Employers Should Tread Carefully With EPLI Coverage
Employment practices liability insurance (“EPLI”) is designed to provide employers with coverage for legal claims made by employees, typically related to allegations such as discrimination, harassment, retaliation, and wrongful termination. Given that these types of claims are relatively common and potentially costly, EPLI can be a valuable risk-management tool for employers.
However, many employers have learned – often too late – that EPLI does not always provide the protection they thought they had purchased. For example, insurers often deny coverage based on legal technicalities, such as an employer’s failure to comply with strict reporting guidelines, or a claim’s falling outside the coverage period or within a carefully drafted exclusion. This leaves the employer in the unenviable position of paying for both EPLI and the full cost of defending or settling a claim.
Moreover, in recent years, insurers more frequently have been dictating the choice of an insured’s employment counsel, rather than allowing the employer to utilize its usual legal counsel. In other cases, EPLI insurers strictly limit an employer’s choice of counsel to a small number of pre-selected firms that have no prior relationship with the employer and often do not even specialize in employment law. Even when insurers do allow employers to use their own legal counsel, some pay only a fraction of the legal fees and set strict guidelines regarding staffing, hours worked, and reimbursement of expenses, which can negatively impact the litigation.
In light of these challenges, as well as the increasing cost of EPLI, employers should carefully consider how best to proceed when it comes to purchasing or renewing EPLI coverage and how to negotiate the best coverage possible.
The following are a few important aspects of EPLI that employers should consider before purchasing or renewing coverage:
Frequently, employers assume that their EPLI will provide coverage for a certain matter, only to be denied coverage because a claim falls under a policy exclusion, sometimes for a fairly common type of claim. In order to avoid finding itself in that position, before purchasing or renewing EPLI coverage, an employer should confirm that the policy does not contain exclusions for important categories of claims, or, at a minimum, ensure that it is clearly aware of which types of claims are not covered.
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; wage-and-hour claims; 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”), the Employee Retirement Income Security Act (“ERISA”), the Occupational Safety and Health Act (“OSHA”), and state law corollaries to these federal laws. Many employers purchase EPLI coverage in the expectation that their policy will provide comprehensive protection, without understanding that a bevy of exclusions may leave them vulnerable to a variety of common employment claims.
Reserve The Right To Control The Settlement Of Claims
Unlike other types of liability insurance, EPLI polices can vary widely. Thus, employers may have more room to negotiate the terms of EPLI coverage. For example, EPLI policies often require the insured to accept any settlement that is approved by the carrier or forfeit coverage for the claim. Moreover, a policy may provide that the insurer has the right to deny coverage if the employer unreasonably refuses to consent to settlement and the case results in a significant judgment.
With such concerns in mind, an employer may choose to negotiate with the insurance carrier to include a “consent to settle” provision to allow the employer more control over negotiations by preventing the carrier from imposing a settlement without the employer’s consent. Employers should review such provisions closely before signing.
Your Right To Select Counsel
Insurance companies frequently draft their policies to give themselves sole discretion to select the attorneys who will defend claims covered by EPLI. In other instances, insurers require employers to use lawyers from a pre-approved list of “panel counsel,” even when an employer’s usual attorneys have greater expertise in employment law, extensive familiarity with the employer, and strong working relationships with the employer’s management team. Perhaps most troublingly, some employers report that such “panel counsel” appear to act with greater allegiance to the insurer than to the employer.
To guard against these risks, it is critical that an employer negotiate – in advance – an endorsement to the policy allowing the employer to retain the right to select its counsel.
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 misidentify the entity or business unit in court documents, which can result in protracted disputes between the employer and the insurer regarding coverage. Employers should also make sure that an EPLI policy covers all pertinent claims, whether filed by applicants, employees, or independent contractors.
Understand Coverage Limits And Deductibles
Generally, EPLI policies are subject to a per-claim limit, as well as an aggregate payout limit. The amount of coverage needed will be very specific to the employer and will depend on the employer’s particular circumstances, such as the nature of its business, the industry, the number of employees, and the types of facilities the employer operates.
Likewise, EPLI policies virtually always provide for deductibles. Because the amount of the deductible directly impacts the premium cost, an employer should review its claim history and evaluate its risk tolerance to determine an appropriate deductible amount. If the chief goal of EPLI coverage is to provide protection against catastrophic damages, an employer may want to select a higher deductible and thereby lower its premiums.
Confer With Legal Counsel Before Signing
Finally, before deciding to purchase or renew an EPLI policy, an employer should carefully consider these issues in consultation with legal counsel. Counsel with experience in interpreting these types of documents can identify potential coverage gaps and otherwise assist an employer in obtaining the best EPLI value and protection possible.
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Please contact us if you have any questions regarding EPLI policy coverage. We regularly advise employers on such matters, and we would welcome the opportunity to assist you.