15 Nov Filling the Risk Management Gap: How Employment Practice Liability Insurance Can Protect Your Business

Consider this scenario:

An employee in your organization files a discrimination lawsuit, alleging that she was not promoted because of her gender. You’re confident that the promotion went to the better-qualified candidate and believe you have sufficient documentation to support this decision. Still, having to defend your organization against her claim in a court of law could be costly; legal fees might seriously deplete your business’s cash reserves, perhaps even lead to bankruptcy. But you were smart: Two years ago, you purchased an Employment Practice Liability Insurance (EPLI) policy, which covers precisely this sort of situation. While you’ll have to do some serious damage control with your clients and work to boost employee morale, your business is protected from devastating financial losses.

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Such a scenario is quite possible in today’s increasingly litigious business climate, in which even the most proactive employers can find themselves in violation of one of the many employment laws governing the workplace. That’s why EPLI has become an almost necessary part of a business’s insurance umbrella. EPLI protects employers in the event of such workplace claims as discrimination, wrongful termination, and sexual harassment. Generally, a policy covers eligible losses stemming from such causes of action, as well as associated litigation costs, including attorneys’ fees. And the insurer will provide the services of attorneys who specialize in defending against such claims, significantly increasing the likelihood that employers will prevail in the event litigation does occur.

Maybe you think that your business’s Commercial General Liability (CGL) policy protects you in such situations. Think again. In most cases, CGL policies specifically exclude employment practice claims. All CGL policies protect your business against losses resulting in bodily injury or property damage; employment practice claims, however, generally involve injuries that are mental, emotional, and economic in nature and are therefore outside the range of protection offered by CGL insurance.

What does an EPLI policy typically cover? Among the most common situations are:

• Discrimination and retaliation;
• Sexual and general workplace harassment;
• Negligent hiring;
• Breach of employment contract;
• Wrongful termination, dismissal, or discharge;
• Violations of the Family and Medical Leave Act;
• Situations involving defamation, libel, and slander; and
• Denial of training or deprivation of seniority.

EPLI is available in many different forms. Most commonly purchased as a stand-alone policy or as an endorsement to a Directors & Officers policy, an EPLI policy is generally available in claims-made format, meaning that the policy will cover only those claims made during its term. An EPLI policy also requires that the insured give prompt notice to the carrier as soon as the insured becomes aware of facts or circumstances that might give rise to a claim. Most EPLI policies are subject to a single-policy aggregate limit of liability covering both defense and indemnity, meaning the costs of defending against a claim will diminish the amount paid to cover settlements or judgments. Some carriers will allow an insured to purchase defense as well as policy limits, thereby placing the litigation defense costs outside the amount available for indemnity. Ultimately, the best course of action is to consult your insurance agent, who can assist you in choosing the policy that suits your business’s needs and provides you with the appropriate level of protection.

As with any liability policy, EPLI may not cover certain risks, including:

• Risks covered by other policies, such as a CGL;
• Intentional, criminal, fraudulent, or malicious acts;
• Contractual liability;
• Strikes and lockouts; and
• Violations of the Occupational Safety and Health Act.

Of course, EPLI insurance should be considered only the last line of defense in a healthy business’s risk management arsenal. As is the case in so many situations, knowledge is power: Providing your employees with comprehensive, regular training can substantially reduce the risk that they will engage in the sort of illegal or unethical behavior that leads to litigation. Also, well-written and properly enforced Human Resources policies and procedures are essential for keeping your business in compliance with the many and varied regulations covering the workplace. A good example of the inestimable value of training in preventing employee misconduct is the decline since 2000 in the number of sexual harassment claims filed each year; the drop is often attributed to the comprehensive sexual harassment training many employers now require as a condition of employment. By contrast, one area that seems to be giving rise to more claims against employers is that of wage and hour law; given the ambiguities of some businesses’ salary classifications and overtime policies, there is more room for charges of improper treatment that can lead to litigation against an employer. And though most EPLI policies currently exclude wage and hour claims, some insurers have begun offering coverage for these claims as an extension of an EPLI policy.

The good news is that EPLI policies are practical and usually quite affordable. You should carefully examine your business’s training programs, employment practices, and compliance record to determine its degree of exposure to litigation and weigh these factors against the costs of EPLI. Such a risk inventory may make clear that the cost of an EPLI policy may be a relatively small price to pay when measured against the ruinous financial penalties that can result from employment-practice litigation.