Question: We know insurance is for property loss or personal injury. However, in the past, we always paid to defend ourselves if an employee brought a discrimination claim. I believed Employment Practice Liability (EPL) Insurance was not worth purchasing. Is EPL right for every company?
Answer: Yes! Employment-related claims can impact organizations of every size and in every industry. EPL policies typically provide coverage for employment-related matters. Businesses make daily decisions that impact employees such as hiring, promotions, terminations, and compensation. These decisions could lead to a claim for wrongful employment practice if done incorrectly.
Employers are subject to federal, state, and local laws regarding employment practices. Employment practices liability insurance protects an employer from an employee’s allegations of things like discrimination, wrongful termination, emotional distress, or harassment, including sexual harassment. These types of claims are excluded under General Liability and Worker’s Compensation insurance. Employment Practices Liability coverage must be purchased separately.
Q: I usually pass on travel insurance or insurance for my phone. It seems like they do not cover a lot and have high deductibles for the risk. I’ve heard there are big deductibles for EPL insurance. Is EPL really priced right for the risk it is covering?
A: Defense costs and settlement amounts for EPL claims can have a serious financial impact on a company. Employment-related claims may cause financial hardship but can also harm your reputation. Even an organization with good human resources policies and procedures in place can be sued. The cost of defending a claim can be tremendous.
The purpose of most insurance policies is to cover large, unpredictable claims rather than small, repetitive incidents. Clients should select a self-insured retention they can comfortably pay. A few things to consider when selecting a self-insured retention include:
- Selecting a higher retention usually results in a lower premium and can be a tool for managing insurance costs.
- Typically, only one retention must be satisfied when one claim triggers coverage under two or more liability coverages.
- Some policies offer a 10% retention reduction if the insured consents to the first settlement offer recommended by the company within 30 days.
Q: Can you provide an EPL claim example?
A: Check out this EPL claim example provided by Travelers Insurance on their EPL Coverage Highlight sheet:
Allegation: Employee alleged discrimination and retaliation.
Total claim value = $317,500
Claim detail: A plaintiff alleged that the insured discriminated against him on the basis of his age and disability. The plaintiff further alleged that he was terminated in retaliation for filing a worker’s compensation claim and for complaining about discrimination. The defendant contended that the plaintiff was not able to perform the essential functions of the job and that he was discharged for legitimate, non-discriminatory, and non-retaliatory reasons. Travelers spent more than $175,000 defending the case and paid $142,000 in settlement costs.
Q: We really like our current lawyers. They are practical and they know our business and culture. If we get a claim, will we be able to use our current firm with the EPL Insurance?
A: There is a way to utilize your firm for EPL claims, but this needs to be addressed upfront before the policy is put in force. There are two options when it comes down to structuring the EPL policy to handle the defense of claims:
- Option one is a Duty to Defend policy. The Duty to Defend policy obligates the carrier to assume control of the claim defense process, including selecting counsel and paying legal bills.
- Option two is a Reimbursement or Duty to Pay policy. The Reimbursement policy requires only that the insurer reimburses for funds expended by the insured in defending a claim. Most policies are written on a Duty to Defend coverage basis.
The carrier would utilize its own in-house legal counsel or a pre-approved panel of attorneys to handle EPL claims. In this situation, a client would not be able to use their own attorney. If a client is looking to use their own attorney, they should pre-negotiate it with the carrier if they are on a Duty to Defend basis or purchase a Reimbursement policy which would allow the client their choice of legal counsel without having to get permission. Reimbursement policies typically cost 15-20% more than Duty to Defend policies.
Q: What if the claim is really frivolous? The only claims against us in the past have been brought by disgruntled employees who were making excuses for bad performance. Does the client still control the decision of whether to settle versus defending through adjudication?
A: The Hammer Clause in an EPL policy gives the client the right to refuse to settle and litigate any EPL claims. However, it’s important to understand the financial risk the Hammer Clause puts on clients who refuse to settle. The standard Hammer Clause indicates that if a client refuses to settle the claim as proposed by the carrier, they will be financially responsible for any settlement amount exceeding the insurer’s original recommendation. The client would also be responsible for additional defense costs. Let’s take a look at how this works.
Insurer suggested settlement: $75,000.
The client disagrees with the settlement and opts to litigate the claim.
Final judgement: $150,000
Additional defense costs = $50,000
According to the standard hammer clause, the client would pay out-of-pocket for the difference in the $150,000 judgment and the insurer’s original $75,000 settlement recommendation. The insured must also absorb the $50,000 in additional defense costs that were incurred. In this situation, the client would pay $125,000 for not settling this claim.
The Coinsurance Hammer Clause is more favorable to the client than the traditional Hammer Clause. The Coinsurance Hammer Clause allows for sharing of any settlement, judgment, or additional defense costs larger than the settlement figure recommended by the insurer to settle a claim. The percentages can vary from 50%/50% to 70%/30% depending on the insurance carrier.
The above claim scenario with a 50% coinsurance hammer clause would look like this:
Settlement = $150,000 x 50% = $75,000
Additional Defense Costs = $50,000 x 50% = $25,000
Total cost to client = $100,000
Q: Is this coverage only for discrimination claims?
A: EPL policies typically offer broad coverage features for employment-related matters. Discrimination claims are the most common types of EPL claims. However, other common claims include retaliation, wrongful termination, wage and hour violations, and sexual harassment.
Construction companies should be aware of exposures they face that are typically not covered, or often excluded on EPL policies, such as:
Third-party liability coverage – Third-party liability comes into play when non-employees allege harassment, discrimination, and other wrongful acts against businesses and their employees. These acts typically do not involve bodily injury or property damage, so the General Liability policy is not triggered. The majority of EPL policies do not explicitly cover third-party claims, although most insurers will provide such coverage by endorsement.
Contractors have an increased exposure to third-party liability claims due to the number of interactions their employees have with clients, sub-contractors, vendors, and others daily. Given the increased risk, it’s important for contractors to understand if their EPL policy includes third-party liability coverage or if they are self-insuring this exposure.
Wage and Hour claim allegations – This is the failure to pay overtime wages owed to the employee. There have been several high-dollar wage and hour claims filed on a class action basis which significantly increased the amount payable under such lawsuits. This is why most EPL policies exclude Wage and Hour claims. Some carriers are willing to offer a sub-limit for Wage and Hour claims or can add coverage via endorsement.
Q: Construction companies are seeing high turnover and difficulty recruiting. Does high turnover equate to more claims?
A: Employment Practices Liability insurance covers employment-related claims from current, former, or even prospective employees. Some industries, like landscaping and construction, have naturally higher turnover rates which can be attributed to things like seasonal employment. Construction companies are seeing even higher turnover in 2021, which means more employment practices liability exposures to manage.
Contractors are also subject to the heightened EPL risk environment with expanding exposures driven by:
- Cultural shifts regarding sexual harassment and increasing verdicts resulting from the commencement of the #metoo movement.
- Legislation relating to biometric information claims.
Q: What would be the first step if I want to look into EPL? And what should we be doing as a company to mitigate the risk?
A: If this article piques your EPL interest, we recommend reaching out to a trusted insurance advisor who has knowledge in this arena. Request an assessment of your EPL exposures to better understand the key EPL risks facing your business and if you have adequate controls in place to mitigate those risks. Like any insurance product, it is there for the unexpected, but you can lower risks by reviewing and implementing good policies and procedures.
Thank you to Josh Levy from Husch Blackwell for his contributions to this article!