Employment Practices Liability Insurance Policies

October 14, 2010, 10:52 AM

With the continued increase of employment-related claims, many of which are decided by federal and state juries, Employment Practices Liability Insurance (EPLI) policies have been more widely used by businesses. EPLI is a very specialized insurance designed to cover claims by current, former or prospective employees who claim their legal rights as employees have been violated. These policies are generally designed to protect against wrongful termination, discrimination and sexual harassment claims. Other claims alleged in employment litigation, such as defamation, invasion of privacy, negligent hiring, supervision, promotion or retention, or even intentional torts, such as assault and battery and emotional distress, can be covered. Whistleblower claims and wage and hour claims may be covered with regard to cost of defense (attorneys fees and related litigation costs), but actual damages (for example, unpaid wages in an overtime case) usually are not covered. Directors and Officers insurance liability policies and Errors and Omissions insurance do not typically cover employment-related claims.

Should an employer purchase such a policy? Several things must be kept in mind. First, the employer must evaluate its risk to know whether to purchase these types of policies. Your industry, size, financial ability to defend and pay claims, history of employment claims, and whether your company has human resource professionals managing risks, are all factors to consider. If a business decides to purchase coverage, the policy coverages must be carefully reviewed because they can vary in coverages, restrictive definitions, exclusions, deductibles, and price. Typically, a policy will cover specific employment practices violations, as well as contain exclusions and restrictive definitions. These policies often do not include claims for violations of the National Labor Relations Act (NLRA), Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), Employee Retirement Income Security Act (ERISA), or the Worker Adjustment and Retraining Notification Act (WARN). Employers should look for policies which offer comprehensive coverage or negotiate with the insurance carrier to include broad coverage, including for claims outside traditional claims such as harassment, discrimination and wrongful termination. While many EPLI policies will provide coverage for back pay, lost benefits and legal expenses and litigation-related costs, they will not typically pay front pay, fines, penalties, punitive damages or for business interruption.

Two other considerations should be kept in mind. First, the insurance company usually retains the right to designate counsel of its own choosing from a panel of insurance lawyers the carrier regularly uses. Your own labor and employment law firm may not be on that panel. You may want to negotiate for control of the selection of the attorney who knows your business and regularly provides legal advice and handles your matters. Secondly, some EPLI policies require that the employer consent to financial settlements that are approved by the insurance company as a condition of continued coverage. This may not be consistent with your business principles.

Finally, these policies are not intended to be a substitute for good employment practices. Strong policies, training, professional human resources staffs, good risk management and excellent compliance programs are the best tools to provide a productive workplace. --R. Barrow Blackwell