Employment practices liability insurance :: A primer

By Amy Elizabeth Stewart

In the mid-1990s, standard general liability policies began excluding coverage for employment risks. Since that change, insurance specifically for employment-related liability has been a standard component of corporate insurance portfolios. 

Although some businesses elect not to shift employment risks to an insurer, many purchase employment practices liability (EPL) coverage to protect the company, its executive team, and other employees from lawsuits filed by employees, former employees, and applicants asserting employment claims.

Scope of coverage

EPL policies are fairly standardized and cover common employment-related risks:

• Wrongful discharge or discipline
• Employment discrimination
• Sexual harassment
• Violation of state and federal statutes designed to protect employees
• Negligent compensation
• Promotion or hiring decisions
• Other claims arising from the employment relationship

EPL policies may also provide coverage for certain inappropriate conduct toward third parties that mirrors the coverage for employee claims. This third-party coverage may be contained in a separate insuring agreement.

Finally, employee benefits coverage, which protects the employer from liability for negligence in the administration of the company’s employee benefit plans, may also be included in an EPL policy, added as an endorsement, or available through a separate policy or insuring agreement. (An endorsement is a document attached to an insurance contract that amends the policy in some way. An endorsement may add, remove or alter the scope of coverage under the policy.) 

Covered "loss"

Considering the range of available remedies in an employment discrimination case, the “loss” covered by an EPL policy will be carefully defined. Covered damages typically include:

•  Compensatory damages
•  Punitive, exemplary or multiplied damages, if insurable under applicable law
•  Liquidated damages awarded pursuant to the Age Discrimination in Employment Act, Family and Medical Leave Act, or Equal Pay Act
•  Back and front pay
•  Defense expenses
•  Attorneys’ fee awards

Conversely, other remedies and damages are commonly omitted from covered loss, including:

• The cost of the insured’s compliance with non-monetary or injunctive relief
• Uninsurable amounts
• Taxes, fines and penalties, with a possible exception for punitive, exemplary or multiplied damages
• Future salary, wages, commissions, or benefits
• Salary, wages, commissions, benefits, or other monetary payments that constitute severance payments
• Benefits owed to an employee

Exclusions

EPL policies contain some significant, common exclusions, such as:

• Property damage and bodily injury
• Breach of contract, including breach of employment contracts and collective bargaining agreements
• Claims arising from an alleged violation of obligations imposed by laws relating to the following (although there are often exceptions for retaliation claims):
  • Social Security
  • Unemployment insurance
  • Workers’ compensation
  • Disability insurance
  • The Worker Adjustment and Retraining Notification Act (WARN)
  • Occupational Safety and Health Act (OSHA)
  • Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
  • National Labor Relations Act (NLRA)
  • ERISA
  • Wage and hour laws

Employing people does increase a company’s potential risk for exposure to employment-related claims. To help offset such risk, a company should strongly consider adding EPL insurance to its risk management portfolio. However, because of the number of common exclusions in an EPL policy, and the potential a claim will fall within one or more of those exclusions, it’s important for business policyholders to fully understand how the policy works in the event of a claim.