Considering the Insurance Option
Over the past decade employment related litigation has burgeoned. New federal statutes such as the Americans with Disabilities Act and the Family and Medical Leave Act, the enlargement of remedies like compen-satory and punitive damages, and new and ever expanding ton theories advanced by the plaintiffs bar, have led many corporate executives to feel under a stare of siege.
Damage awards, particularly when punitives are involved, can run into the multimillions. Even a successful defendant may end up spending over $50,000 to defend a protracted litigation. In some cases employment suits have forced employers into bankruptcy or even dissolution.
It is therefore of the utmost importance for employers to be well versed on all potential measures they can take to reduce employment-related risk. One such measure is insurance.
Under certain circumstances companies and managers have been successful in obtaining coverage for employment claims under traditional insurance policies. These include Comprehensive General Liability Insurance (CGL); Director's and Officer's (D&O); Errors and Omissions (E&O); Fiduciary Responsibility Insurance (FRI); Workers' Compensation; Homeowners (for individuals); and excess insurance policies.
These forms of insurance are not typically offered by the insurance industry with employment practices litigation coverage in mind. Nonetheless, some courts have interpreted coverage terms very broadly. For example in Solo Cup Co. v. Federal Insurance Co., the Seventh Circuit held that a carrier had the obligation to defend allegations of discrimination under an excess Liability umbrella policy. While purely intentional acts were not encompassed within the policy definition of "occurrence," the court reasoned that claims of disparate impact discrimination were covered because that theory does not demand proof of discriminatory intent. Similarly, in Interco Inc. v. Mission Ins. Co., the Eighth Circuit determined that an insurer had a duty to defend alleged "intentional and/or reckless" act because recklessness could fall within the policy definition of occurrence. In other cases courts have allowed coverage of employee claims for emotional distress and mental anguish under "bodily injury" or "personal injury" endorsement language. Indeed, some plaintiffs' attorneys have had the acumen to recite the physical manifestations of alleged injuries in their complaints in the hope of accessing the deep pocket of an insurance company.
To counteract what the insurance industry views as overly broad judicial construal of standard insurance policies, many such policies now contain employment practices exclusion provisions that expressly disclaim coverage of employment related claims. Even policies which allow some employment claim coverage now virtually always restrict it to exclude many of the most frequently asserted causes of action.
Employment Practices Liability Insurance
However, in recognition of the need for protection in these employment litigation fraught times, in the early 1990s, insurance companies began to devise a new insurance product specifically designed to provide coverage for employment discrimination, sex harassment, wrongful discharge, negligent supervision, and work related defamation claims. Pioneers of this new product, known as Employment Practices Liability Insurance (EPLI) included Reliance Insurance Company of Illinois, Lloyd's of London. Chubb & Sons Inc. and Lexington Insurance Co. Today over 50 carriers offer some sort of EPLI product.
Since EPLI is relatively new, the policy is far from uniform. Insurers offer widely ranging kinds of coverage at vastly different rates, making comparison and selection difficult for the consumer.
The starting point for a cost-benefit analysis is usually cost. In the current mar-ketplace, premiums for EPLI start in the neighborhood of $4, 000 but are more typ-ically in the range of $10, 000 for a medium size concern. Available deductibles can be as low as $I, 000 to $2, 000 or as high as $20, 000 to $25, 000 per claim. (Price and deductible levels are in a stale of some flux as carriers are just beginning to garner adequate actuarial data to appropriately cost this new product.)
Benefit analysis is a highly individu-alistic and involved affair. It is a vast oversimplification to say that the most expensive policies are the best, since the degree and nature of protection needed by every organization differ markedly.
Notably, while your insurance bro-ker may with the best of intentions endeavor to find an EPLI policy that fills the gaps in your firm's insurance portfolio, agents rarely have the legal know-how to guide you towards policies that will provide effective projection in the rapidly transmuting terrain of employment law.
For one thing, the precise language used to define terms such as "the insured," "an insured event," "claimant," "claims," "loss," and "damages" on the policy will be of critical consequence in the context of employment litigation. To illustrate, should comprehensive protection of indi-viduals be desired, the definition of "the insured" should include not only the corporate entity, but current, former and prospective officers, directors, managers, nonmanagerial personnel and perhaps independent contractors.
