the extended reporting period found in most policies (see the next paragraph).

Extended Reporting Period/Tail Issues

Claims-made policies only provide protection for lawsuits and actions brought during the policy period. In the event that coverage is replaced or cancelled, protection may be desired for events that took place prior to expiration/cancellation but for which no claim has yet been filed. This coverage is called a “tail” or “extended reporting period” (ERP). Here are some issues to consider:

-Can you buy the ERP at your option or only when the insurance company cancels the policy?

-For what period is the ERP valid? One year? Two years?? Longer???

-What is the premium for the ERP? (The cost is usually expressed as a percentage of the current premium.)

-In what time frame must the insured decide to buy the ERP? (The usual period is 30 or 60 days.)

Policy Limit
What amount of coverage is provided by your policy? What’s the total amount of protection offered for all claims during the covered time frame (also known as an “aggregate limit”)? Multiple claims can, in effect, use up the limit of coverage.

Defense within Limit

Most EPLI policies include the cost of defending a claim (attorneys’ fees, etc.) within the policy limit of liability. That means that the amount of coverage purchased must be enough to cover the awards and the defense costs of all claims. This can be an issue when considering the amount of coverage (aggregate limit) you buy.

Definition of Wrongful Employment Practice

Each EPLI policy will contain a definition of the wrongful acts that are included in the policy. Here are some acts to be considered when reviewing coverage:

• Discrimination
• Negligent Hiring
• Wrongful Discharge, Evaluation, Discipline, Promotion
• Employment-Related Personal Injury (Libel or Slander)
• Sexual Harassment
• Workplace Harassment
• Failure to Hire
• Workplace Tort – Wrongful Termination, Retention, etc.

If an act is outside the definition of wrongful act, there is no coverage.

Definition of Harassment

Some policies narrowly define this coverage as “sexual harassment.” A better (broader) definition is “workplace harassment” or “harassment including sexual harassment.”

Special Insurance Company Provisions

Some employment practices liability insurance policies include special features. Usually these are measures to prevent losses. Insurers may provide access to a hotline, allowing free access to experts to discuss employment actions and situations. The purpose is to give the insured access to information and opinions on issues that could lead to a claim.

Another feature offered by some insurers is a reduction in the deductible applied to a claim if the insured called an attorney prior to the termination of an employee. Should a claim result, the deductible is reduced by half.

Retroactive Date / Prior Acts Coverage

We discussed above the idea that claims-made insurance policies respond to claims brought during the policy period. Many policies include a date after which a claim must occur in order for the policy to respond—a retroactive date. When changing insurance companies, it is vital to understand the new policy retroactive date. The use of a “Tail” may be necessary if the retroactive date is not sufficiently in the past.

When buying coverage for the first time find out how “prior-acts” will be handled. Some insurers exclude all past occurrences. Some will only exclude “pending and prior litigation.” In other words, if you knew that the incident was going to result in a lawsuit there is no coverage.

Third Party Coverage

Some insurers offer coverage that includes allegations of harassment or discrimination to non-employee, third parties. For example, a customer alleges that a clerk refused service due to her race or ethnicity.

Review the definitions of third party and the wrongful acts that are included in the extra coverage.

Employment Practices Liability Insurance Coverage Review Chart

Complete the following using the information provided by your agent or have the agent fill in the blanks.

Name of the insurance company providing quote/coverage:

Name of agent providing quote/coverage:

Insurer financial rating by AM Best Company. (Available at www.AMBest.com):

The maximum payout for the total of all claims. (Also called aggregate or total limit):

The maximum payout per claim. (Also called per claim limit):

What is the deductible for claims?

What events are included within the definition of a wrongful employment act? (Harassment, discrimination, wrongful discharge, etc.)

Are the costs incurred in the defense of a claim included in the limit of coverage provided or in excess of the coverage provided? (Most EPLI policies will have defense as part of the limit of coverage.)

Is the policy a claims-made policy or an occurrence policy? (Most EPLI policies will be claims-made.)

If claims-made, can the insured buy the extended reporting endorsement after cancellation of the policy? (Policies should offer at least 1 year of extended coverage. Three years is better.)

What is the premium for the extended reporting period endorsement?

If claims-made, how does the policy insure acts prior to the inception of the original policy?

Is there an exclusion for claims involving an insured suing another insured? (May be a separate endorsement or within the exclusions.)

Does the policy include coverage for wrongful acts against non-employees and third parties?

Does the policy indemnify or pay-on-behalf of the insured for a claim? (Indemnification means that you will pay the expenses and the insurer will reimburse you. In most cases, pay-on-behalf is preferable.)

Make a list of other policy exclusions:

(Review both those included in the exclusion section of the base policy and separate endorsements.)