How employment practices liability insurance can protect against employee claims Featured

8:00pm EDT April 25, 2010

Most employers work hard to make sure that they follow the law when it comes to human resources policies. But if an employee alleges that a policy was breached, the result could be an employment practices claim, resulting not only in financial loss but also in loss of reputation.

Claims can cover a broad spectrum of actions, including sexual harassment, retaliation, wrongful termination and discrimination because of race, religion, age or gender, and provide for relief to the employee.

“Damages can include compensatory damages, such as replacing the money the employee should have received, and punitive damages,” says Martha Jacobs, a vice president in the Financial Services Group of Aon Risk Services Central Inc. “These cases can take up a lot of time and be very emotional.”

Smart Business spoke with Jacobs about how employment practices liability insurance (EPLI) can help protect your company against employment practices claims.

What key things should business owners understand about EPLI?

Business owners should be cognizant of their duties under the policy. They should understand the definition of a claim, know when they’re supposed to notice a claim and who these notices should be sent to, and know what their rights are in regard to selecting legal counsel. There can be problems if a business owner agreed to use a panel of counsel within the insurance policy but then hires a different firm during litigation and incurs costs without alerting the insurance carrier. Owners should also understand what isn’t covered. There has been a fair amount of litigation around wage and hour claims, such as overtime pay or failure to pay for meal times or breaks. These are not traditionally covered under an employee practices policy. This is a difficult risk to underwrite, an expensive claim to defend and is often deemed uninsurable under public policy.

What should be included in an EPLI policy?

There should be a broad definition of loss, including punitive damage coverage with favorable venue wording. This requires the carrier to look at any jurisdiction that has a nexus to the claim, policy, insurer and insured, to see if the law in any applicable jurisdiction is favorable to providing insurance for this type of claim. Policies are drafted broadly to make it difficult for insurance carriers to find a way to raise an insurability concern.

Business owners should obtain as much control over selection of counsel and settlement authority within the retention/deductible as possible. There should also be broad notice capabilities so the insured doesn’t get caught with late notice arguments. Large companies have a much greater frequency of claims. But smaller companies run into notice difficulties when they do not understand the breadth of the definition of the claim. Smaller business owners should seek to obtain an appropriate period of time to get a claim in to the carrier before any policy provisions are violated and should acquaint themselves with the definition of claim under their policy. There should be a broad definition of wrongful acts so that a wide array of activities is addressed by the policy, including a broad definition of workplace torts and, ideally, third-party coverage.

What are the concerns with EPLI policies?

These claims are very intentional in nature as far as the alleged activity. EPLI policies are designed to cover activities such as sexual harassment, retaliation, race or gender discrimination, or hostile work environment. But some states have issues against allowing insurability of intentional acts. If you’re in one of these states, you can use ‘wrap’ policies, often obtained from Bermuda insurance carriers, to provide coverage for punitive damages and intentional acts.

Some also fear that purchasing coverage may make it more likely that employees will bring claims or that the claims will be larger. There is no evidence, however, that this is the case, and in some instances, the presence of an insurance carrier can take the emotion out of the case for plaintiffs and make them realize they are not getting revenge against their employer, they are going to battle with an insurance carrier.

What is the typical cost for EPLI?

It varies widely based on what type of deductible the business is willing to take. And because employee headcount is a big determining factor of cost, it is hard to make any generic statement regarding pricing.

However, premiums have not increased, even in this economy. They’ve stayed flat or decreased, depending on claim history and risk profile. So, business owners might think that the price for EPLI would be too high, but that’s not the case. While larger employers have purchased EPLI for a fairly long time now, it is important for companies with fewer than 5,000 employees to consider purchasing the coverage while pricing remains inexpensive, because smaller companies run a greater risk of exposing their balance sheets to a catastrophic loss from an EPLI claim than large employers and are more likely to get value from the risk management services provided by carriers through the coverage.

What should business owners do if they are hit with an employment practices lawsuit?

Business owners should reach out to their broker if coverage is in place to consult on his or her duties, as far as the policy and claim process. They should also quickly determine the ability to either use a panel of counsel assigned by the insurance company or select their own counsel. It’s critical to get this legal advice immediately, because there’s a brief window of time after receiving a claim where the tiniest mistakes can make a huge difference. For example, a business owner may fail to hit time periods with regard to litigation or take some internal action in relation to the claimant that dramatically increases exposure on the overall claim.

Martha Jacobs is a vice president in the Financial Services Group of Aon Risk Services Central Inc. Reach her at (412) 594-7535 or