It can be said with a fair degree of accuracy that the decade of the 1990s saw the birth of employment practices liability insurance (EPLI). Virtually nonexistent before 1990, the coverage was developed in response to the growing number of employment-related lawsuits and, some might contend, the accompanying media attention. (Remember the Anita Hill/Clarence Thomas proceedings in which the subject of work-related harassment became a national preoccupation.) Another strong contributing factor was the fact that finding coverage under existing standard insurance policies was difficult at best.
The policies most often pursued by insureds as sources of coverage--commercial liability, directors and officers, workers compensation, and even homeowners--all contain provisions that give insurers reasonable justification for precluding coverage for damages associated with wrongful employment practices. For a commercial liability or homeowners policy to apply, the damages claimed must be considered bodily injury, property damage, or personal injury, and actions such as wrongful termination, work-related harassment, or unfair job discrimination usually do not come within the meaning of those terms. (Homeowners policies also contain a business exclusion.) Another hurdle an employer must overcome to be granted coverage under these policies is the intentional injury exclusion, because many if not most wrongful employment practices can be considered to be caused intentionally.
Workers compensation policies include employers liability insurance, which applies to bodily injury to an employee that is caused by accident or disease, when the claim falls outside the immunity provided to employers under workers compensation statutes. Intentionally caused injuries are excluded from employers liability coverage, so the same barriers to coverage inherent in commercial liability policies apply to employers liability insurance.
Directors and officers (D&O) insurance typically covers claims for money damages that are not based on bodily injury, property damage, or personal injury. In fact, the latter terms are specifically excluded in D&O policies, as are claims for mental anguish and emotional distress. It is also possible that the particular director or officer may not be named in the policy, which could create a coverage problem, so gaining coverage under a D&O policy is likewise far from a certainty.
Despite the presence of policy provisions that give insurers justification for resisting coverage, insurers have not always prevailed in such coverage clashes. Actually, the results of these disputes have been mixed. As a consequence of rising employment litigation and the uncertainty of the outcome, insurers were compelled to add exclusions for employment-related claims to liability policies in the early 1990s. This ultimately created the need for a specific insurance form that would respond to claims for wrongful employment practices.
Features of employment practices liability insurance
During the 1990s, employment-related practices liability insurance grew from a niche product marketed by a handful of companies to a sizable specialty line. Many variables exist as to format and coverage among the forms used to provide this insurance. EPLI may be written as a stand-alone policy or as an endorsement to a commercial liability or businessowners (BOP) policy. A deductible, generally ranging anywhere from $1,000 to $25,000, is a common feature associated with the coverage. Some forms include indemnity and defense costs "within limits," whereas others may offer defense costs "in addition to" the limit for damages.
Employment practices liability insurance ordinarily is written on a claims-made basis, with a retroactive date. Only claims first made against an insured within the policy period (or within any extended reporting period option that an insured buys) are covered. In a claims-made form, the offense that causes the "damage" must take place on or after the retroactive date and before the end of the policy period. The retroactive date acts as "a line in the sand," so to speak. Claims for wrongful employment offenses committed prior to that date, even though the claim is made during the policy period, will not be covered. Ordinarily, the retroactive date will be the inception date of the coverage. However, retroactive dates can be changed or eliminated entirely, although the absence of a retroactive date could subject an insurer to a significant increase in exposure.
Claims-made vs. occurrence
In a policy written on an occurrence basis, the event that triggers coverage is injury or damage that occurs, or happens, during the policy period. As is sometimes the case, the claim may not be made until months or even years after the policy expires. The policy that responds to the claim is the policy in force when the injury or damage occurred. With a claims-made form, coverage is triggered when the claim is first made, provided the offense leading to the claim took place sometime between the retroactive date and the expiration of the policy.
With a claims-made form, insurers are aware of all claims made during the policy period, and usually can determine how much it will cost to settle the outstanding claims. As a result, and because EPLI is a relatively new line of insurance, insurers usually provide this coverage on a claims-made basis.
Other features/considerations
Defense costs are a primary concern of employers, particularly smaller employers who find it difficult to absorb such costs. Though many lawsuits are won by employers, minimum legal costs to defend such suits can be as much as $25,000.
Employers are subject to a host of federal laws such as the Equal Employment Opportunity Act (EEOC), the Civil Rights Acts, the Americans with Disabilities Act (ADA), and the Family and Medical Leave Act, to name a few. In addition, a number of state and municipal laws dealing with employment situations also affect employers. As a result, they need insurance to protect them against violations, alleged or real, of these laws.
Typical employment practices covered under employment practices liability policies or endorsements include wrongful termination, unlawful discrimination by race, gender, age, etc., work-related harassment, including sexual harassment, employment-related defamation, wrongful demotion, and so on. Be aware, however, that coverage varies by insurer and must be carefully reviewed.
