IN FOCUS: Employment Practices Liability Insurance

December 1, 1999 Advisory

In recent years, insurance companies have begun to offer Employment Practices Liability Insurance ("EPLI") to employers. These policies grew out of traditional Directors and Officers Liability ("D & O") policies that employers were increasingly trying to invoke in employment suits. While EPLI policies, on the surface, are very appealing, each policy is different and, before buying one, you should carefully explore what will and will not be covered.

What do EPLI policies cover?
Generally, EPLI policies cover discrimination claims, including sexual or other types of harassment, wrongful discharge claims and may include coverage for such claims as defamation and negligent infliction of emotional distress. In addition, unlike traditional D & O policies, EPLI policies cover all of the employees and the entire organization.

What are the advantages of EPLI policies?
The most obvious advantage of an EPLI policy is that the insurance company will generally pay to defend the case and, if it concludes that the claim is covered by the policy, will pay any award ordered by the court or will pay for a settlement. Indeed, the cost of defending employment claims can be quite significant, particularly to smaller employers. Another advantage is that some insurers, as a condition of insuring the employer, will first "audit" the company's policies, training and procedures and may require the employer to "improve" them. In theory, this kind of audit will help to prevent the situations that lead to lawsuits. Of course, before making any changes, it is a good idea to consult with your attorney because the policy that the insurance company may try to impose may not comply with and/or may have unintended consequences under state law.

What are the disadvantages?
Many EPLI policies are written to exclude coverage for "intentional acts." Since "intent" is an essential element of most discrimination claims, this becomes an important issue. Sometimes, the insurer will agree to pay for the costs of defense, but will reserve its right to deny coverage under the intentional act exclusion if liability is later found by the court or jury. Moreover, an EPLI policy is unlikely to cover any award of punitive damages against the employer. Another disadvantage to many employers is the potential loss of the ability to use its own attorneys, and to have a meaningful role in planning the defense strategy, as the insurance company typically decides what law firm will defend the case, and assumes decision-making authority over most strategy issues. Finally, some insurance companies put a low cap on the hourly rate they will pay for legal services, causing some employers to complain that the counsel appointed by the insurance company are not as experienced in employment law as the specialists they normally would retain.