Introduction. The continuing explosion of employment litigation against employers in this country has motivated many employers to consider purchasing employment practices liability insurance, commonly known as EPL insurance. Such insurance provides liability insurance coverage against the most common types of wrongful discharge and employment discrimination claims usually asserted against employers. The market for such insurance in Maine and elsewhere is still relatively new and immature, but such insurance offers Maine employers a way to control and budget for an otherwise highly variable cost: the cost of employment-related legal claims.

     Purpose Of Article. This article has been written to provide employers who are potential employment practices liability insurance purchasers with useful information from a non-insurance-industry source about EPL insurance. This article seeks to neither promote nor discourage the purchase of EPL insurance.

     Scope Of Article. This article does not discuss traditional insurance subjects or every detail of EPL insurance policies, such as: claims made policies versus occurrence policies, different types of deductibles, primary and secondary insurance, extended reporting periods, retroactive dates, self- insured retentions, co-payments, coverage limits, etc. Instead, the article focuses on topics which are unique to EPL insurance policies. This article also does not discuss any specific insurance companies, their financial creditworthiness, their market presence, or their actual claims handling practices. All these matters are important to an insurance purchasing decision, but they are beyond the scope of this article.

     First: Check Existing Coverages. An employer considering the possibility of purchasing EPL insurance should first review all of the employer's existing insurance policies to find out whether the employer already has that coverage, or a substantially similar coverage. In particular, an employer should check its General Liability policy, its Workers' Compensation policy, its Directors & Officers policy, and any Umbrella or other similar liability insurance policies it may have. For each policy, all declarations pages, endorsement pages, and riders should be reviewed. Although most such contemporary non-EPL policies do not cover employment practices liabilities, there are so many different policies, policy endorsements, coverage clauses, and exclusion clauses on the market that an employer can be sure about what insurance coverages it has only by reviewing and checking its existing policies.

     Second: Consider Alternatives To Insurance. EPL insurance may provide some coverage to an employer after an employment-related claim has arisen, but since all EPL insurance policies have deductibles, co-payments, and coverage limits, and since an employer's employment practices are presumably within the employer's control, an employer should consider whether an expenditure of resources should be made to prevent claims from arising instead of, or in preference to, paying for an insurance premium to cover claims after they arise. For example, a premium for a small employer for EPL insurance may be $2500 per year. If an employer only has that $2500 to spend on employment-related matters, should the employer spend $2500 for EPL insurance coverage, or should the employer spend the $2500 (or less) for preventative actions? Preventative actions which may be taken include: (1) a complete review and revision with the help of experienced labor counsel of the employer's employee handbook, personnel policies, and employment practices; (2) extensive training for the employer's managers and supervisors on how to avoid common employment-related legal claims; and/or (3) acquisition of other useful employment law resources such as The Maine Employer's Handbook, periodical subscriptions, association memberships, and other training programs. Each employer must decided for itself whether "an ounce of prevention is worth a pound of cure." Some employers have the resources to take preventative measures and to purchase EPL insurance. Such employers may find that insurance premiums are reduced for employers who have taken proper preventative measures.

     Third: Shop Around. As stated above, the market for employment practices liability insurance is still relatively new and immature. As a result, policy terms and prices offered to an employer may vary quite widely. EPL insurance policy forms are not standardized. An employer considering purchasing such insurance should shop around extensively to find out what policies at what prices are available, both from local vendors and out-of-state vendors.

     Fourth: Accurate Applications. As with most other types of insurance policies, EPL insurance policies are typically priced and issued on the basis of the insured's application for insurance, and such policies typically contain a clause voiding the insurance for any material misstatements or false statements contained in the application form. An employer applying for EPL insurance coverage must be very careful to accurately answer the questions on the application form. Many application forms contain extensive questionnaires about an employer's various employment practices and policies. These extensive questionnaires should be carefully and conservatively answered. TIP: An extensive insurance application questionnaire may provide a very good benchmark by which an employer may assess the quality or riskiness of its employment policies and practices, even if the employer never actually submits the insurance application.

