What Do You Know About Your EPLI Coverage? Employment Practices Liability Insurance Can Play a Key Role in a Risk Management Scheme

FOR METRO AREA IN-HOUSE COUNSEL

GCNew York O CTOBER 12, 2004 What Do You Know About Your EPLI Coverage? Employment practices liability insurance can play a key role in a risk management scheme.

BY RAYMOND T. MAK With employment claims and all claims during the policy period. jury awards ever increasing,1 Recognition of this distinction is critical DECADE AGO, employers would be remiss in not because, almost without exception, the expendi- most employers faced having at least a basic understand- ture of defense costs and indemnity is considered Awith employment ing of EPLI in determining “losses” under an EPLI policy and reduces its claims would instinctively whether it fits within their risk limits of liability. So, while a policy may cover react by arranging for their management scheme. the loss incurred in a single claim of, for exam- defense through either out- ple, $1 million, the policy will be insufficient to side or in-house counsel. What to Have and Why? cover other claims if the policy’s aggregate limit Insurance for the defense of is that same $1 million, which has been eroded employment litigation was Not unlike other insurance by the insurer’s payout of the covered loss. virtually unheard of, and policies, an EPLI policy has a vari- EPLI policies typically have aggregate limits although it has became ety of provisions and options to that are higher than that provided for a single increasingly popular today, Raymond T. Mak consider, ranging from limits of claim, for example, a $1 million limit of liabil- there are still many employers liability, the size of the deductible or ity for each claim, but a $5 million limit in the that, for different reasons, have self-insured retention, coverage and aggregate during the policy period. Employers not yet embraced it as a tool of risk manage- exclusions, to counsel selection and control of that experience frequent employment claims ment philosophy, or do not fully understand litigation. While these components can vary must seriously consider this component of an the insurance product they have purchased. greatly, all of them relate directly to one key EPLI policy in light of their claims experience. For some employers, the cost of such a consideration: cost. As with anything else, the “Pure” EPLI policies are those that are product, commonly known as employment more you pay, the more you get. stand-alones. In other words, their coverage is practices liability insurance, or EPLI, may At the same time, however, another adage independent and exclusive of any other type of weigh against its purchase and is seen as comes into play: How much do you realistically claim. They are frequently more expensive, as a luxury on the balance sheet. Others need? In order to address this in a meaningful they not only provide a greater spectrum of cov- simply may have an underappreciation or even fashion, one must assess an abundance of factors erage of employment claims, but also because a lack of understanding of the product. Indeed, such as the size of the employer, its workforce, its their limits of liability apply only to such claims. even employers that may have already demographics, the geography of employment, This is in contrast to policies such as directors purchased EPLI may not fully understand employment policies and procedures, and claims and officers liability (D&O), errors and omis- how the product works, especially, for example, experience, the last of which should include sions (E&O), and others that provide employ- in larger corporations where insurance frequency and severity. No one factor is deter- ment practices liability coverage merely as an is purchased and administered by a risk minative or scientific. However, consideration endorsement or extension to the primary intend- management or human resources department, of these elements of risk provides a rational basis ed coverage of other claims. While some advan- but claims that are covered by insurance in assessing the need and scope of EPLI. tages to having EPLI coverage as a “combined” are defended and/or supervised by the law There are many components in an EPLI component with other claims include its cost department attorneys. policy. The following are some of the effectiveness, consistent defense provisions and fundamental ones to be aware of. ease of program administration, the drawback is Raymond T. Mak is a partner in the labor and Limits of Liability. This is usually defined as the lack of coverage breadth. EPLI endorsements employment practice in the New York office of a specific amount, set forth in the policy, that or extensions do not provide as much coverage Epstein Becker & Green, and is responsible for the the insurer is obligated to pay for a claim and have much more severe policy restrictions management of the firm’s employment practices during the policy’s effective period. It is for employment claims than a stand-alone policy. liability insurance business. He can be reached at distinguished from the “aggregate limit,” which Of equal importance, due to the very nature 212-351-4541 or by e-mail at [email protected] most EPLI policies also contain, that applies to of such a policy’s coverage for a combination of GC NEW Y ORK NEW YORK LAW JOURNAL different types of claims, the potential deletion during the policy period are reported