With intense competition among insurance companies driving attractive prices, more employers are finding employment practices liability insurance (EPLI) more affordable and an important tool in protecting themselves against such liabilities.
Based on Workforce interviews with legal and insurance industry experts, here are some frequently asked questions (FAQs) to help HR and risk managers learn more about this increasingly necessary insurance.
Why are employers becoming increasingly interested in EPLI?
Employment practices liability insurance, which includes coverage for sexual harassment claims, has been around ever since the early ’90s. But a recent increase in employment lawsuits, and increased media attention to the hefty judgments in high-profile cases, has generated more employer interest.
For example, nearly 70 percent of all employment claims result in monetary awards, the average of which is approximately $1.5 million, according to Cathy McKeon, principal in charge of Risk Management Consulting Services for New York City-based PricewaterhouseCoopers. And that figure doesn’t even include legal fees, court costs and time loss while personnel defends the organization.
Why was EPLI coverage created, and is there a demand for this type of insurance?
Insurers first began offering EPLI coverage in early 1992. The political and social climate was seething in the aftermath of Supreme Court Justice Clarence Thomas’s 1991 confirmation hearings and Anita Hill’s accusations that he sexually harassed her when he was head of the Equal Employment Opportunity Commission (EEOC).
Also in 1991, the Civil Rights Act was amended to allow juries to award compensatory and punitive damages to plaintiffs in employment-related civil cases. According to the 1997 Employment Litigation Survey, conducted by the Society for Human Resource Management (SHRM) and the national lawfirm Jackson, Lewis, Schnitzler & Krupman, nearly half the 611 suits mentioned by survey participants (SHRM members) involved a discrimination claim of some sort. Fifteen percent involved race or national origin discrimination, 14 percent involved age discrimination, 11 percent involved sexual discrimination or equal pay and 2 percent of the lawsuits involved religious discrimination.
Furthermore, the number of sexual harassment complaints lodged with the EEOC alone has more than doubled from 6,883 in 1991 to 15,889 in 1997. In the same period, monetary awards granted in federal sexual harassment suits rose nearly seven times from $7.1 million to $49.4 million, according to U.S. News & World Report.
What does EPLI coverage typically include?
Employment practices liability insurance provides indemnity coverage for defense costs, settlements and judgments arising from employment claims related to 10 basic areas: discrimination, sexual harassment, wrongful termination, breach of employment contract, negligent evaluation, failure to employ or promote, wrongful discipline, deprivation of career opportunity, wrongful infliction of emotional stress, and mismanagement of employee benefits. "Fines and penalties usually aren’t included," says Loretta Worters, spokesperson for New York City-based Insurance Information Institute.
Aren’t these liabilities automatically covered in standard commercial general liability insurance?
No. Insurance companies currently offer EPLI either as a separate policy dedicated to the above mentioned exposures or as an extension of coverage under Directors’ and Officers’ liability (D&O) or umbrella liability policies. Most D&O policies for publicly held companies cover the specified individual’s entity (executives, managers, supervisors and employees), but not the company a whole.
With claims typically in the six-figure range and higher, an EPLI claim could deplete D&O coverage, leaving a company unprotected, according to Peter Foster, a national EPLI specialist at Boston-based JNH Marsh & McLennan, an insurance-brokerage firm.
What percentage of U.S. companies have EPLIs?
There are currently no official statistics, but industry experts estimate approximately 10 to 15 percent of U.S. firms have purchased EPLI, and the numbers are increasing—fast.
Most buyers have a tendency to be concentrated in professional services, such as law, health, retail and financial industries, says Foster. This trend is due, in part, to the fact that employers in these fields are more vulnerable to third-party liabilities—for instance, if a subcontracted security guard harasses the customer of a retail store. But today, EPLI is becoming standard fare.
How has EPLI coverage changed over the years?
Available from only three insurers in 1994, EPLI coverage is offered by approximately 70 carriers today. Earlier EPLI policies only provided for legal expense reimbursement—not indemnification for settlements and judgments.
Today, many do insure these circumstances. EPLI premiums have plummeted, making it easier for small and mid-size companies to purchase it. Five years ago, premiums for companies with fewer than 100 employees were in the $50,000 to $100,000 range. Today, that same policy would cost $5,000. As a result, more employers are deciding it’s less expensive to buy EPLI than be self-insured.
What kinds of policy limits are available today?
The Chubb Group of Insurance Companies offers $50 million limits—and provides coverage for clients in Belgium, Denmark, France, the Netherlands and Sweden. And New York City-based American International Group Inc. (AIG) offers a maximum of $100 million on a single limit through its subsidiary, Lexington Insurance Co. in Boston, says Foster.
Is EPLI best only for companies with thousands of employees?
Although employment-related claims can be filed against firms of any size, risk management can be especially critical for small- and mid-size companies (between 3 and 1,000 employees). "If you have this Pollyanna-ish view that no one is going to sue because you’re a family business you just need one new employee to come in and be the catalyst for a catastrophe," says Worters.
Foster agrees. He’s seen one company with $5 million in assets take a $1 million hit, and then lose an appeal. "That price didn’t include defense costs. When you lose 20 percent of your bottom line, you’re going to be impacted."
Who else is at risk?
