To Be (Insured) or Not To Be (Insured)?

That is the question that employers face each day in Connecticut and across the nation when it comes to Employment Practice Liability Insurance (EPLI, for short).  The problem with such a question is that the answer is a classic "it depends".  For some employers, the answer may be an easy yes. For others, perhaps an easy no. But for the vast majority in the middle, it will depend on a variety of circumstances.

Michael Moore, of the Pennsylvania Employment Law Blog took a very solid start at looking at some of the issues employers should look at and what employers should know.  He lists the following five things that every HR generalist should know about EPLI.  There are other issues as well so I’ve incorporated Mike’s great list with a few thoughts of my own.

  • Coverage: Mike notes that "EPLI policies typically cover claims of wrongful discharge, workplace harassment and discrimination." Some may offer more coverage. 

Knowing what will, and will not be covered is important at the outset. After all, what good is insurance if it won’t cover many of the common claims that an employer faces. 

  • Exclusions. Mike notes EPLI policies "exclude many claims based on the statute that creates the legal right or the activity that gives rise to the claim" including FLSA, NLRA, WARN, COBRA, OSHA and ERISA. 

As with the coverage item, knowing what will be automatically excluded from coverage is important. Some employers believe EPLI is an umbrella type coverage that catches anything that relates to employment law. The truth is that most policies are written much more narrowly. 

  • Policy Limits and Deductibles: As with any type of insurance, there will be policy limits and deductibles that usually apply on a per claim and aggregate basis.

In my view, this is an extremely important consideration for employers. Setting a high deductible may keep your costs down, but if the deductible is on a per claim basis, EPLI will do little to help a situation or control costs where an employer is faced with five separate employment law actions at once. 

  • Defense Costs, Selection of Counsel and Settlement:  Mike’s point here is a good one; he notes that because defense costs are usually included within EPLI this also "means that every dollar an employer spends defending a claim reduces the amount available for settlement or to pay a judgment. Since the existence of insurance coverage must be disclosed as part of discovery in most law suits, a plaintiff’s attorney will factor insurance coverage into his or her case evaluation."

However, often left out of a discussion is what happens when the insurer and the employer are at odds with a settlement. The employer may, for example, want to send a message to other employees that they will not settle out frivolous claims even for nuisance value. The insurer, however, may want to reduce the risk of exposure and want to settle the case. Employers often neglect to think about how EPLI will work with settlements and within its overall litigation strategy.

  • Policy Types and Insurance Company Notification: Lastly, Mike notes that "EPLI policies are typically written on a “claims made” basis meaning that the claim must be incurred during the coverage period and reported to the insurer during an extended reporting period. Since employment actions may take years to turn into a claims, an employer may be left with no coverage if the policy is dropped or tail coverage isn’t purchased." I posted previously on the need to notify the insurer of such claims. 

With Congress considering changing various statutes of limitations on employment claims, this could have a further impact on EPLI claims as well.

There are other factors that an employer should consider as well. What will happen to a company’s relationship with existing counsel? Will the insurer allow the employer to choose defense counsel? What is the insurer’s "reputation" in the marketplace? What message will this send to employees? Will employees sue more knowing that they might receive a settlement? How will this work with an employer’s arbitration provision?

EPLI is definitely not for every employer. Before you decide to go with such a policy, make sure to think through the issue to understand both the pros and the cons.  It may be that an arbitration provision (forcing the parties to go to arbitration) may be a viable alternative for some, while for others, maintaining the status quo will be best.