     Fifth: Analyze The Policy Provisions. An employer considering the possibility of purchasing an EPL insurance policy should analyze the nature and scope of the coverage provided by the policy. This usually entails analyzing the policy's coverage provisions, the exclusions, and the claims handling provisions.

     Coverage Provisions. In general, from an insurance purchaser's point of view, the more broadly-worded the coverage provisions, the better. A policy which provides coverage by means of a "list" of statutes or types of claims may not provide as much coverage as a policy which provides coverage, for example, "for any wrongful or unlawful employment practice, condition of employment, or termination from employment." If a policy lists certain federal statutory claims as being covered, check that state statutory claims and common law claims are also covered. If a policy lists specific types of tort claims as being covered, check that all the various types of tort claims are covered (such as: defamation, invasion of privacy, false arrest, false imprisonment, malicious prosecution, intentional or negligent infliction of emotional distress, interference with prospective advantages or contractual relationships, deceit, fraud, misrepresentation, assault, battery, harassment, negligent evaluation or supervision, wrongful discipline, retaliation, and violation of public policy). The same is true of various "contract" claims: breach of express contract, written or oral; breach of implied contract; promissory estoppel; unjust enrichment; breach of specific promise; breach of covenant of good faith; etc. Obviously, it is hard to list every type of possible claim that may be asserted against an employer. The creativity of potential claimants' attorneys should not be underestimated: legal claims may be asserted for almost anything about which anyone may complain! This is all the more reason why a potential purchaser of EPL insurance should seek broadly-worded coverage provisions.

     Harassment. Most EPL insurance policies cover harassment claims, but an employer should seek a policy that covers all types of harassment claims, not just sexual harassment claims. For example, a policy should cover claims for racial harassment, national origin harassment, religious harassment, and disability harassment.

     Claimant's Attorney's Fees. With regard to coverage matters, an employer should also ask what coverage, if any, is provided for a claimant's attorney's fees. Most EPL insurance policies are very unclear on this point, yet a claimant's attorney's fees are likely to be a big issue in most employment- related litigation cases.

     Exclusions. Many EPL insurance policies contain exclusions from coverage which substantially undermine the scope and usefulness of the coverage provided by the policies. Some of the most common exclusions are discussed as follows:

     1. The Intentional Act or Willful Act Exclusion. This is one of the most common and most problematic of all exclusions. The exclusion is common because insurance companies resist insuring persons against their own intentional or willful misconduct. The exclusion is problematic, however, because almost all employment- related legal claims involve allegations of intentional or willful misconduct. Allegations of intentional discrimination and intentional wrongful conduct are pervasive in lawsuits against employers. Also, under many employment statutes and labor statutes, the standard of what is considered an "intentional" violation may be quite low. If an EPL insurance policy says in its coverage section that it covers employment discrimination claims but then in the exclusions section excludes coverage for intentional or willful violations, the policy's coverage is almost useless. In fact, this type of exclusion could create a conflict of interest between an insured and an insurance company in a case in which the insurance company must pay damages if the employer is found guilty of an unintentional violation but not if the employer is found guilty of an intentional violation.

     2. The Retaliation Claims Exclusion. This is another common but problematic exclusion. Employment-related retaliation claims are now very common, and a policy which excludes coverage for such claims is a policy which does not cover a very common type of claim. Also, many claimants join retaliation claims with other types of claims, so an employer insured under an EPL insurance policy with such an exclusion could find itself in the uncomfortable position of having insurance for some but not all of the claimant's claims.

     3. Assault and Battery Exclusion. This is another common but unacceptable exclusion. Many assault and battery claims are asserted in sexual harassment cases. "Assault and battery" does not require the claimant to have been beaten or attacked by the wrongdoer. At common law, assault is "placing a person in fear of unconsented touching," and battery is "unconsented touching."

     4. Defamation Exclusion. This is another common but unacceptable exclusion. Defamation claims against employers are very common, yet they arise in many different factual circumstances: references for former employees, internal misconduct investigations, informal "stray" comments, formal written letters, etc. Also, defamation claims are commonly joined with other claims asserted in lawsuits against employers.

