Employment Practices Liability Insurance: Buyer Beware!

An employer who purchases employment practices liability insurance likely expects coverage for claims of unlawful employment practices. Unfortunately, the devil is in the details in terms of what types of claims are covered and what types of claims are not covered, as well who is responsible for the legal fees incurred on the part of the employer in defense of such claims.

As one large employer recently found out the hard way, such coverage may be unavailable when it is most needed. A federal trial court recently held in Cracker Barrel Old Country Store, Inc. v. Cincinnati Ins. Co., M.D. Tenn., No. 3: 07-cv-00303 that Cracker Barrel was not entitled to coverage under its employment practices liability insurance in a brought by the EEOC because the plaintiff technically was not an employee as provided in the policy. The court further ruled that the insurer had no duty to defend Cracker Barrell, meaning all the legal fees incurred were the responsibility of Cracker Barrell itself. We cite the Cracker Barrel decision for the propositoin taht employers need to beware of their employer practices liability insurance policies in terms of what is covered and what is not. Furthermore, in no way should an employer rely on its employment practices liability insurance policy as the sole means of managing the risk of employment claims and litigation.

Most companies have insurance for bodily injury or property damage claims arising from activities of their company or products they may sell. They also have insurance for loss from fire, theft, floods and other catastrophes. These policies however rarely cover employment claims such as sexual harassment, age discrimination, wrongful termination, and defamation. Indeed, these policies often expressly exclude employment-related claims.

As a result, some employers have purchased or are even seriously considering, employment practices liability insurance, a stand alone insurance coverage. When shopping for an employment practices liability insurance policy, or if your company already has such a policy, a thorough review should be undertaken in terms of what is covered.

  • Employment Practices Liability insurance is on a “claims-made” basis, meaning coverage occurs when the lawsuit is filed, not when the alleged wrongful action occurred. Thus, if you were to purchase a policy covering the 2013 calendar year, coverage would be limited to complaints or lawsuits filed in 2013.
  • Prior wrongful acts on the part of the employer are usually covered as long as the employer did not have prior knowledge of the alleged wrongful acts. Unlike a defective product you sold which causes bodily injury, In other words, just as you cannot buy fire insurance for a building while it is burning, you also cannot insure against a “known” employment loss.

Most EPLI policies include defense costs (also known as legal fees) within the limit of liability for a covered loss. This is an important factor. For example, let’s assume the limit is $100,000 per claim. If a former employee files an employment discrimination claim and the employer incurs $50,000 in defense costs, the insurer will only pay another $50,000 to settle the case or pay a judgment. After that, the employer in this example is on its own.

EPLI policies typically cover claims such as sexual harassment, discrimination, wrongful discharge, and retaliation and sometimes personal injury claims, such as defamation and invasion of privacy. However, EPLI policies often expressly exclude intentional wrongdoing. This is significant because many employment claims, especially discrimination claims, involve allegations of intentional misconduct. If a jury were to conclude that an employer intentionally discriminated against a former employee, the EPLI policy may not cover the employer for the loss. The good news is that many EPLI policies often pay defense costs until a jury makes that finding and sometimes during any appeal. In employment cases, defense costs can often exceed a plaintiff’s actual damages. As a result, the duty to defend is highly valuable to the employer.

In purchasing EPLI coverage, an employer also needs to consider how much control it will retain over the defense of a claim where the insurer has accepted coverage. Can the employer select its own defense counsel? If the employer has counsel it trusts and who knows its employment practices, it may not want the insurer to appoint its own chosen counsel.

In addition, the employer needs to consider how much control it will have over any settlement. The insurer’s and employer’s interests do not always coincide in this respect. While settlement may make economic sense in the context of a particular insurance claim, an employer may have business reasons that make settlement undesirable.

In short, employers have to assess whether EPLI coverage makes sense. As the Cracker Barrel decision demonstrates, EPLI policies are not a cure-all, but they can provide employers with some level of protection for some employment claims. Of course, the best protection of all is to have good policies and practices in place, stay familiar about employment matters, and consult with employment counsel early and often when potential issues arise. Here again, a proactive, preventive approach will go far in limiting costs, exposure and liability.