EPLI Insurance Guide
Managing employees carries risk - behind every employment decision is a potential lawsuit. Prospective employees that are not hired may believe they were discriminated against, employees working long hours may believe they are not being properly compensated or promoted, and employees that are let go may be believe they were wrongfully terminated. EPL insurance (also known as employment practices liability insurance) provides coverage for defense costs, damages and claim expenses incurred resulting from employment related claims. It also provides a team of specialized attorneys that the organization can consult when making difficult employment decisions, in order to minimize the likelihood of a claim and any resulting damages. For directors looking to perform in depth policy reviews, we have published both a D&O Checklist and EPLI Checklist to assist with coverage assessments.
What Does EPLI Insurance Cover?
As briefly mentioned above, employment related claims can arise from a broad range of accusations. Depending on the business and its industry, certain claims may be more prevalent than others as demonstrated below.
- FAILURE TO HIRE & FAILURE TO PROMOTE: While these claims can affect any business, “failure to make partner” claims are particularly prevalent against law firms, asserted by employees/attorneys, that, after dedicating years of long hours are denied partner status or promised promotions.
- WRONGFUL TERMINATION & BREACH OF EMPLOYMENT CONTRACT: The employment at will doctrine isn’t ironclad and eliminating the position after termination wont always prevent a claim. Employees that are fired may often assert breaches of good faith and/or fraudulent inducement (among others).
- DISCRIMINATION & EEOC ACTIONS: Many companies are male dominated at the executive level and regularly seek younger candidates. Both of which can easily give rise to gender and age discrimination claims. Additionally, the EEOC provides a convenient (and cost effective) avenue to employees that believe they have been discriminated against. These claims are not solely limited to blatant race or gender discrimination. Activities such as: improper criminal background checks on applications and questions related to family medical history on job applications can also result in EEOC actions.
- WAGE & HOUR CLAIMS: Wage and hour claims are filed when employees believe that their employer has misclassified them as an exempt employee, they are working excessive hours, or believe they are not receiving appropriate pay/benefits. Wage and hour claims have grown significantly over the past few years. Even claims without merit can be costly to defend.
- SEXUAL HARASSMENT: Workplace sexual harassment can assert a myriad of accusations including improper comments, inappropriate advances, and unwelcome conduct. Industries which are male dominated with a younger workforce (such as technology companies and financial firms) are increasingly exposed to such claims.
- 3rd PARTY CLAIMS: Third party EPLI insurance is particularly important for businesses with a large client base and those that deal a lot with the public such as retailers, restaurants and commercial real estate owners. It provides protection against claims asserted by customers, vendors and other 3rd parties. These can range from violations of the ADA act (such as failing to provide wheelchair access) to accusations of sexual harassment to discrimination claims by clients alleging they were discriminated against or did not receive the same level of professional attention. Not all policies provide 3rd party coverage, which is why it is important to perform a careful assessment.
How Is EPLI Purchased?
- EPLI ENDORSEMENT: Adding an EPLI endorsement to an existing liability policy is one approach to purchasing coverage. This approach however does have its downsides. Often, coverage is sub-limited to a limit of 100k, 250k or 500k (inclusive of defense costs) which often does not provide enough coverage. Additionally, the coverage provided is usually relatively basic. For example, among other claims, these endorsements usually do not provide coverage for: wage and hour claims, claims asserting breaches of employment contracts, or 3rd party claims asserted by clients or vendors. While an endorsement may be acceptable for small businesses, organizations seeking broad coverage will want to avoid such endorsements.
- D&O POLICY: Packaging EPL insurance through a D&O policy is generally the most common approach for many reasons. Most importantly, the coverage provided is broad. Employment claims also account for a considerable percentage of claims asserted against private company directors and officers. Lastly, it eliminates the need to manage multiple policies and is cost efficient for what it provides.
- STAND ALONE POLICY: There are four main reasons companies may prefer to purchase a separate, stand-alone EPLI insurance: 1) companies interested in preserving their D&O limits solely for “true” D&O claims, 2) companies disinterested in D&O coverage and looking to obtain a more cost efficient EPLI policy without including D&O, and 3) companies that have sustained prior claims making it difficult to package with their D&O insurance, and 4) organizations seeking the broadest possible coverage with terms they can more easily negotiate.
Basic Terms Of EPLI Insurance
- DUTY VS NON-DUTY TO DEFEND: The duty to defend is an important element within professional and management liability insurance policies. It effectively tenders the responsibility of the defense onto the insurance carrier, removing the burden from the insured. In addition it also provides a team of experts for consultation. Most companies will want to avoid purchasing any policies that are written on a non-duty to defend (duty to indemnify) basis.
- DEFENSE COSTS: When setting policy limits, employment practice insurance policies can be written one of two ways: 1) with defense costs included in the limit, or 2) defense costs “outside” of the limit. Being that defense costs account for such a significant portion of the claim, this is an important area of critique. A policy with a 1 Mill limit which is inclusive of defense costs provides substantially less coverage than a policy with a 1 Mill limit which provides defense costs “outside”. Arguably, such a policy could be viewed as effectively maintaining a 2 Mill limit or higher.
- DEFINITION OF “EMPLOYEE”: As is the case with all professional and management liability insurance, all definitions must be reviewed carefully. Definitions of employees are however particularly important and should include: 1) partners, managers, LLC members 2) part time employees, interns and volunteers, 3) independent contractors and 4) prospective and prior employees.
- MISC EXCLUSIONS: While the above serves as a very general guide to some of the more important terms/exclusions contained within EPLI policies that are still man others that require assessment (and negotiation) such as exclusions for breaches of employment contracts and/or regulatory/EEOC actions.
Recent Trends Increasing Employment Claims
- Gender (and trans-gender) equality issues are posing new challenges for corporations
- Pay equity claims are sprouting up in certain states (such as NY and CA) alleging compensation disparities between races, genders, etc.
- Genetic discrimination claims are on the rise.
- The EEOC has been actively pursuing companies for improper use of criminal background checks on employment applications.
- Website ADA (americans with disabilities act) claims are on the rise brought by persons with disabilities asserting that they are unfairly being denied access to websites which do not provide proper audio/visual assistance.
- Mobile devices make it easier than ever for employees to record and document questionable workplace practices.
- Social media is creating workplace challenges for companies who are basing employment/termination decisions on employees’ social media usage
- DOL (Dept Of Labor) has been discussing the implementation of new overtime laws which would qualify previously exempt employees
- Many industries, such as the tech and finance sectors actively seek younger persons, resulting in inadvertent potential age discrimination based claims.
- AREN’T EMPLOYMENT CLAIMS COVERED BY MY LIABILITY POLICY? Maybe. As we have referenced above, some policies do extend some coverage via a basic endorsement. However these endorsements generally only provide a basic level of coverage subject to usually low sub-limits which may not provide enough protection.
- HOW MUCH DOES EPLI COST? EPLI insurance premiums depend on a number of factors. The number of employees, and business industry are the most obvious rating factors. Generally speaking, a basic EPLI endorsement for a small company may cost as little as $300, while stand-alone policies and coverage purchased under D&O packages will often begin at $1,000.
- DOESN’T THE EMPLOYMENT AT WILL DOCTRINE PROTECT US? The short answer is no. Employment at will doctrines may protect companies from some wrongful termination claims but it does not eliminate the possibility of lawsuits entirely. Wrongful termination claims are also only a small portion of potential claims against directors & officers of a company. There are a myriad of others as highlighted above.