The definition of insured can vary from form to form, with some forms including coverage for employees and others omitting such coverage. A key issue in this regard is whether former employees are covered. Employees terminated months or even years ago can often be the cause of wrongful employment practices claims that may not be initiated until long after the offense was committed. In addition, in some forms only full-time employees may be covered, leaving part-time, temporary, or leased workers uninsured.
Most employment practices coverage forms contain a provision that requires the insurer to obtain the written consent of the insured before settling a claim. In the event of a lawsuit against the insured, however, it is the insurer that ordinarily decides on the selection of defense counsel.
Risk management measures/underwriting considerations
Establishing loss control measures is essential to minimize claims frequency and avoid the catastrophic claim. Especially important is management and employee training conducted by human resource specialists, including sensitivity training, to heighten employee awareness concerning appropriate employment-related practices.
Other measures include standard employment manuals that explain employment policies and procedures, detailed documentation of problems and solutions, and grievance procedures that give managers and employees an opportunity to resolve potential problems before they turn into lawsuits.
With regard to underwriting, insurers ordinarily require that a prospective insured complete a detailed application questionnaire. The questionnaire addresses a wide range of information that provides the insurer a comprehensive picture of the applicant's employment situation. Areas of paramount importance are loss history, including present or anticipated claims, financial condition, and the firm's human resources practices. Some examples of typically asked questions are turnover rate, potential plans for growth, layoffs, etc., human resources training, availability of human resources manuals, handbooks, etc., general composition and salaries of the existing employee force, and pending claims or lawsuits. The questions are designed to enable the insurer to make a well-reasoned decision as to the acceptance of the risk and the premium charge.
Features of AAIS Employment-Related Practices Liability coverage (ERPL)*
AAIS ERPL coverage is designed for typical BOP insureds--small to medium-sized risks--and responds to situations in which one or a few employees rather than large classes of employees are involved. Coverage is written on a claims-made basis.
AAIS has filed the ERPL form, as an endorsement to its BOP and Artisans policies, in all states that have approved those programs. Insurance departments in several states, however, have required coverage modifications to the countrywide form. As a result, changes have been made to the form in these states to comply with state requirements. The changes for the most part involve cancellation, offers for the extended reporting period option, coverage of punitive damages, and separate limits for defense coverage.
The AAIS endorsement is a complete coverage option with its own definitions, exclusions, and aggregate and per-claim limits. The limits are separate from those in the underlying BOP or Artisans policy. Because it is endorsed onto those policies, the common policy conditions and state amendatory endorsements that apply to the underlying policies also apply to the ERPL coverage.
Because coverage is on a claims-made basis, a wrongful employment practice or offense that results in a claim must take place on or after the retroactive date and before the end of the policy period. In addition, the claim must be made or presented either within the policy period or within the optional extended reporting period, provided the insured has purchased the option.
Defense coverage is subject (in most states) to the policy's per-claim and aggregate limits. The deductible applies to both damages and defense costs. In other words, damages and related defense costs within the deductible amount are the insured's responsibility.
For example, if the insured carries a $20,000 deductible and a claim is settled for $15,000 and legal expenses are $7,000, the insurer would be required to pay only $2,000 of the combined amount ($22,000 combined for settlement and defense minus $20,000 deductible).
Two supplemental coverages are included: pre-judgment and post-judgment interest. Both coverages are paid in addition to the per-claim and aggregate limits, and are not subject to the deductible.
Two optional coverages are offered with the endorsement: an extended reporting period option and an option to cover additional insureds. The need for extended reporting period coverage may exist if the ERPL coverage is canceled or nonrenewed; if it is replaced with other insurance that is not on a claims-made basis; or if it is replaced with other claims-made insurance with a later retroactive date.
Exclusions help control exposure by limiting coverage to situations that occur on an individual basis, and by precluding coverage for losses stemming from financial decisions that could involve large numbers of claims. Among the exclusions are claims involving loss that arises from labor disputes and collective bargaining, reorganization or downsizing, violations of ERISA and COBRA federal laws, and financial impairment, including bankruptcy or insolvency.
The need for coverage against claims alleging wrongful employment practices is real. Commercial lines insurers, including those that write the BOP, have an excellent opportunity to provide this coverage and fill a growing need faced by their policyholders.
For more information about AAIS insurance programs, contact Robert Schnoll, AAIS marketing manager, at (800) 564-AAIS (2247), extension 222; fax: (630) 681-8356, or e-mail address: BobS@aaisonline.com. *
The author
Robert J. Prahl, CPCU, is director of education for the American Association of Insurance Services.