Employment Practices Liability Coverage: What Every California Employer Should Know
It is common knowledge that the number of claims against California employers by their former or current employees have escalated in recent years. No employer, no matter how small or how large in size is immune from such claims and lawsuits. Small and medium size businesses are often the most exposed to liability because they typically don’t have proper human resources or legal departments to deal with employment-related issues on an ongoing basis to avoid or minimize such claims.
While employment claims alleging discrimination based on sex, age, race, sexual orientation, disability, wrongful termination, harassment, retaliation and other employment related torts are on the rise, there is an even greater increase in “wage and hour” claims, including class action lawsuits, against larger employers. They are also being more aggressively litigated by Plaintiffs’ attorneys in part because of the availability of attorneys’ fees in such cases which may not be proportionate to the amount of actual recovery.
Despite the high prevalence of employment related claims, most California employers do not have widely available insurance coverage for such claims. The insurance coverage is Employment Practices Liability Insurance, known in the industry as EPL Insurance or EPLI. EPLI is typically offered as an endorsement to a business owner’s policy or a general liability policy or it could also be a specific stand-alone policy.
Many of the same businesses who are high risk for employment related claims either do not know about this insurance or simply assume (wrongly) that their existing liability policy will cover them for such claims. Even those who are familiar with the EPLI are simply unwilling to pay the premiums or consider it to be an unnecessary expense. Indeed, many of the more sophisticated employers believe that they are unlikely to ever be sued by an employee. Unfortunately, the reality is quite different. Employment claims are very frequent and chances are that every employer will face them as part of doing business at one or more times during the existence of its business. Defending even a non-meritorious claim can cost tens of thousands of dollars and significantly impact a business’s ability to survive.
EPLI is a type of liability policy that essentially pays for defense and indemnity of many, but not all, employment related claims. Here are some of the salient features of EPL insurance coverage. [1]
Covered Claims
Such policies pay for covered claims from the time of interviewing a prospective employee to termination. Some examples of types of claims covered under such policies include: wrongful termination, discrimination, harassment, retaliation, employment-related defamation, invasion of privacy, and other employment related adverse action just to name a few.
Persons Protected
Typically, such policies protect individuals and their spouses in cases of sole proprietorships. In partnerships or joint ventures, they protect all partners or members; and for a limited liability company, they protect all its members and managers, all executive officers and directors (whether or not employees) of other entities, all employees and former employees but only with respect to wrongful acts committed while employed by the employer.
Coverage for “Wage and Hour” Claims
Such policies historically did not offer any coverage for “wage and hour” claims. However, in recent years, some insurers have started offering a coverage endorsement that may be attached to the EPLI but it has reduced sub-limits and typically only covers the costs of defending such claims but not indemnity, i.e., they don’t pay for judgments or settlements against the employer. For example, a $1,000,000 EPLI policy may only have a $100,000 sublimit for defending “wage and hour claims.”
Other Main Characteristics of EPLI Policies
Claims-Made Policies: Such policies are written on a claims-made basis. This simply means that covered claims must be reported to the insurance company while the policy is in effect, or within an extended period set forth in the policy. In addition, the event leading to the claim must have occurred either on or after the effective date of coverage. It is similar to, for example, lawyers’ professional liability policies, which are also written on a claims-made basis. It is important to obtain tail coverage if the policy is allowed to expire.
Policy Limits Are Reduced By Defense Costs: A standard EPLI policy provides coverage on a “self-consuming” or “burning limits” basis – the insurance available to settle or pay “all damages” (i.e., settle claims or pay judgments) is reduced by all “defense expenses.” Needless to say, each employer should keep that in mind when selecting the policy limits which would cover not just any settlements or judgment but also defense costs.
Employer’s Consent to Settlement Required: EPLI policies typically require employer’s consent to settlement. However, if the employer refuses consent, then their insurer’s liability for damage is limited to the amount of the proposed settlement.
Exclusions and Limitations
Willful Acts of the Insured: Just like any other liability policy, EPLI does not cover liability for willful acts of the insured, which is expressly prohibited by Insurance Code section 533. For example, there will be no indemnification for claims for retaliation and wrongful termination in violation of public policy. Indemnity for such torts requiring a necessarily harmful mental state is not permitted under California law. Similarly, violation of employment discrimination statutes may be a “willful act” for which coverage is barred by this statute. However, the statute is no bar where any discrimination could be considered unintentional. In addition, the insurer may still be required to provide the insured with a defense against claims expressly covered by the policy.
No Coverage for Equitable Relief: Just like other liability policies, EPLI does not cover equitable relief such as job reinstatement or an injunction against future wrongful employment practices.
Other Important Exclusions
EPLI policies also exclude coverage for criminal, fraudulent or malicious acts, for damages for which the insured has assumed liability in a contract, for workers’ compensation, disability benefits or unemployment insurance, and similar laws, There is also no coverage for the insured’s violation of certain federal or state laws applicable to employers such as the Fair Labor Standards Act, Employee Retirement Income Security Act, the Occupational Safety and Health Act, etc. However, EPLI policies typically provide coverage for more common claims asserted in employment related lawsuits such as claims under Title VII of Civil Rights Act of 1964, Age Discrimination in Employment Act, Americans with Disabilities Act, Equal Pay Act, Pregnancy Discrimination Act of 1978, and Family and Medical Leave Act of 1993. There is also coverage for state and local statutes regulating the same acts and omissions. For example, claims asserting violation of the Fair Employment and Housing Act are covered.
EPLI Insurance Cost
The cost of EPLI coverage depends on a variety of factors, including number of employees, history of prior claims, employee turnover and employer’s ongoing rules and practices. While EPLI coverage is not cheap, it is not prohibitively expensive either.
Conclusion
Despite the limitations and exclusions set forth above, many of which are no different than any other liability policy, it is highly recommended that every employer consider having EPL Insurance coverage. No one size fits all and each employer must review its potential loss exposures with an experienced and knowledgeable insurance agent and purchase an adequate amount of coverage. Just having one such claim during the existence of the business may pay for the insurance premiums for the life of the business.
[1] Given the space limitation, it is beyond the scope of the article to discuss all aspects of what’s covered and what is excluded under EPLI. Further, different policies may contain different insuring clauses and additional or different exclusions and limitations. This article only provides a broad general overview of EPLI.