(August, 2008)
Proprietary (non-ISO) versions of Employment-Related Practices Liability (sometimes called Employment Practices Liability - EPLI) policies provide liability coverage to employers for allegations involving the following:
Coverage for such claims is excluded in standard CGL policies, excess liability, employers liability and D & O liability insurance. Interest in the coverage has increased because of the enactment of federal civil rights laws and the passage of the American with Disabilities Act, and increases in litigation by employees.
Various insurers created and offered employment practices coverage in response to employee lawsuits alleging violation of federal laws, as well as to their complaints of sexual harassment and discrimination in the workplace.
In the past, as claims for employment-related causes of action against businesses became common, an exclusion in general liability and excess liability policies was developed to clarify that these forms did not cover liability arising from such acts.
The following federal laws form the basis for suits and administrative proceedings under the Equal Opportunities Commission (EEOC) in hiring, promoting or firing employees:
· Age Discrimination in Employment Act (1967 and as amended in 1985)
· Civil Rights Acts of 1964 and 1991
· Americans with Disabilities Act of 1992
A form of discrimination--sexual harassment--was provided for certain legal remedies in the Civil Rights Act of 1991.
Wrongful termination has been a common cause of action against employers for several years, largely because of the explosive litigious climate in the U. S. The protection of the employer under the legal doctrine of "employment at will" continues to erode. This long-standing doctrine held that private employment was a relationship that could be terminated at any time by either the employer or employee and it could occur without explanation or justification.
General Liability and Employment Practices Exposure
Today, it is unlikely to find a general liability policy that does not contain specific exclusions. However, employee claimants still attempt to make claims for employment practices losses under their employer's CGL policy. Occasionally, coverage might be established if a claimant can prove the following:
· that the employment-related injury was caused by an "occurrence";
· that the injury meets the policy's definition of "bodily injury," "property damage" or "personal injury"‘ and
· that no policy exclusion was applicable.
Typically courts have ruled that such acts (including sexual harassment) were not occurrences because they were intentional rather than accidental acts.
Even if acts such as discrimination, wrongful termination or sexual harassment were regarded as occurrences under the CGL policy, the resulting injury was not usually treated as "bodily injury." Most courts have held that such injuries as mental anguish or other emotional distress must show some physical manifestation to be considered bodily injury.
Some courts have interpreted "bodily injury, sickness or disease" in a way that expands policy coverage. Such an interpretation was held in a NY Court of Appeals case, Lavanant v. General Accident Insurance Co. of America, 1992 CCH Fire & Casualty 3842 (NY 1992). In this case an owner of an apartment was sued by a tenant who suffered emotional distress when a ceiling to an apartment collapsed. The CGL insurer presented the claim to the court, which it denied, citing that the allegations made against the insured did not constitute "bodily injury." The Appeals court concluded that the words "sickness and disease" in the insurer's definition "not only enlarge the term of bodily injury but also, to the average reader, may include mental as well as physical sickness and disease."
Insurers have also denied liability claims arising from discrimination, wrongful termination and sexual harassment since such practices, even if held to be occurrences or bodily injury, would fall within the scope of the employer's liability exclusion, "arising out of and in the course of employment by the insured." Personal Injury coverage in the CGL policy also does not specifically name "discrimination, wrongful termination or sexual harassment" as covered named perils in the definition of “personal injury”. For an example of a court decision where a claim failed to qualify for coverage due to the claim’s circumstances, please refer to PF&M Section 369_C007, Policy Excludes Injuries Caused by Harassment in Court Cases.
In the late 1980s insurers worried that courts would expand the CGL so that it would liberally respond to employment practices lawsuits. In response, the Insurance Services Office, Inc. (ISO) adopted the Employment-Related Practices Exclusion (CG 21 47). This form, under bodily injury coverage and personal injury coverage, excludes damages "'arising out of a refusal to employ; termination of employment; coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination; or other employment-related practices." The exclusion also applies to consequential injury related to any of the above. CGL policies with this endorsement do not cover employment-related claims, and further would specifically exclude coverage for claims of slander or invasion of privacy if brought by employees under the personal injury coverage.
The increased use of employment-related exclusions in general liability policies created a need for a market addressing such exposures. Such a market is provided by a number of specialty domestic insurers and Lloyd's of London Underwriters, for the three major types of employment-related injury claims:
· wrongful termination
· discrimination and
· sexual harassment.
The insurers generally offer separate policies covering the three major categories or only one source of litigation. At least one insurer has issued a policy specifically covering only claims brought under the Americans with Disabilities Act. Another insurer has designed an endorsement to be attached to the Directors and Officers Liability policy to cover employment-related practice liability.
The first policy addressing this issue was developed by Lloyd's Underwriters to cover defense only, paying the insured's defense costs arising out of employment-related injury claims, but not resulting damages. This company has since developed a combined policy for covering defense only and indemnity settlement.
Employment-practices liability insurance is written on a claims-made basis and, since it was originally developed as a nonstandard form by specialty insurers, coverage still varies substantially between companies.
