In the last post, we discussed how the increasing number and expense of employment-related claims and lawsuits have prompted employers to seek insurance for the associated defense costs and potential liability awards. While employment practices liability insurance (EPLI) policies are the insurance industry’s answer, as with any type of insurance, there are a number of important considerations the savvy employer will evaluate before purchasing any EPLI product. In today’s issue we’ll highlight the most common EPLI policy type, some important terms and the importance of timely notice of claims, and coverage, and exclusions.
Policy Type, Terms and Notice of Claims-Most EPLI policies are “claims made” policies, that is, the claim must be incurred during the coverage period and the insurer must be notified during a designated reporting period. Because employment disputes may develop over a long period before they actually become “claims,” employers should consider purchasing tail coverage when dropping or changing EPLI policies. It is critical to understand the policy definition of all terms, and in particular those for “claim,” “loss,” “insured,” and “wrongful employment practice.” Know your carrier’s notification requirements. Failure to provide timely notice as set forth in the policy may result in the insurer denying coverage for an otherwise covered claim.
Coverage-EPLI usually provides coverage to the employer, its executives and employees against claims for discrimination, retaliation, harassment; defamation, invasion of privacy and negligent supervision; and wrongful discharge, failure to promote and failure to hire. Traditional insurance policies, including “umbrella” policies, directors and officers liability policies and workers’ compensation generally exclude these types of employment-related claims. Attorneys’ fees and other defense costs, often the largest expense in covered claims, are usually included with the limits of the typical EPLI policy. However, every dollar spent defending the claim reduces the amount available to pay a judgment or a settlement.
Exclusions-While the types of claims covered by EPLI policies has expanded since they first became available, they often do not cover: wage and hour claims or claims for employee benefits; claims resulting from the failure to provide sufficient prior notice of a mass layoff or plant closing; health coverage continuation claims; claims under the National Labor Relations Act and Occupational Health and Safety Act regulations; or the state or municipal equivalents to these laws. The costs of providing a disabled employee with reasonable accommodation and the breach of employment contract or independent contractor agreements are often excluded. These exclusions are significant because such claims, particularly class claims for wage and hour violations, are increasingly common and can result in devastating uninsured liability. Some EPLI policies will cover wage and hour claims, but they are usually very expensive.
EPLI also does not cover claims or counterclaims an employer may have against a former employee such as for misappropriation of trade secrets and breach of restrictive covenants against unfair competition, solicitation of customers and disclosure of confidential information. Punitive damage awards are generally not covered.
If your company is in an industry in which certain otherwise excluded claims or types of damages awards are common, consider including one or more carve-outs in the EPLI policy you purchase so that such coverage will be available. It will cost more, but may be well worth it.