to the can be attributed to enhancements in policy of policy limits is that much greater. The conse- insurer within the specified window period coverage and exclusions. quence becomes crucial when, for instance, an after the policy expires.3 An insurer can While they still do not provide for “all-risk” employer is battling a D&O litigation under disclaim an otherwise covered claim for late coverage, most policies now include catch-all which the loss incurred may exhaust the policy’s notice.4 Thus, it is critical for an employer to phrases that eliminate potential disclaimers of limits of liability and may result in no coverage tender notice (i.e., advice in writing to the coverage, such as, for example, language that for the employment claims, or vice versa. Just carrier) whenever it becomes aware of any facts specifies “all other protected classes” in the envision a board of directors meeting where a or circumstances that could lead to a claim. definition of covered discrimination claims, risk manager has to inform the board that the Other EPLI polices trigger coverage with and “other similar state laws” when defining D&O policy coverage evaporated because there “pure” claims made provisions. Such policies do employment claims pursuant to federal law. was an EPL class action claim. Thus, it is impor- not require a specific period during which claims Some insurers even offer third-party cover- tant that employers consider all the implications must be reported to the insurer (although age that protects an employer in connection of utilizing EPL endorsements or extensions as a they require notice “as soon as practicable”), a with claims made by nonemployees, such as substitute for an independent EPLI policy. mechanism that, for obvious reasons, is prefer- customers or employees of vendors. Employers Self-Insured Retentions & Coinsurance. Not able to the claims made and reported policies. should note that there may be sub-limits to unlike other types of policies, self-insured Scope of Covered Claims & Exclusions. For such coverage — a separate limitation on what retentions or deductibles in EPLI policies are purposes of EPLI coverage and exclusions, an insurer will pay for third-party claims. common, excepting only for those underwritten As is the case with coverage provisions, for some nonprofit organizations. Even with employers should be aware of a policy’s those types of employers, the trend indicates exclusions from coverage. Although recent increases in the amount or size of the deductible.2 ‘‘PP ure’ EPLI policies are improvements to coverage implicitly eliminate The deductible is obviously a key component exclusions contained in “less mature” policies, of an EPLI policy — not only does the employer … stand-alones … coverage is there are exclusions that are common to almost bear the obligation of payment up front (unless it all EPLI policies. is agreed otherwise by the insurer, sometimes in independent and exclusive of They include the cost to comply with the “duty to defend” policies, to advance defense accommodation provisions under the Americans costs), but the deductible applies to each separate any other type of claim. with Disabilities Act, WARN Act liability, claim. There are, although less common, policies wage-based claims, workers’ compensation and containing a single deductible that applies during employment claims can be categorized into similar laws, severance payments, assault and the entire policy period, regardless of the number three general classifications, those arising battery and bodily injury (even if employment- of claims tendered. pursuant to statutory liability, tort theories, and related), and the cost of reinstatement. Coverage Employers should also be aware that many contract-based claims. for either intentional acts or punitive damages polices contain coinsurance obligations. Such Federal and state statutory liabilities are the can be prohibited by states (either by regulation provisions would require the employer to pay sources of claims of: or as contrary to public policy). a portion of both defense and indemnity • discrimination and harassment for pro- There are 17 states that prohibit or restrict expenses associated with all claims. This is tected categories (i.e., race, ethnicity, gender, coverage for punitive damages and/or inten- independent of, and in addition to, the age, religion, national origin, pregnancy, dis- tional acts, including New York, California, deductible. Depending upon the insurance ability, veteran status, and sexual orientation); Florida and Illinois.5 Most insurers offer separate carrier, the amounts in such coinsurance • equal pay and wage and hour claims; coverage to fill in such coverage gaps, either by clauses can vary from 5 to 25 percent. • OSHA claims; and “most favorable venue” provisions or with an Under some policies, the employer has • claims pursuant to the Family and offshore wraparound in a jurisdiction such as the option to select the percentage of the Medical Leave Act and the National Labor Bermuda that does not restrict such coverage.6 coinsurance provision. Not surprisingly, this Relations Act. Consent to Settle. Because EPLI is a option is typically reflected in the Employment claims under tort theories risk-transfer mechanism, there is an element of premium/cost of the policy. include wrongful termination, retaliation, mis- transfer of control as well. Almost all EPLI Coverage Trigger — Claims Made Versus