The comprehensive employment practices liability policy covers all three of the employment-related practice exposures: wrongful termination, sexual harassment, and discrimination.
It is important to note in each policy the definition of each of the above exposures, as these definitions are not uniform. They should be carefully examined to determine the scope of coverage under each policy available.
For instance, under the definition of discrimination, one insurer defines the term "as the actual or alleged failure to hire or employ an applicant or actual or alleged failure to promote, the demotion of, or the employment-related defamation of a current employee because of race, color, creed, national origin, sex, sexual orientation or preference, religion, age, gender, disability or handicap, or pregnancy."
The above is a comprehensive definition of discrimination and contrasts with a narrower definition worded simply, "termination of an employment relationship or a demotion or a failure or refusal to hire or promote an individual because of race, color, religion, age, sex, disability, pregnancy or national origin."
Several policies do not specifically list all covered wrongful acts, but simply refer to violations of federal laws dealing with discrimination, such as the Civil Rights Act, Age Discrimination in Employment Act, or the Americans with Disabilities Act.
A broader approach is to include other named perils closely related to, but outside of the scope of policy definitions of wrongful termination, discrimination and sexual harassment. Such additional perils in one insurer's policy include:
· breach of an oral or written employment contract;
· employment-related misrepresentation;
· violation of employment discrimination laws;
· wrongful failure to employ or promote;
· wrongful discipline;
· wrongful deprivation of a career opportunity;
· failure to grant tenure;
· negligent evaluation;
· invasion of privacy;
· employment-related defamation; and
· employment-related emotional distress.
Employment practices liability insurance policies commonly cover costs of investigating, defending and settling claims. However, differing from standard general and professional liability policies, defense costs are normally included within policy limits. One reason for this is that a high percentage of claims paid under this coverage involve defense rather than indemnity settlements. Therefore, defense costs will reduce and, possibly, ultimately exhaust the limit of liability. Several insurers provide defense-only coverage policies. Advantages of this form are:
· most costs attributed to employment practices liability exposures are for defense, rather than judgments or settlements;
· defense-only contracts are less expensive; and
· the insured is in control of its own defense.
Defense-only policies indemnify the insured for costs incurred in defending claims; the insurer does not have any involvement in the settlement of claims.
Since employment practices liability insurance is often provided on a nonstandard form, exclusions vary among companies. Exclusions substantially affect coverage granted in the insuring agreement and therefore are an important basis of comparison among ERPL policies. The following are the most common exclusions used in employment practices liability forms:
· dishonest, fraudulent, criminal or malicious acts
· liability assumed by contract
· bodily injury, sickness or disease
· property damage liability
· workers compensation, unemployment compensation, disability benefits, etc.
· fines or penalties
· liability imposed under the Employee Retirement Security Act of 1974
· damages from failure to comply with the Workers Adjustment Retraining Notification (WARN) Act
· loss arising out of costs providing any of the reasonable accommodations required as a result of the Americans with Disabilities Act
· proceedings under the National Labor Relations Board
· violations of the Consolidated Omnibus Budget Reconciliation Act (COBRA) or the Occupational Safety and Health Act (OSHA)
· when the insured is placed in bankruptcy, receivership, liquidation or reorganization; closes one or more plants; lays off more than a stipulated number of employees over a 30 or 60-day period of days; or merges with another business firm
· circumstances or events of which the insured was aware prior to the policy inception date
· strikes, lockouts, labor disputes and class action suits
· pollution
· nuclear exclusion
The employment practices liability policy covers the named insured business whether as an individual proprietorship, partnership or corporation. When the coverage is endorsed to a D&O (directors and officers) liability policy, coverage applies only to individual directors and officers and not the corporate entity. Some insurers cover all employees while others cover only supervisors/managers. Another approach is to provide coverage only to those employees named in the declarations.
The importance of including all employees as insureds is most evident in the area of sexual harassment. It is quite possible that any employee could be involved in sexual harassment, regardless of management or supervisory status.
The broadest coverage afforded under the policy applies to
wrongful acts occurring anywhere in the world, providing the claim and suit or
administrative proceeding is brought within the
Some forms apply only to acts within the
It usually makes the most sense to acquire a policy which best conforms to the territorial jurisdictions where the insured is located. Also, endorsements are usually available to broaden the coverage territory or that arrange for an insured to be reimbursed for settlement and defense expenses when dealing with lawsuits in countries that bar involvement of ERPL insurers.
When employment practices liability coverage was first offered, insurers usually maintained the ability to unilaterally settle all claims. Today, most forms contain Consent to Settle or a similar provision. This requires an insurer to only settle with the insured's permission. However, such provisions also contain a clause that caps the insurer's liability if the insured does not grant permission for a settlement that was accepted by a third party.
Some policies contain two separate limits: an annual aggregate limit and a limit per claim. Aggregate limits vary with each company. Several insurers offer limits up to $10 million, while others offer limits to $5 million, or up to $1 million. However, as the exposure to employment practices losses have grown, many proprietary forms have gotten more conservative, offering a single, annual aggregate limit.
