In order to ensure their EPLI insurance policies will respond, in light of growing employment liability claims, companies and their directors are becoming increasingly aware of the importance of in depth EPLI insurance assessments. In order to supplement our previously published D&O CHECKLIST and assist the c-suite in their coverage audits, we have recently published a thorough 4 page EPLI CHECKLIST (HERE). Below we highlight a few key considerations from our checklist.
- Limits: When performing an EPLI policy review, determining limit adequacy is a logical starting point. This can however prove to be a difficult exercise. When setting policy limits, companies should consider:
- The number of entities/subsidiaries insured under the policy
- Historical loss data - has the company sustained any prior employment related claims that may attract future claimants
- Does the organization have any high profile directors on the board that may be deemed a deep pocket in the event of alleged misconduct
It’s also important to understand how exactly those limits are being applied. If the EPLI coverage is being issued as part of a larger D&O package policy, are the limits being shared across all lines of coverage or are they dedicated to each coverage component? Limits that are being shared across multiple coverages carry a greater risk of limit-exhaustion. For example, a policy containing a 5 Mill shared limit can be exhausted by one D&O claim, leaving nothing remaining for a subsequent EPLI claim. Lastly, policyholders should also understand any sub-limits that may apply. For example, coverage for 3rd party claims and wage and hour defense costs often contain their own separate sub-limits.
- Settlement Within Retention: When incurring an employment related claim, some directors may be tempted to settle the claim in-house without involving the insurer. This can be particularly true for seemingly smaller claims and companies whose EPLI policies contain larger retentions. Since any payment can be perceived as an admission of guilt and can compromise future defense, most carriers explicitly bar the policyholder from making any payments/settlements or incurring any defense costs without obtaining prior consent form the carrier - doing so will compromise coverage by violating the policy’s defense & settlement clause. Some policies however do contain a “settlement within retention” provision which will allow the company to settle any claims under the retention.
- No Action Clauses: No action clauses specify the requirements that must be met prior to taking action against the insurer. This typically means complying with the policy’s terms and conditions. However some no action clauses further restrict any action against the insurer until underlying claims have been settled. A typical clause may read as follows:
“No action shall be taken against the Insurer unless, as a condition precedent, there shall have been full compliance with all the provisions of this Policy nor until the amount of the Insureds' obligation to pay shall have been finally determined either by final and nonappealable judgment against the Insureds after trial or by written agreement of the Insureds, the claimant and the Insurer.”
Due to the fact that such a requirement would place undue burden on the policyholder, such language should be avoided or removed.
- Consent to Settle: It’s understandable that many insureds prefer to aggressively defend themselves against any alleged employment misconduct that they deem to be frivolous. In addition to preventing against becoming a potential “soft target” for future claimants, it’s also often a matter of defending one’s moral character and proving their innocence. For this reason companies should pay careful attention to the consent to settle clause (hammer clause) contained within the policy. The consent to settle clause requires the insurer to obtain approval from the insured prior to settling any claims, yet also limits the liability of the insurer should an insured decline to settle with the plaintiff. Policies that contain “hard hammers” often hold the insured responsible for 50% of the difference (in damages/settlements and defense costs incurred) between the initial proposed settlement amount and the final judgement. Such aggressive “hammer clauses” should be avoided or negotiated. More favorable policies will limit that percentage to 20% of the difference, with some policies containing no hammer at all.
- Oral Demands: Most EPLI policies define “claims” broadly which is generally to the advantage of the policyholder. The one exception however is “oral demands”. Due to their ambiguous nature, “oral demands” can create considerable uncertainty for the insureds when determining if in fact any claim has actually been made. Does a verbal complaint to HR or aggravated email to the CEO qualify as a claim? This uncertainty can compromise coverage by causing insureds to inadvertently violate the policy’s reporting requirements when the fail to report such claims in a timely manner. For this reason, we recommend insured’s carefully consider the removal of “oral demands” from the policy’s definition of “claim.
- Damages (front & back pay): Almost all EPLI policies exclude coverage for severance pay, which is understandable given that these payments stem from standard business risks. However, in addition to coverage for compensatory and punitive damages, any EPLI policy purchased should also provide coverage for front-pay and back-pay which can often be asserted during claims alleging wrongful termination.
- Employees: When defining “insured persons” EPLI policies should include within their definition of “employee”: seasonal, part time and leased employees, interns, volunteers, temporary and seasonal workers. Most policies will also include independent contractors (subject to some qualifying criteria). Obtaining a broad definition of “employee” can be of particular importance for non-profits, staffing firms, and professional service firms or those that frequently engage independent contractors. Some insurers will further broaden their policies to include coverage for “prospective employees” which is helpful for claims asserting failure to hire, discrimination, and EEOC actions involving background checks.
- Bodily Injury Exclusion: Bodily injury exclusions preclude a wide range of “injuries”. When addressing the bodily injury/property damage exclusion, policyholders should ensure that there is an appropriate carve back for claims asserting mental anguish, invasion of privacy, humiliation and emotional distress – all of which can be commonly asserted during employment claims.
- Breach Of Contract Exclusion: EPLI policies often exclude claims alleging breaches of employment contracts, however the scope of such exclusions can vary. When performing an EPLI policy review, policyholders should consider:
- Is it limited to written contracts only or does it extend to oral/implied contracts?
- Are alleged violations of employment policies and employee handbooks also precluded?
- Does the exclusion extend to breaches of 3rd party contracts and independent contractor agreements
- Statutory Exclusions: EPLI policies commonly contain a statutory violation exclusion precluding coverage for claims such as OSHA, WARN and NLRA violations. While these exclusions are understandable, policyholders should be aware of their ability to purchase coverage for certain statutory related claims, such as defense cost coverage for claims alleging FLSA (wage and hour) violations. Additionally, in order to preserve coverage for claims brought by whistleblowers should an employee assert they were wrongfully terminated following the disclosure of any suspected statutory violations, insureds should also ensure that their policies contain appropriate carve-backs for whistleblower claims related to the excluded statutory violations.
- D&O Coordination: It’s important to ensure any EPLI policy purchased also properly align with the organizations’ D&O policy. Most D&O policies contain employment related exclusions, precluding coverage “for, based upon, arising from, or in any way related to an employment practices wrongful act committed by an insured person”. In the context of private companies, it’s important to highlight that many private company D&O policies extend the definition of “insured persons” to include employees. This also means that coverage for employment related claims can also be precluded under any “insured vs insured” exclusion. For insureds looking to effectively coordinate their EPLI and D&O policy terms we have a few suggestions:
- Ensure that any EPLI exclusion is limited solely to claims brought against the entity.
- Narrow the lead in language of any EPLI related exclusion, from; “based upon, arising from or in any way related to”, to simply “For” such claims
- Ensure the exclusion contains language that specifies the wrongful act must be intentional – some policies will also provide defense costs only related to such claims, until the courts make a final determination of guilt
- Ensure the employment related acts exclusion contains appropriate carve-backs for any resulting securities claims (following an employment related claim) – of particular importance for public companies.