Employment harassment and discrimination lawsuits are growing rapidly as more employees become aware of their legal rights. These lawsuits are expected to escalate even more as the awareness increases. It is no surprise that companies are going for employment practices liability insurance (EPLI) to protect their interests. As the name suggests, EPLI is a type of liability insurance targeted at companies and employers to protect them against liability that arises out of employment practices. Let's take a closer look at this type of employer protection. Here we'll introduce the general features of this policy and show you how companies choose the policy best suited to their needs. (To learn the basics of insurance, read Understand Your Insurance Contract and Exploring Advanced Insurance Contract Fundamentals.)

Coverage and Claims
EPLI covers judgments, settlements and defense expenses up to the specified policy limits for a company, its directors and officers, and its previous and present employees. Many insurers may not cover employment applicants, leased, temporary, part-time, seasonal employees and even independent contractors. Hence, employers should opt for comprehensive coverage that includes permanent, temporary and prospective employees.

The coverage includes all the office-related lawsuits such as sexual and non-sexual harassment, religious, gender and racial discrimination, unlawful termination, negligent assessment, breach of employment contract, mismanagement of employee benefits plans, failure to employ or promote, denial of career opportunity, unfair discipline, invasion of privacy, defamation and intentional infliction of emotional stress. Many EPLI policies also provide larger coverage and cover claims brought by the Equal Employment Opportunity Commission (EEOC) on behalf of an employee.

As with all insurance policies, the terms and conditions of the coverage may vary considerably from insurer to insurer. The insured company must be acquainted with the specified definition of the term "claim" within the policy.

Premium
Generally, premium rates differ from one state to another and from one company to another. Premiums are calculated by determining the total amount of insurance a business requires and its perceived risk. Risk factors such as the number of employees in a company, the turnover ratio, the presence of a proper human resources division, and any previous harassment or prejudice suits against the company affect the premium rates of that company.

However, many companies try to lower the premiums by adopting zero-tolerance policies against alcohol and drug abuse, harassment and discrimination at the workplace. As a rule, insurers evaluate a company to verify the presence of any workplace liabilities before issuing the policy. Consequently, the insurance company will propose the necessary changes that need to be introduced in the company. These variations help in setting up a healthy atmosphere at the workplace and protect the company against lawsuits.

EPLI Policies Differ from CGI policies
It is important to note that coverage provided by EPLI policies and comprehensive general liability insurance (CGL) policies are different. Unlike EPLI policies, CGL policies provide only general liability coverage and insure against tangible damages such as claims for injury and property damage. CGL policies tend to cover property damage and bodily injury cases, while EPLI policies do not cover these cases and instead tend to protect the employer against claims of wrongful termination, workplace harassment and discrimination.

Companies with EPLI policies have to inform the insurance company of any claims that occurred during the coverage period. Only these will be covered under EPLI. With CGL, a claim made today about damages that occurred in the past will still be covered under the policy, even if the claim is made many years later. EPLI policies only cover the claims that the employer reported and of which it was aware during the coverage period.

Deductibles and Limits of Liability
Deductibles apply to each claim in EPLI policy. A company can purchase insurance limits of liability of between $1 million up to $25 million. For example, a $1 million limit implies that an insurer would compensate only to the limit of $1 million. Usually, an EPLI policy is subject to a per-claim deductible (which ranges from $2,500 to $25,000 per claim) and a per-claim limit of coverage (the maximum amount an insurance company will pay to the insured company).

Finally, insurance plans have a per-policy aggregate limit of liability. While aggregate limit is the highest amount an insurance company will pay out for the claims during the policy term (generally one year).

Hammer Clause
The hammer clause authorizes the insurer to advise the insured company to make a settlement to the other party. According to the hammer clause, the insurance company will offer settlement up to a certain amount. If the insured company refuses this option and subsequently loses the case, then the company is liable to pay the judgment amount beyond the limit the insurer has agreed to pay. Suppose the insurer offers the settlement of $70,000. The insured company refuses the offer and the claim in the judgment comes to $120,000 against the insured. In this case, the insurer will pay $70,000 minus the existing deductible. The insured company has to pay the remaining $50,000 along with the deductible amount.