If the company wishes to pass along the risk of costs for all kinds of claims, the definition of claim must cover not only lawsuits instituted in courts of laws, but charges filed with the Equal Employment Opportunity Commission and counterpart state and local agencies.
To ensure extensive loss indemnification, the "loss" and "damage" definitions should encompass sums paid in settlement, attorneys' fees awarded to plaintiffs, pre-judgment and post judgment interest, defense costs including expert and witness fees, front pay, pack pay, compensatory damages, and (if possible) liquidated and punitive damages. The extent of policy limits is also of key importance. The broadest possible definition of employment prac-tices violations may additionally be advisable. Employment counsel should be consulted to ensure that the kinds of claims to which your company is vulnerable are comprehensively covered.
Indeed at such point as your firm is seriously looking into the EPLI, it is imperative that it seek the advice of counsel with employment law expertise. Your attorney will be able to scrutinize the policy with an eye towards issues which, as noted earlier, agents are likely to be unaware of and even the most knowledge human resource and risk managers may not consider.
Customize Your Policy
The EPLI policies on the market are rarely offered on a take-it-or-leave-it basis. Terms can -- and should -- be negotiated.
One provision that is frequently a subject of negotiation relates to defense counsel. A major benefit of insurance is the duty of the provider to defend, which is broader than the duty to indemnify. In exchange for this benefit, policies virtually always provide that the insurer will select counsel and maintain control of the litigation.
Many employees are just as happy to let their carrier choose counsel. (Presumably, the insurance company will retain reputable and skilled attorneys.) Other employees may not have a preference for a specific law firm, but do want to at least participate in selection of counsel. Still others feel very strongly about using attorneys whom they know and trust. Whatever the case, negotiation of the selection of counsel provision to make it more flexible may be worthwhile. For instance, the policyholder might be able to get approval of its own lawyer if it agrees to pay any portion of the fees which may be higher than the rate charged by the insurer's attorney.
Evaluating the Employment Practices Liability Insurance Option
Ultimately, whether employment practices liability coverage is worth the cost is a highly individualized analysis which each enterprise must make for itself. However, any decision should include consideration of the following four factors.
Risk Vulnerability: Can your company afford to gamble? To what extent does it have the financial resources to weather several protracted litigations or a sizable loss? If a company can afford the expense of EPLI coverage but could not sustain a large damage award, insurance may be the product alternative.
Past Claim History: Have employment claims previously been filed against the company? How often? What monetary awards or settlement sums have been paid? Importantly, what is the trend of claims? A company which had numerous claims filed against it in the 1980s, but which received only a few in the early 1990s, and none for several years, probably has less of a liability concern than a firm that has received far fewer total complaints but which has witnessed a claim increase over the past five years.
Workforce Composition: What is the constitution of the workplace? Anyone can assert a contract or tort claim but discrimination laws largely protect specified classifications of employee. How have individuals in those protected classes fared at the company? Have a disproportionate number of older workers been paid off in recent years? What is the company's promotional record? Do women and minorities compose a large percentage of the rank and file, but only a small percentage of management? Such circumstances may not in fact result from discrimination but they present a picture that they will help plaintiffs establish a prima facie case.
Personnel Policy and Procedure: Does the firm undergo regu-lar personnel policy and procedure audits? Does it have a strong human resource department, an up-to-date employee handbook, well publicized antidiscrimina-tion and antiharassment policies and a fair and effective internal grievance system? To the degree good human resource practices exist, litigation risk is lessened. But the reverse is also 1.
After careful evaluation of the above
four factors, a company may determine that the cost of EPLI is a
worthwhile investment. Alternatively, the employer may choose to channel
its resources towards risk preventive measures such as the reassessment
of dismissal and promotional criteria, careful monitoring of internal
employee complaints, and the overall strengthening of personnel
policies. Most important, the employer must ensure that its human
resource department has the sufficient expertise, authority, and funding
to be a truly effective agent of risk reduction.
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