Employment Practices Liability insurance (EPLI) is a critical component of risk management for businesses of all sizes. It provides protection against claims made by employees alleging discrimination, wrongful termination, harassment and other employment-related issues.
Despite its importance, many organizations make common mistakes when it comes to EPLI. These mistakes can lead to inadequate coverage and increased financial risk. This whitepaper explores these key mistakes and offers guidance on how to avoid them.
1. Not covering all relevant entities
One of the most significant concerns in purchasing an EPLI policy is ensuring that the policy applies to all entities and operations. EPLI policy forms are manuscript and differ between insurers. The coverage for subsidiaries and affiliates varies widely. Many companies mistakenly assume that they only need to include entities that have operations and/or employees, but it's common to see passive investment vehicles or holding companies named (even if incorrectly named) in litigation.
If the policy doesn't cover the named entity, the costs incurred to dismiss or otherwise defend that entity won't be covered. EPLI also won't cover contractual indemnification obligations. Similarly, holding companies and affiliated entities must be listed as insureds to be covered.
Companies should work with their brokers to identify all relevant entities and operations with each renewal and take a comprehensive approach toward including those entities and operations in their EPLI policy.
2. Inadequate coverage limits and third-party coverage
Another common error is selecting coverage limits that are too low or buying coverage that's too narrow, such as leaving out third-party EPLI coverage. Third-party EPLI is an extension that protects companies and their employees, directors and officers against non-employee claims for alleged discrimination or harassment. Third-party EPLI claims may be brought by customers, vendors, tenants, business guests or other non-employees.
This coverage can provide critical defense protection against the recent rise in expensive consumer discrimination claims, such as under California's Unruh Civil Rights Act or the Americans with Disabilities Act. Employment-related and third-party EPLI claims can result in substantial defense fees, settlements or judgments.
An experienced insurance broker will evaluate potential risks and confirm that the EPLI policy provides adequate coverage provisions and limits to protect against these financial burdens.
3. Omitting coverage for severance and separation agreements
Many EPLI policies won't cover severance payments except to the extent that they're part of a claim settlement negotiated with and consented to by the insurer. Accordingly, when offering severance to departing employees, insureds should consider whether the employees have raised any claims that would trigger insurance.
Companies often seek a release of claims when offering severance to departing employees. Some employees respond with claim allegations in connection with demands for increased severance. Insureds should promptly notice and involve the insurer upon receipt from an employee of any written demand seeking monetary or non-monetary relief, even if the employee's demand appears in an informal email seeking increased severance to release claims as part of negotiating a separation agreement.
The benefits of timely notice in this type of situation are twofold. First, there may be coverage for a portion of the separation agreement cost. And second, notice would preserve rights to coverage if separation negotiations fail and the matter turns into a larger claim down the road.
4. Overlooking the importance of risk management practices
EPLI isn't a substitute for effective risk management practices. Companies that neglect to implement comprehensive HR policies, training programs and procedures to prevent employment-related issues are more likely to face claims. Repeated claims can create significant costs, as EPLI coverage applies only after the retention is satisfied, and retentions apply on a per-claim basis. As this can lead to difficulties and increased expense in buying subsequent EPLI coverage, businesses should invest in robust risk management strategies to complement their EPLI coverage.
Employment laws and regulations are constantly evolving. Failing to update EPLI policies to reflect these changes can leave businesses vulnerable. Organizations should regularly review and update their policies to ensure compliance with current laws and to address any new risks that may have emerged.
5. Not understanding policy exclusions and consent requirements
EPLI policies typically include consent requirements and exclusions that can limit coverage. Key consent requirements include consent to defense arrangements (discussed below in more detail) and to settlements. Most policies require the insurer's advance written consent to make or accept a settlement offer if total loss (defense and settlement) would exceed the retention and require the insurer's contribution. Carriers strictly apply these consent requirements, and it's difficult to get any coverage for a settlement that was reached without the insurer's input.