     5. Punitive Damages and Civil Penalties Exclusion. This is another common exclusion, yet punitive damages or civil penalties are now available to claimants under both federal and state laws for most acts of intentional employment discrimination. Some laws or jurisdictions do not allow for insurance of punitive damages or civil penalties, so an employer should look for policies which cover punitive damages "to the extent allowed by law."

     6. Wage & Hour Claims Exclusion. Most EPL insurance policies exclude any coverage for wage & hour claims (such as claims for unpaid minimum wages or claims for unpaid overtime pay) for the understandable reason that insurance companies cannot subsidize their insureds' payrolls, but some policies provide some limited coverage for some wage & hour claims (such as FLSA retaliatory discharge claims).

     7. FMLA Claims Exclusion. An employer should be very careful about a policy which contains a blanket exclusion of all FMLA claims. In particular, claims that an employer discharged an employee in violation of the FMLA are now common and frequently joined with other claims arising out of discharges.

     8. Contractually Assumed Liabilities Exclusion. This is another common exclusion, and it is valid up to a point. An employer must look carefully at how the exclusion is worded. Is the exclusion so broadly worded that it will exclude claims for breach of employment contract, whether based on an express employment contract or an implied employment contract or some other contract theory?

     Claims Administration and Handling. The major issue in the administration of EPL insurance policies is the issue of how to deal with common employment-related claims or demands that are not covered by the policies. For example, an unpaid overtime claim may be joined with a sex discrimination claim. Another example is this: claims or demands by discharged or laid off employees for reinstatement to their jobs are very common, but most EPL insurance policies say nothing about reinstatement demands other than that the insurance company will be liable for no injunctive or equitable relief. An employer considering the possibility of purchasing an EPL insurance policy should ask the insurance company these types of questions:

     1. Will the employer have any ability to control or have input into the selection of defense counsel in a case in which claims not covered by the policy are joined with claims covered by the policy? What if the claims that are not covered are "more serious" than the claims that are covered? Will the insurance company pay all fees if two defense attorneys must be hired? What if the employer has a longstanding relationship with experienced labor and employment counsel and the employer wants that counsel to handle the case?

     2. What will the insurance company do if a possible conflict between the employer and the insurance company arises in the following circumstances: if a former employee asserting a claim wants to be reinstated to the employee's former job, and the case can be settled without reinstating the employee only for a lot more money than if the employee were reinstated (because if the employee is not going to be reinstated, then the employee wants more money to settle the case), and the employer does not want to take the employee back and wants to settle the case without reinstating the employee, but the insurance company wants to settle the case with a reinstatement of the employee. What policy provisions address this type of situation?

     3. In general, how will the EPL insurance company work with the employer to respond to all the various types of non-monetary requests commonly made by claimants in connection with employment-related claims: requests for promotions or transfers, requests for letters of reference, requests for fringe benefit adjustments, requests for discipline of other employees, requests for work accommodations, requests for apologies, etc.? What policy provisions address these types of requests?

     Summary. An employer considering the possibility of purchasing EPL insurance has many options and factors to consider. Lawrence C. Winger, Esq. can provide legal services to such an employer in a number of areas: (1) to help the employer review and analyze its existing insurance coverages; (2) to help the employer review and revise, if necessary, the employer's employment policies and practices; (3) to provide training to the employer's managers and supervisors on employment law matters; and (4) to help the employer evaluate potential employment practices liability insurance policies.

DISCLAIMER: All information is provided for educational or promotional purposes only and not as legal advice on a particular matter. The information is provided AS IS with no warranties of accuracy, completeness, merchantability, or fitness for a particular purpose. Providing this information DOES NOT create an attorney-client relationship between Lawrence C. Winger, Esq. and the reader. All information is Copyright (c) Lawrence C. Winger, Esq. 2000 All Rights Reserved.

Dated: January, 2000
[Top Of Page]