Companies undergoing dramatic transformations face greater risks, according to Barry Cosloy, a principal of the Global Human Resources Solutions Practice at PricewaterhouseCoopers. With every merger, acquisition, downsizing or spin-off, the lines of responsibility for monitoring employment policies and practices are redrawn or become seriously blurred.
With every cost-containment initiative, training budgets are likely to suffer, as are investments in reporting and recordkeeping. HR departments will be hard-pressed to keep policies and communications current and implement necessary procedures to assure compliant behavior, he says. An aggressive plaintiff in a litigious climate is a dangerous mix for employers.
Does EPLI coverage vary according to different carriers?
Yes. Each EPLI policy on the market today is unique. Each carrier will have differences in definitions, exclusions, terms for who is insured, the type of proceeding that triggers coverage, and insured events. The key for HR and risk managers is to know how to shop around and to make sure your company gets the right policy for its needs.
What are the most common EPLI deficits that employers should be aware of?
Risk managers and HR shouldn’t assume that EPLI is a standard insurance product. Policies vary considerably and some products are "very poor," according to Rachel McKinney, co-author of The EPL Book—A Practical Guide to Employment Practices Liability and Insurance.
Some of the more common and potentially expensive deficits include: no prior acts coverage (limits coverage to events that take place during the policy period); exclusion of coverage for alleged wrong employment practices arising out of charges of retaliation or public policy violations (whistle blowing), limited coverage to only the employer and supervisors; and exclusion of coverage for "intentional acts," for which many wrongful employment practices are considered.
Do all states allow coverage for punitive damages?
Many states have laws precluding insurance companies from providing coverage against punitive damage awards. The rationale behind these laws is that punitive damages are intended to punish the offender. But if the offender is covered by insurance for his or her misconduct, then an argument can be made that he or she hasn’t really been punished, says Jeffrey G. McClure, an attorney at Walnut Creek, California-based Davenport & Gerstner, a labor and employment law firm.
Public policy in approximately 16 states currently preclude such coverage. "HR professionals, however, will probably see a significant amount of litigation within the next few years regarding coverage issues under these policies." says McClure.
So how does HR begin to assess whether EPLIis needed in its organization?
Human resources managers should work with the company risk manager or the individual who purchases employer insurance, and with other key senior executives. "Any assessment should be a collaborative effort, drawing upon internal expertise and the skills of outside advisers, including counsel, says Cosloy. Coopers & Lybrand LLP, for example, has developed a "Preemptive Compliance Review" to help organizations assess their exposure to employment-related claims. The good news is that you’re not starting from scratch.
What are points that HR should look at when considering EPLI?
According to the Insurance Information Institute, keep the following in mind:
- Take a look at the company’s policies and procedures before getting a price quote from an insurer. The more effective the policies and procedures that are in place, the less risky the company appears to the insurer.
- Be careful about hiring workers with histories of drug or alcohol abuse.
- Instate tough, zero-tolerance policies toward workplace harassment, discrimination and the abuse of drugs and/or alcohol.
- Develop an employee-standards handbook that defines the skills and performance you expect for each position.
- Measure an employee’s performance on a regular basis.
- Shop around for the best price.
Why do most insurance carriers conduct an ‘audit’ before providing coverage?
Because the insurer wants to assess your risks as a customer. When an insurance carrier initiates the fact-finding process—sometimes referred to as an "audit"— it will ask HR for details about the company’s demographics, downsizing history or plans, hiring, training, promotion and termination practices, grievance procedures, history of claims and total dollar loss history. Most companies see this process as a positive opportunity to review or develop clearer policies and practices.
What do insurers look at to determine which companies are high-risk employers?
McKeon says that management of employment-related risks requires a disciplined and thoughtful process. To an insurer, a high-risk employer would answer ‘yes’ to one or more of the following questions:
- Is the organization highly decentralized, with significant autonomy over employment policies and activities delegated to local operating units?
- Do operating executives exercise authority over employment activities with little HR involvement?
- Are employee performance reviews neglected or delayed?
- Has the HR function experienced significant turnover?
- Do personnel files lack critical documentation relating to hiring, performance evaluation and termination?
Once this insurance is purchased, should employees be told about the company’s EPLI coverage?
Absolutely not, according to one former risk manager of a Fortune 500 company—making it public knowledge would open Pandora’s box. Only a few of the key senior-level executives should know about it besides, of course, the senior HR leader who is critical to the fact-finding process.
Will EPLI diminish employers’ commitment to sexual harassment and other discrimination prevention programs?
Hopefully not. Several working women’s advocacy groups have expressed some concern that it may, yet HR and risk managers should know better. EPLI is no substitute for discrimination prevention strategies. Insurance coverage helps to defray costs, but companies that win or lose a lawsuit suffer long term because of time lost, loss of shareholder confidence, lowered employee morale, visibility in the media and damaged customer relations.
Says McClure: "Every employer should make sure that it has taken the necessary steps to reduce its exposure to [sexual harassment] liability. Adopt a policy and educate both supervisors and employees about the issues." Undertaking an aggressive and proactive approach will go a long way toward protecting your company’s assets—and reputation.Workforce, October 1998, VOl. 77, No. 10, pp. 45-50.