representation, negligent hiring, supervision, policies include a provision that requires the Claims Made and Reported Policies. Unlike and retention; intentional and negligent inflic- insurer’s consent to settle employment claims. homeowners and general liability policies under tion of emotional distress; employment-related As a practical matter, when the loss incurred is which coverage is occurrence based, EPLI slander and defamation; invasion of privacy; within a policy’s deductible, there is less, if any, policies are generally written as claims made and interference with contractual relationships. concern on the part of the insurer to withhold and reported policies, whereby, in order to Finally, contract-based claims include consent to settle. Conversely, when the claim obtain coverage, insurers require that a claim be breaches of employment agreements, hand- exposure is near or exceeds the deductible both made against the employer and reported to books, and benefits and compensation plans. limit, the interests of the employer and the the insurer during the policy period. EPLI policies today provide for much insurer may differ greatly. However, most of these “claims made and greater coverage for employment liability Employment claims differ from other types reported” provisions also contain a reporting claims than when the product was first of claims in that factors other than money are “window,” either 30 or 60 days, which preserves introduced to the market some 17 years ago. at issue. Preservation of employee morale and coverage if claims made against the insured Undoubtedly, the growth in the EPLI market respect may require spending more to defend a OCTOBER 12, 2004 personnel decision than the employee could give up such a right by separate agreement or a Conclusion recover if she prevailed. Concomitantly, the specific endorsement to a policy. Insurers are reinstatement of a former employee as part of a more likely to make such agreements with When used effectively, an EPLI policy can proposed settlement may be, for a variety of larger companies (that presumably retain limit the high costs of employment practice reasons, completely at odds with an employer’s well-reputed employment defense counsel and claims. It can be a vital part of almost all interests. An employer may also wish to pursue that have large policy deductibles). Conversely, employers’ insurance plans and their overall an aggressive defense and reject even nominal there is no such right when the policy is one risk management scheme. settlement terms, if it desires to discourage that is written on an indemnification or “pay on While cost is undoubtedly a factor in the what it perceives as frivolous, copy-cat, or behalf of” basis with the employer retaining purchase decision, that alone should not be precedent-setting claims. the right to select counsel subject to the the determining factor in the selection of the On the other hand, an insurer will most insurer’s consent, which shall not be unreason- various options offered. Employers should be likely be unconcerned with such considera- ably withheld. realistic in light of their needs and have a good tions, considered unique to the employer, Employers should carefully review their understanding of the product, regardless of and may not be willing to fund such battles. policies to determine and understand their whether they are in the market for its potential Instead, it would view a proposed settlement counsel selection rights. Ideally, the best time to purchase or for renewal, or already have a in purely economical terms in light of the resolve any issues with the insurer is prior to the policy in effect. claim’s exposure with respect to defense costs policy’s underwriting, and certainly before any and liability. claim arises. To protect the insurer against the employer’s Ethical & Conflicts Issues. Even when ••••••••••••••••••••••••••••••• “litigate at all costs” philosophy, an EPLI the insurer agrees to the employer’s choice 1. According to the June 2004 report issued by Jury policy may contain a “hammer” clause that of counsel, the employer may be confronted Verdict Research, the median jury award for employ- allows a carrier to limit its claim payment to no by yet a different issue: Its counsel may be ment cases increased 18 percent in 2003. The report, Employment Practices Liability: Jury Awards and more than the amount the claim could have unwilling to accept the insurer’s rate structure Statistics (2004 Edition), analyzes jury verdict trends for settled for plus defense costs. More recently, in unless the employer agrees to pay the difference various employment claims and also provides an analy- recognition that such provisions cause strain between the insurer’s rates and its regular, sis of plaintiffs’ recovery trends. 2. See Richard S. Betterley, American Agent & upon the relationship, some policies have been presumably higher, rates. Moreover, counsel Broker (May 2004), at p.251. modified to include so-called soft hammer may be unfamiliar with, or unwilling to 3. Most insurance carriers are willing to extend the clauses, which share the cost between the abide by, the insurer’s litigation guidelines, reporting period for an additional premium. 