Businesses of all sizes should have coverage for employmentpractice claims. EPL policies are now sold as endorsements toworkers' compensation policies or packaged with property andliability policies. The EPL endorsement generally funds the defensecosts for employee claims, including those that areunsuccessful.

The following actions are points to keep in mind before andafter securing coverage:

• In some cases, the insurer may have an extensiveprogram of loss prevention as part of the EPL policy coverage andmay be able to assist an organization in developing soundemployment practices.

EPL underwriters will be looking forthe following common mistakes before writing the policy andassessing premiums:

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  • Lack of employee handbook/harassment policy.
  • Insufficient applicant evaluation.
  • Inadequate or erroneous documentation of personneldecisions.
  • Incomplete or inaccurate employment evaluations.
  • Failure to have appropriate procedures in place to investigatecomplaints.
  • Failure to follow severance procedures for:
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    • Negotiating releases and waivers of claims.
    • Providing COBRA and other required benefits information.
• Reach agreement with the CGL, D&O, and EPL insurerson selection of defense counsel when the policiesare placed or renewed.

The choice of defense counsel can becritical to the success of an employment-related claim. Insurersmay have a list of approved defense counsel, while manyorganizations have their own list of outside counsel that they dealwith on a regular basis. In some cases, the lists may include thesame names, but they may not. Large businesses with corporate riskmanagers or in-house counsel often prefer to predesignate theliability defense counsel, so they can maintain better control overthe claim and are assured of working with counsel that understandthe company and its industry. Large organizations typically have aself-insured retention of $500,000 or $1 million within which thebusiness manages claims with its own defense counsel.

Most EPL forms pay for or reimbursethe insured for defense costs. The insurer usually controlssettlement, but businesses should make sure the insurer does nothave the right to settle without the insured's consent. In order toencourage the insured to agree to settlement, insurance companiesmay use what is known in the industry as a “hammer clause.” Ahammer clause generally states that, if the insured refuses thesettlement offer, the insurer's responsibility to pay the loss iscapped at the amount of the settlement offer. The clause may allowfor continued participation by the insurer even after the insuredhas rejected a settlement offer.

• Report every likely claim situation to allinsurers: D&O, CGL, EPL, and umbrella/excesscarriers.

Most polices are claims-madecoverages, not occurrence coverages, so claims must be reportedwithin the policy period itself or any extended period in order tobe covered. The insurer generally agrees to pay damages only if aclaim is first made during the policy period or within a 30-to-60day period after the policy period ends. The timing of a claim canbe a critical issue in pay-related discrimination cases, forexample. The Lilly Ledbetter Fair Pay Restoration Act of 2009resets the statute of limitations for pay-related discriminationcases to provide an employee with 180 days to file a formalcomplaint of discrimination after receiving each paycheck,rather than only after the initial instance of paydiscrimination.

• Let involved parties know that EPL coverage may beavailable.

When a business has an EPL policythat extends liability coverage to third parties, customers,clients, and vendors, the business's attorney should inform partiesinvolved in a claim that the coverage may be available for thespecific claim or lawsuit. When possible, protect the interests ofinvolved parties in a settlement agreement: directors,officers, involved employees, third parties, and agents/brokerswith an interest in the settlement.

Under most D&O polices theinsured, not the insurance company, controls the defense of claims,although the insurance company may eventually pay for all or partof the defense. Risk managers may require that the insurer includea provision stating that it will advance defense costs once thedeductible or retention is satisfied, similar to the language inthe standard D&O policy.

• Engage attorneys with experience in employmentlaw to help the business prevent or minimizeclaims.

Counsel experienced with a particularbusiness or industry can more effectively assist in managing therisks. It is vital for counsel to understand the nature of eachemployee group within an organization, the history of past employeeor union complaints, the attorneys who were involved, and whetherany employees are covered by a collective bargaining agreement.

Managing the Claims Process

• The insured should immediately place all potentially liableinsurers (CGL, workers' compensation, employers liability, auto,EPL, umbrella, excess, etc.) on notice and tender any demandletter, complaint, threat of suit, or possibility of a suit to thecarriers. The organization's insurance broker can assist indetermining potentially applicable insurers and in providingnotice.
• Because EPL policies are claims-made policies, timely notice isa condition of coverage. Notice should be provided pursuant to thenotice instructions in the insurance policy, even when there issome question whether the policy will cover the claim. When a claimis filed or the employer receives notice that a claim may be filed,the employer should send all evidence regarding the nature andscope of the incident with the request for defense of the claim totrigger the insurers' obligations to investigate.
• When an employee files a lawsuit, the insured should engageexperienced, specialized counsel who understand the nuances ofcoverage triggers and how to manage discovery demands, presscoverage, and public relations issues. Insureds will be interestedin protecting their reputations (that they did not commitdiscriminate, create a hostile work environment, ignore reports ofsexual harassment, etc.) and may wish to “defend on principle tothe U.S. Supreme Court.” However, the insurer will calculate thecost of dealing with the case and will want to settle when it iseconomically reasonable to do so. An expert counsel will know howto deal with both plaintiffs and insurers. Depending on whocontrols the choice of defense counsel, an organization may have topay the costs of the specialized counsel itself or seekreimbursement from the insurer.
• When dealing with an insurer, the insured should remember thatmany insurance company employees are authorized to say “no,” andfewer are authorized to say “yes.” Thus, it is important to dealwith the insurer's representatives with the authority to say “yes”to demands and settlement offers. A representative with experiencein handling employment claims can be a valuable resource for theinsured with limited employment practices claims experience.
• The insurer should send out the reservation-of-rights letter assoon as possible. Some states require insurers to provide notice ofreservations about coverage within specific time periods or waiveall coverage defenses. An organization facing an employmentpractices claim should check with counsel about any timingrequirements in the applicable jurisdiction. The purpose of areservation-of-rights letter is generally not to declinecoverage, but instead to make sure the insured is aware ofpotential coverage issues that may, at some future date, limit orpreclude coverage.
• There should be full disclosure of any genuine conflict ofinterest between the insured and insurer. In case of a conflict ofinterest, the insured should retain independent counsel, which maybe covered under the policy.

Post Claim Loss Reduction

Loss reduction involves post-claim activities planned before anyclaims are filed. Ideally, an employer will consider post-claimloss reduction as part of the overall process of purchasingemployment practices insurance. Subrogation in insurance providesloss payment from third parties. Arbitration, mediation, and publicrelations efforts are event reduction strategies. Catastrophe orcontingency plans are a coordinated approach to liability lossreduction.

Disclaimer: This article is designed toprovide accurate and authoritative information in regard to thesubject matter covered. It is offered with the understanding thatthe writer is not engaged in rendering legal, accounting, or otherprofessional service. If legal advice or other expert assistance isrequired, the services of a competent professional should besought.