Navigating the nuances of hiring and firing employees can be tricky business. You may make a mistake and be exposed to liability. You may do everything right, yet still be sued. Employers have the option to deal with these risks by purchasing an insurance product called Employment Practices Liability Insurance (EPLI). Like any insurance product, EPLI contains distinct advantages and disadvantages.
EPLI policies generally require an insurance company to pay defense costs for certain types of claims brought by employees as well as pay any judgments entered against the employer. But coverage under EPLI is often limited. EPLI policies usually cover claims such as unlawful discrimination and harassment, wrongful termination, infliction of emotional distress, wrongful discipline and mismanagement of employee benefits. EPLI policies generally do not cover claims based on violations of the National Labor Relations Act (NLRA), the Worker Adjustment and Retraining Notification Act (WARN), Occupational Safety and Health Act (OSHA), the Employee Retirement Income Security Act (ERISA) and state wage and hour laws.
Most EPLI policies are “claims-made,” meaning that the policy must be in effect when the claim is made, rather than when the underlying conduct giving rise to the claim occurs.
Once an EPLI policy is triggered, the insurance company has exclusive control over whether a case is settled or goes to trial; so if the employer would like to take a case to trial to establish legal precedent or to avoid being perceived by other employees as an “easy mark,” it will be disappointed to learn that the insurance company, not the employer, has the right to make that decision. Further, depending on the type of policy, the employer may not have the right to choose its employment counsel in the lawsuit. An EPLI policy will either contain a “duty to defend” or “duty to reimburse” provision. A duty to defend provision allows the insurance company to appoint counsel who will represent the employer in the underlying claim brought by an employee. This attorney and law firm will likely have no existing relationship with the employer. Alternately, a duty to reimburse provision allows the employer to choose its counsel.
Another key point in negotiating an EPLI policy is determining whether the amount the insurance company is required to pay to satisfy a judgment is in addition to the costs of defending the lawsuit or whether the amount available to satisfy a judgment is depleted by defense costs. This is a critical distinction of which to be aware when obtaining an EPLI policy. If the amount the insurance company is required to pay to satisfy a judgment is decreased by the costs of defense, then an employer may have a strong incentive to settle the case early as defending the case through trial completion may deplete the amount available to satisfy a judgment. For example, if the total policy amount is $1,000,000, but the costs of defending a complex claim by multiple employees through trial is $500,000, the insurance company will only be responsible to pay the remaining $500,000 of any judgment that is entered. Thus, if a jury awards $750,000 in damages at trial, the insurance company will pay $500,000, and the employer will be responsible for the additional $250,000 of the judgment amount – an unpleasant surprise to an employer who assumed it “bought insurance” to cover these types of claims.
EPLI policies are a potential tool to mitigate the risks of some employment claims, but they are not perfect. Employers should be mindful about negotiating key points in an EPLI policy such as policy limits, selection of counsel and whether defense costs will deplete the insurance underwriter’s duty to pay any judgment entered. It is critical to negotiate these points when you are first obtaining EPLI insurance or when you are renewing your policy. At these junctures, you may have the opportunity to select your counsel or ensure that your preferred counsel is on the insurance company’s panel. If you wait until after a claim is made, it is too late to negotiate these points and you may be stuck with counsel appointed by the insurance company. To learn more about this topic or other employment-related issues, contact Sean Monson at (801) 536.6714 or click here to contact Sean via email.