4. See, e.g., Specialty Food Sys., Inc. v. Reliance Ins. insurer and the employer. which may require preapprovals of certain Co. of Ill., No. Civ. A-98-2595 (E.D.La. July 19, 1999). Selection of Counsel. The differing interests litigation strategies and expenses, restrict 5. See Punitive Damages Review (2001), self-pub- of the employer and insurer with respect to the or limit payment of certain administrative — lished by the law firm of Wilson, Elser, Moskowitz, Edelman & Dicker, LLP. control of litigation also come into play in the but deemed necessary by counsel — expenses, 6. Despite a state’s public policy prohibition against selection of counsel. An employer may have a and require provision of status, liability the insuring of punitive damages, coverage may long-standing relationship with an employ- assessment, and litigation budget reports on nonetheless be obtained through the purchase of a “most favored jurisdiction” endorsement to the policy. ment law firm that knows its business as well as the claim. This endorsement would state that, with respect to the its policies and procedures, and thus would be Counsel may believe that such requirements insurability of punitive damages, the law of the jurisdic- better equipped and more efficient in handling are onerous and, in fact, interfere with the tion most favorable to the insurability of punitive damages will apply, provided it meets one of the following its employment claims. However, many ability to exercise independent discretion and criteria: It is the jurisdiction (1) where punitive dam- employers are unaware of their important right professional judgment in properly defending a ages were awarded; (2) where the act giving rise to the to select their own defense counsel to handle case. Additionally, counsel may be concerned punitive damages award occurred; (3) where the insured is incorporated or maintains its principal place claims under their EPLI policies. that the release for review of any required of business; or (4) where the insurer is incorporated or Insurance companies prefer to choose reports or defense bills to the insurer, a third maintains its principal place of business. their own lawyers from a list of “panel” counsel party to a litigation, may constitute a waiver of 7. The most commonly known approach is that taken by the California Court of Appeals in San Diego who, in the insurer’s view, are better qualified any recognized privileges. Federal Credit Union v. Cumis Ins. Soc’y. Inc., 208 Cal. and/or more cost effective, and who are willing Finally, conflicts may arise when there Rptr. 494 (Cal. Ct. App. 1984), where it was held that to accept rates that are deeply discounted in are disagreements in the strategy to be used an insurer is responsible for paying the insured’s reason- able costs in hiring independent counsel when the exchange for a steady flow of new assignments for the defense of a case or where the insured and insurer have divergent interests as a result from the insurer. An insurer’s right to select insurer has agreed to claim coverage only of the insurer’s reservation of its rights to deny coverage. panel counsel is sometimes specifically set under a reservation of rights. In the latter This holding has been codified in California law (California Civil Code §2860), and the insured’s coun- forth in the policy. Often, however, an instance, there would be a legitimate concern sel, who is referred to as “Cumis counsel,” is required by employer learns this for the first time when that the insurer’s primary interest is to deny statute to meet certain minimum qualifications. a request for its own counsel is declined by coverage for a claim, thereby resulting in a the insurer. conflict with defense counsel’s ability to This article is reprinted with permission from the EPLI policies that are written on a duty-to- zealously defend all claims against its October 12, 2004 edition of the GC NEW YORK. defend basis, under which the insurer has client, the employer. Indeed, courts have © 2004 ALM Properties, Inc. All rights reserved. the right and duty to defend any covered recognized this concern as a legitimate ethical Further duplication without permission is prohibited. For information, contact American Lawyer claim, inherently provide the insurer the right dilemma and fashioned different approaches Media, Reprint Department at 800-888-8300 x6111. to select counsel. However, an insurer may in response to it.7 #099-10-04-0004 offices

Resurgens Plaza Wachovia Financial Center 945 East Paces Ferry Road 200 South Biscayne Boulevard Suite 2700 Suite 2100 Atlanta, GA 30326-1380 Miami, FL 33131 TEL: (404) 923-9000 TEL: (305) 982-1520 FAX: (404) 923-9099 FAX: (305) 982-1521

111 Huntington Avenue Two Gateway Center 26th Floor 12th Floor Boston, MA 02199-7610 Newark, NJ 07102-5003 TEL: (617) 342-4000 TEL: (973) 642-1900 FAX: (617) 342-4001 FAX: (973) 642-0099

150 North Michigan Avenue 250 Park Avenue Suite 420 New York, NY 10177-1211 Chicago, IL 60601-7553 TEL: (212) 351-4500 TEL: (312) 499-1400 FAX: (212) 661-0989 FAX: (312) 845-1998 One California Street Lincoln Plaza 26th Floor 500 N. Akard Street San Francisco, CA 94111-5427 Suite 2700 TEL: (415) 398-3500 Dallas, TX 75201-3306 FAX: (415) 398-0955 TEL: (214) 397-4300 FAX: (214) 397-0702 One Landmark Square Suite 1800 Wells Fargo Plaza Stamford, CT 06901-2681 1000 Louisiana TEL: (203) 348-3737 Suite 5400 FAX: (203) 324-9291 Houston, TX 77002-5013 TEL: (713) 750-3100 1227 25th Street, NW FAX: (713) 750-3101 Suite 700 Washington, DC 20037-1175 1875 Century Park East TEL: (202) 861-0900 Suite 500 FAX: (202) 296-2882 Los Angeles, CA 90067-2506 TEL: (310) 556-8861 FAX: (310) 553-2165