Five Things You Should Know About Employment Practices Liability Insurance
If you listen closely on a quiet weekday afternoon, you can hear the steady thumping of stamps on inkpads at the Equal Employment Opportunity Commission’s (EEOC) offices on West Madison Street in Chicago. And it’s no different throughout the country — employee claims of discrimination, harassment, and retaliation are high paced and showing no signs of slowing down.
This high rate of claims means your company needs to be savvy about a number of key strategies that can help you minimize risk. One of these strategies may include purchasing employment practices liability insurance (EPLI). Here, we answer some core questions about EPLI:
1. What is EPLI, and how does it differ from related insurance policies?
EPLI policies allow employers to protect themselves against the exposure and costs associated with claims and litigation arising out of the employment relationship. These policies generally cover claims made by current and former employees, applicants who were never hired, or third-parties claiming the employer has engaged in wrongful conduct.
Discrimination, harassment, retaliation, wrongful discharge, and invasion of privacy are the typical claims covered by EPLI. On the other hand, claims that an employer violated the Fair Labor Standards Act (e.g., failure to pay overtime, misclassification as an independent contractor) are typically not covered by EPLI policies, nor are claims under ERISA, COBRA, or the National Labor Relations Act, although it may be possible to purchase limited coverage for defense costs.
Not surprisingly, EPLI is but one item on a buffet of insurance offerings to employers; alongside it are directors and officers (D&O), commercial general liability (CGL), and errors and omissions (E&O) policies, each serving a distinct purpose. D&O insurance covers acts committed by a company’s directors and officers only; it is of no help when an employee’s supervisor is accused of sexually harassing an employee. Likewise, E&O policies are concerned with true errors and omissions allegedly committed in the course of doing what your company does for a living, and are not implicated by allegations of discriminatory discharge, which is seldom an accident. CGL policies often expressly exclude wrongful employment practices. In other words, EPLI may overlap with other types of coverage, but it largely exerts its own force in confronting an array of everyday claims.
2. Should my company purchase EPLI?
Maybe — it’s a business decision that requires you to take into account several factors, such as the cost of the EPLI premiums and the extent of the deductible (or self-insured retention, to be explained below), your company’s location and number of employees (and how these correlate with the likelihood of a claim being filed against your business), history of claims and losses, and whether you have written, preventative employment policies in place.
According to the 2017 Hiscox Guide to Employee Lawsuits, U.S. companies have a 10.5% chance of being on the receiving end of an employment-related charge, and the chances for Illinois companies are 35% higher than the national average. On average, small-to-medium size companies facing such claims battle for 318 days before resolution and leave the arena with a $160,000 bruise.
As with every type of insurance, the perceived value of the coverage depends upon the company’s level of comfort with the self-insured retention (SIR) or deductible. The SIR is the amount the company must pay out of pocket at the beginning stages of a claim; the insurer is not required to pay a penny until after the SIR has been met by actual payment of defense costs and/or losses by the insured. A deductible, on the other hand, is subtracted by the insurer from its total policy payment, which then must be paid by the company.
As expected, the policy premium will seesaw with SIR levels. Policies with a high SIR amount (or deductible) typically will have lower premiums than the same policy with a low SIR or deductible. These policies are better suited for companies that view EPLI as a type of catastrophic coverage. On the flip side, if your cash flow would make it difficult to absorb a high SIR, then a higher premium with a lower SIR amount may make economic sense.
The number of individuals employed by your company should also factor into your decision-making. Although most federal anti-discrimination statutes apply only to businesses with 15 or more employees, smaller companies are subject to state anti-discrimination laws, which may govern employers with only one employee (depending on the nature of the claim). Nevertheless, it is not unreasonable for a small company in certain industries to forego EPLI, while maintaining strong training and preventative strategies, until it grows closer to 15 employees.
Given the numerous factors that must be taken into account, employers should consult with their attorneys and business advisors to reach a sound decision about whether and what type of EPLI to purchase.
3. What should I do when negotiating the purchase of an EPLI policy?
It is better to negotiate a good EPLI policy up front, than to sign up for standard terms, stuff the policy packet in your desk drawer, and later bemoan its shortcomings when an issue pops up.
A good first step is to talk to your attorney about her previous experiences with various insurance companies; lawyers repeatedly deal with EPLI carriers and it’s best to make decisions based upon known trends than to shop just based on price.
You should determine whether the policy imposes on the insurer a “duty to defend” or a “duty to reimburse.” A duty to defend requires the insurer to defend the claim or lawsuit, cover legal fees and costs, and pay for liability (all up to the policy limits). Insurers with a duty to defend retain high levels of control over the defense of claims, the selection of counsel, and litigation and settlement strategies. The duty to defend extends to all claims, even frivolous ones, or issues reasonably related to the underlying claim.
An insurer subject to a “duty to reimburse,” on the other hand, must reimburse covered costs and losses and is typically not required to defend matters reasonably related to the underlying claim. However, the company retains higher levels of control in selecting counsel and executing its defense strategies.
You may want to consider negotiating a “mutual selection of counsel” endorsement to the policy, which will provide you with greater flexibility in retaining your own counsel, even where the insurer has a duty to defend with the corresponding high levels of control. This will prove helpful when you want your preferred counsel to handle a case, and do not want to relinquish your fate to unknown lawyers selected by the insurance company. Be aware, however, that even if you are able to obtain a selection of counsel provision, you may be required to share in the cost of attorneys’ fees to the extent your preferred counsel charges rates higher than the default panel rates typically paid by insurers. This should be another point of discussion during your negotiations.
4. Even if my company has an EPLI policy, does it always make sense to report a claim?
Unlike auto insurance policies, reporting a claim does not typically impact the cost of maintaining or renewing your EPLI policy. Therefore, it is usually wise to report claims as you become aware of them. However, there may be circumstances where it does not make sense to do so. For example, if your policy comes with an SIR (self-insured retention) of $25,000, and you believe you can settle the matter for $10,000, reporting the claim may achieve nothing but a headache. But even that logic comes with risks; if you are wrong in your estimates and the settlement numbers start to creep up, you risk losing coverage altogether due to untimely notice to the insurer. When in doubt, err on the side of reporting, and consult your attorney to help reach a sound decision.
It is also wise to “park” a potential claim. “Parking” a claim means notifying your carrier that you have been made aware of facts or circumstances that might give rise to a future claim (but for which no current claim exists). If a claim based upon those facts or circumstances later materializes outside of the policy period, because you “parked” your claim, it will be treated as though it arose and was reported during the relevant period.
Staying silent when you know something is brewing may backfire, as insurers are not interested in selling fire insurance to someone who already smells smoke. Providing timely and transparent notice via “parking” also demonstrates to the insurer that your company is prudent, which fosters confidence in the relationship and promotes a sense that you are serious about risk management.
5. What are some common mistakes companies make regarding EPLI policies?
Because most companies prefer to focus on running their business than worrying about the minutiae of an insurance policy, it is easy to overlook potentially critical missteps. Many companies, for example, have never heard of EPLI or don’t even know if they have it. Others automatically renew policies they’ve never read, rather than negotiate more favorable terms. Sometimes, a company is unaware of relevant policy periods, or neglects to promptly ascertain whether an event or awareness of an event constitutes a claim or otherwise triggers reporting requirements. Finally, because there are so many types of insurance policies out there, it is not uncommon for companies to think their existing policies will address employment practices claims, only to later discover that they’re hung out to dry.