United States: Employment Practices Liability Insurance - Plan Early Or You May Not Get To Choose Your Attorney Or Decide How To Defend A Lawsuit

Employment practices liability insurance (EPLI) policies are meant to protect employers from employment-related claims by employees. But many employers have recently encountered some of the pitfalls that exist with insurance coverage for employee lawsuits. One reason for this is that no standardized policy language exists yet because this type of policy is still in its developmental stages. The bad news is that without standardized policy language, crucial issues sometimes get overlooked by employers. Some of these issues are discussed below. But the good news is that this state of flux may allow employers to negotiate better terms.

Entities: Unless every corporate entity (such as parent companies, subsidiaries, divisions, etc.) is specifically included in the policy, coverage for claims may be denied based on the fact that the claims are not brought against the "policyholder."

Employees: It is important to know whether protection exists for claims by applicants, employees (current, former, full-time, part-time, seasonal, leased, etc.), and/or independent contractors. Additionally, the policy should clearly explain whether coverage extends to claims made personally against officers, directors, managers and/or supervisors, and how class actions will be handled.

Claims:The policy will define "covered claims," and many potential claims may be excluded. Employers should ensure that all employment-related claims and types of damages are covered (including claims of discrimination, harassment, assault and battery, wrongful discharge, negligence, retaliation, whistleblowing, invasion of privacy and other employment torts, administrative charges, etc.).

Time period and notice: Many EPLI policies provide coverage for claims made during a specific time period, regardless of when the events leading up to the claim occurred. Insurers also require some sort of timely notice of a claim, which can be defined in many different ways and triggered by various levels of employee demands and complaints.

Limits, deductibles and co-payments: The cost of coverage can vary dramatically depending on the monetary limits, deductibles and co-payments chosen. Employers should be aware that defense costs usually count towards the coverage limit amount.

Punitive damages: Employers need to know that agreements to insure punitive damage awards in many states (including Missouri, Illinois and Kansas) could be unenforceable in some circumstances. This could have particular importance in Missouri, where state discrimination law claims are subject to unlimited punitive damage awards by juries.

Choice of representation: It is important to note that the insurance company typically has the right to select defense attorneys pursuant to the policy terms. The best opportunity to select an experienced attorney with whom the employer has dealt is when an employer initially applies for an employment practices liability policy or renews a policy. Unless an employer obtains an endorsement naming the legal representation it wants in a future lawsuit or reserves the right to choose defense attorneys each time a lawsuit is filed, the insurance company may reserve the right to pick the attorney or firm that will represent the employer.

Settlement decisions: Some employers do not want to automatically settle lawsuits for fear that other employees will "join the club" and file a claim of their own or that settlement might negatively affect the morale of other employees. On the other hand, insurance companies may be more concerned with the cost of the litigation. EPLI policies often contain "hammer clauses" giving the insurer the right to force a settlement or else the employer will be liable for all damages and defense costs exceeding the proposed settlement amount.

Employers should consider getting a thorough analysis of a proposed EPLI policy to prevent adverse technicalities or surprises, to compare competing policies, and to negotiate the most favourable terms. Of course, personnel decision audits, regular policy reviews, and supervisory training are the best formula for avoiding claims and lawsuits altogether.