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Employers Beware: The Hidden Pitfalls Of EPLI Coverage

[November 4, 2013]  In recent years, many employers have learned the hard way that Employment Practices Liability Insurance (“EPLI”) does not always provide the protection that employers hoped and thought they had purchased. For example, insurers commonly deny coverage based on a variety of legal technicalities, such as an employer’s failure to comply with EPLI reporting requirements, or a finding that a claim was not made during the coverage period or fell within an exclusion from coverage. Further, insurers are more often dictating the choice of an insured’s employment counsel, rather than allowing employers to utilize their usual employment counsel. In light of these challenges, employers should carefully consider whether to purchase or renew EPLI coverage and how to negotiate the best coverage possible if EPLI is purchased or renewed.

While EPLI coverage can be a valuable asset, employers should assess their goals with respect to purchasing and/or renewing EPLI coverage. Generally, EPLI policies are subject to a per-claim limit as well as an aggregate payout limit. The amount of coverage needed depends on the employer’s particular circumstances, such as the nature of its business, how many people it employs, and the number of facilities the employer operates. Because the amount of the deductible impacts the premium cost, an employer should review its claim history to determine an appropriate deductible amount. In this regard, if the chief goal of EPLI coverage is to provide protection for catastrophic events, an employer may want to select a higher deductible and thereby lower its premium.

The following are a few important aspects of EPLI coverage that employers should consider before purchasing or renewing coverage:

Make Sure The Policy Covers All Potential Claims

An employer should review its EPLI policy to confirm that it does not contain exclusions for important categories of claims. For instance, it is not uncommon for EPLI policies to exclude claims of assault and battery in the harassment context; sexual harassment claims filed by non-employees; retaliation, wage-and-hour, and negligent hiring, training or supervision claims; and claims alleging violations of such laws as the Family and Medical Leave Act (“FMLA”), the Worker Adjustment and Retraining Notification Act (“WARN”), the National Labor Relations Act (“NLRA”), the Fair Labor Standards Act (“FLSA”), and the Occupational Safety and Health Act (“OSHA”). Many employers purchase EPLI coverage without realizing that their policies provide limited protection and leave them vulnerable to a variety of significant employment claims.

Reserve The Right To Control The Settlement Of Claims

Unlike other types of liability insurance, EPLI can vary widely. Thus, employers can negotiate, to some extent, the terms of EPLI coverage. Employers may want to negotiate with the insurance carrier to include a “consent to settle” provision in order to prevent the carrier from imposing settlements without the employer’s consent. Often, EPLI policies require the insured to accept any settlement that is approved by the carrier, or lose insurance coverage for the claim. Moreover, the insurance carrier may insist on language reserving the right to deny coverage if the employer’s refusal to consent to settlement is unreasonable and the case results in a significant judgment. Employers should review such provisions closely before signing on the dotted line.

Insist Upon Your Right To Select Counsel

Insurance companies generally have the right to select the attorneys who will defend cases covered by EPLI, unless the employer has negotiated in advance an endorsement to the policy allowing the employer to retain the right to select counsel. When policies do not contain this important endorsement, insurers are increasingly requiring employers to use lawyers from a pre-approved list of “panel counsel,” even when the employers’ own attorneys have greater expertise, substantial familiarity with the employer, and strong working relationships with the employer. Perhaps most disturbingly, employers have found that such “panel counsel” often appear to act with greater allegiance to the insurer than to the employer.

Make Sure The Policy Covers All Appropriate Entities And Individuals

If an employer is composed of several business units or entities, it is important to ensure that the EPLI policy covers all appropriate ones. Otherwise, an employment claim may be deemed to be uncovered or to fall within an exclusion. Additionally, individuals filing suit against employers often identify the business unit or entity incorrectly in court documents, which can result in protracted disputes regarding coverage. Employers should also make sure the EPLI policy covers all claims filed by applicants, employees, and independent contractors.

Confer With Counsel Before Signing

Finally, before deciding to purchase or renew an EPLI policy, an employer should carefully consider these issues in consultation with counsel. The Firm can assist in reviewing and negotiating EPLI policies to determine if the coverage is appropriate and to help obtain the best value and protection possible.

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Please contact us if you have any questions regarding EPLI policy coverage. We regularly assist employers with such matters, and we would welcome the opportunity to assist you.