All employment practices liability policies contain a deductible. It applies to both indemnity and defense costs. A common deductible used is $10,000.
Note: When a deductible is used along with a coinsurance or co-payment provision, the deductible is usually applied first.
Most forms contain coinsurance or co-payment provisions. Underwriters use these clauses to encourage the insured to use loss control measures in preventing employment practices liability claims. Normally the coinsurance percentage is 5 percent to 10 percent of the claim.
All policies are written on a claims-made basis and are written with a retroactive date. This date is the inception date of the first policy. The retroactive date precludes coverage for claims arising from acts occurring prior to that date, regardless of when the claim is made.
If the insured learns of an incident that might lead to a claim and reports the particulars of any such incident in writing to the insurer, then any such claim arising from the reported incident is deemed to have been made during the policy period in effect at the time written notice was submitted. This clause is also known as the "awareness provision."
All policies include extended reporting provisions, which allow insureds to present claims made against them after a policy has been canceled or is not renewed. In most cases such provisions apply whether the insured or company cancels or non-renews, but some insurers provide extended reporting coverage only if the insurer cancels or non-renews.
The cost of the extended reporting coverage varies from company to company but it is usually stipulated in the policy.
The duration of the clause is usually one year but in some cases it can be purchased for 3 years. The insured usually has 30 to 60 days within the expiration date to elect this provision.
Questions on the application usually address: the nature of the business conducted; annual receipts or sales; how long the company has been in business; number of employees and salary ranges; past claims history; whether the company has been involved in a grievance or administrative hearing before any federal agency or under any federal acts, such as EEOC, National Labor Relations Board, Civil Rights Acts, Age Discrimination in Employment Act, or Americans with Disabilities Act. They may also ask whether the insured anticipates any significant down-staffing or layoffs in the company within the next 24 months; turnover rate; whether the workforce is unionized; employment agreements with employees or officers; whether the company has a human resources or personnel department; whether the company provides orientation, training programs and employees handbooks to employees; does performance evaluations; uses grievance procedures for complaints of discrimination or sexual harassment; has company adopted anti-discrimination policies or anti-sexual harassment policies; has written job descriptions; and maintains personnel records.
Copies of the EEO--1 report for the previous calendar year, employment application forms, latest financial statement and the employee handbook must be submitted with the application. The application should be signed by the principal partner or officer of the insured, as well as by the individual in charge of the human resources or personnel department.
The Americans with Disabilities Act imposes two broad requirements: equal opportunity and reasonable accommodation. Equal opportunity requires an employer to evaluate a job applicant's ability to complete essential functions of the job, regardless of disability. Reasonable accommodation requires the employer to provide reasonable accommodation to insure equal opportunity in the job application process, enable disabled employees to perform essential functions, and enable such persons to enjoy the same benefits and privileges of other employees.
Certain procedures can be established by the insured who is interested in controlling or reducing the incidence of claims arising from allegations of discrimination, sexual harassment or wrongful termination.
Discrimination - For discrimination an employer may:
· adopt a written anti-discrimination policy
· use job application forms and interview procedures complying with federal and state discrimination laws
· prepare written job descriptions
· set up leave of absence policies complying with the Pregnancy Disability Act (1978) and the Family Leave Act (1993)
· implement an equitable drug testing policy
Sexual harassment - can be controlled through the company's efforts in the following manner:
· written policy against sexual harassment
· training of managers and supervisors
· prompt and thorough investigation of complaints
· take appropriate actions following investigation
· implement procedures to prevent future incidents
Wrongful Termination - to guard against an increase in incidents of wrongful termination, employers should:
· perform thorough pre-employment interviews and background checks
· avoid promises of permanent employment
· review all employer-produced material, such as employee handbooks, benefits descriptions, etc., with counsel for misleading statements
· conduct periodic performance evaluations
· record warnings to employees for tardiness, unacceptable work or misconduct in the employee's personnel file
· establish termination procedures, put them in writing and distribute to supervisors.
The underwriting process of employment practices liability insurance involves the review of the application and other documents, such as annual reports; SEC 10K report; employee handbook, employee benefit handbook; employee discipline, termination and outplacement procedures; collective bargaining agreements; employment application form; supervisory manual; and employee performance evaluation form.
Underwriters should closely examine an organization's financial stability. This is because consistent profitability should minimize layoffs and terminations. Companies in a weak or unstable financial condition are difficult to insure.
Another key to the underwriting process is the existence of written procedures affecting employment practice such as in salary administration, employee benefits programs, employment-at-will, performance evaluation, hiring processes, and employee discipline or discharge.
The percentage and numbers of women and minority employees is another key factor, particularly in situations involving unfair discrimination cases. Often female and minority employees may be more sensitive in work environments where they make up a small percentage of the company’s workforce.
Other factors that should be scrutinized are terminations within a 12-month period and turnover rates.
The rating base used for this coverage is the number of employees working in the insured's operation, adjusted by the policy's limits and deductibles. Other judgment factors that enter into pricing are: location, mix of exempt vs. non-exempt employees, type of business and claim experience.