Common exclusions include claims related to wage and hour disputes, intentional acts and violations of certain statutes. Additionally, contractual liability is sometimes excluded, yet claimants often allege it in connection with other employment claims. Therefore, it's beneficial to seek an insurer that will defend breach of employment contract claims. Some policies also distinguish between breach of written contracts and breach of implied contracts, only providing affirmative coverage for breach of implied contracts.
It's crucial for businesses to thoroughly understand the coverage grants and exclusions, and they should work with their brokers to address any gaps in coverage.
6. Delaying claims reporting
Perhaps the most common basis for denial of EPLI claims is untimely reporting. Most EPLI policies are claims-made-and-reported forms, which means coverage applies only to claims first made during the policy period and reported to the insurer during the policy period (or within a certain grace period after policy expiration).
Timely reporting of claims is essential to preserve rights. Delays can result in denials of coverage, and many states strictly enforce EPLI notice timing requirements. Thus, companies should establish clear procedures for reporting claims and ensure that all employees are trained accordingly. Prompt reporting also allows insurers to bring their defense experience to the table early in the case and can help mitigate potential damages.
The most frequent culprit in causing late-notice barriers to EPLI coverage is failing to notify the insurer of Equal Employment Opportunity Commission (EEOC) charges, or their state equivalents. EPLI notice requirements are driven by what constitutes a "claim," as defined by the policy. Most EPLI policies include broad definitions of "claim," including any written demand for monetary or non-monetary relief, civil proceedings, alternative dispute resolution proceedings, and administrative or regulatory proceedings and investigations against any insured for a wrongful employment practice.
Typically, the definition of claim also expressly includes EEOC charges or their state equivalents under the subpart for administrative or regulatory proceedings and investigations. As a result, a failure to provide timely notice of EEOC charges during the policy's required period can lead to coverage disputes or denials if the policy expires and the matter later develops into a more significant claim.
7. Not understanding duty to defend vs non-duty to defend
In general, EPLI policies are written as either placing the duty to defend a claim on the insurer (often referred to as "duty to defend") or placing it on the insured ("reimbursement," "non-duty" or "non-duty to defend").
Duty to defend. The traditional benefit of a duty-to-defend form is that the carrier will assign defense counsel and defend all allegations, whether covered or uncovered, except for wage and hour allegations (which are typically carved out). Insurers often have agreements in place with experienced employment lawyers nationwide, and they may be able to engage those lawyers at discounted rates compared to what businesses pay without EPLI coverage. The benefits can be limited, however, if the carrier ultimately seeks to recoup the portion of defense costs allocated to uncovered aspects of the claim. Likewise, many EPLI claims include wage and hour allegations that are excluded from coverage and require allocation in the first instance, reducing the benefit of the form.
Reimbursement. In contrast, a reimbursement form allows the insured to select defense counsel, subject to the insurer's consent to selection and the reasonableness of the rates. The question of a "reasonable" rate can be a source of contention. Carriers often propose to cap reimbursement at rates firms charge on their panel for duty-to-defend forms, even though some panel firms may charge below-market rates due to bulk discounts and national contracts. Reimbursement forms also may lead to questions about allocation, because they don't require insurers to defend both covered and uncovered allegations in the first instance. As a result, the parties must agree on what portion of the claim involves covered allegations, and only that portion of defense costs will be reimbursed, absent a provision allocating 100% of defense costs to covered claims.
Often endorsements can be negotiated to pre-approve preferred defense firms, establish reimbursement rates, address allocation or recoupment concerns and otherwise soften the edges of the two extremes. Considering these nuances and the variation available in the marketplace, it's important to work with an experienced broker to select the proper form and ensure appropriate endorsements to meet the insured's defense preferences and risk profile.
Conclusion
EPLI is a crucial safeguard for businesses, but it requires careful consideration and management to be effective. By avoiding these common mistakes, organizations can better protect themselves against employment-related claims and ensure that their EPLI coverage aligns with their risk management strategies. Partnering with experienced insurance brokers and investing in proactive risk management practices are essential steps in navigating the complexities of EPLI.