Another variant is the soft hammer clause (also called modified hammer clause) wherein the insurer must pay a fixed percentage (typically 50%) of the potential defense or indemnity costs that exceed the amount of the settlement offer declined by the insured company. For instance, suppose the insurer proposes a settlement offer of $60,000 and the insured company declines the offer. Unfortunately, the claim in the judgment equals $110,000 against the insured company. Hence, the insurer is liable to pay the amount of settlement plus the 50% of the amount exceeding the settlement (ie. $75,000). The insured company is liable to pay the remaining $35,000 along with the deductible.

Sometimes, hammer clause contain a stipulation that empowers insurers to compel the insured company to opt for arbitration or any such means of dispute settlement. And, in some instances, a company can eliminate a hammer clause from the policy by increasing the deductible.

Duty to Defend
Insurers provide duty-to-defend coverage that requires the insurer to defend against claims on the company's behalf. As a result, the insurance companies retain the right to choose the counsel that will defend the insured company in case of a legal action.

Normally, EPLI policies insurer to choose legal counsel for the insured company. Typically, EPLI insurers have a preauthorized panel counsel, which is specifically employed to defend regional insured companies. Because insurers have more claim experience and are emotionally detached, this can lead to early settlement of the claim with lower costs.

On the other hand, if the company prefers a particular counsel, then the company should name that counsel in an endorsement to the policy.

Duty to Pay
Duty-to-pay policy (also called "no-duty to defend" policy) is perfect for companies that are concerned about their good names and the probable effect of an unfavorable settlement. As per the duty-to-pay policy, the insured company can control its own defense, choose its own attorney and challenge all the claims. However, a higher deductible has to be paid in this policy as there are chances of higher legal costs and also higher settlement costs.

Policy Exclusions
EPLI coverage does not cover every situation. Typically, exclusions include criminal acts, fraud, illegal profit or advantage, purposeful violation of law, and claims arising out of downsizing, layoffs, workforce restructurings, plant closures or strikes, mergers or acquisitions. (To learn more about mergers, see The Basics Of Mergers And Acquisitions and The Wacky World of M&As.)

In case of punitive damages, many states rule out allowing insurers to compensate against them. However, many EPLI policies provide punitive damages through the "most-favored jurisdiction" clause. The clause specifies that the punitive damages coverage will be regulated by the state law that favors insuring against punitive damages. For example, if a company has business operations in many states and a claim arises in the state where punitive damages coverage is excluded, if the company was established in a state that supports punitive damages coverage, then the company can get coverage under its EPLI policy.

Conclusion
Certainly, mistakes do occur at workplaces and a company may make costly errors in its employment practices. It can start with a small gag on an employee or questionable contract termination. That's when a company needs liability insurance to protect it from lawsuits. Having a suitable employment practices liability insurance plan in place can save a company's reputation and protect it from financial losses in the court system.

Related Articles
  1. Entrepreneurship

    3 Reasons to Develop an Employee Handbook for Your Small Business

    Learn how a small business can benefit from an employee handbook covering labor laws, codes of conduct, leave policies and media relations.
  2. Budgeting

    5 Alternatives to Traditional Health Insurance

    Discover five of the most popular alternatives to traditional health insurance plans, alternatives that are increasingly popular as health insurance costs rise.
  3. Insurance

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  4. Retirement

    Shopping the New Retirement Products

    There are more options than ever for retirement portfolios these days. Choosing the right product comes down to your needs, time and management style.
  5. Entrepreneurship

    10 Characteristics Of Successful Entrepreneurs

    Do you have the qualities of a successful entrepreneur? Those who do tend to share these 10 traits.
  6. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  7. Personal Finance

    Don't Sign That Non-Compete Without Reading This

    Non-compete contracts aren't just for high-level execs these days. How to protect yourself if your employer – or prospective employer – insists you sign one.
  8. Products and Investments

    Cash Value vs Term Life Insurance: Which is Best?

    The debate between cash value life insurance and term insurance plus an investment plan is an ongoing one. Here's a look at both sides of the argument.
  9. Career Education & Resources

    Laws & Regulations To Know Before Changing the Name of Your Business

    Discover some of the most important steps you need to take after making a decision to change your legally established business name.
  10. Economics

    Why Enron Collapsed

    Enron’s collapse is a classic example of greed gone wrong.
RELATED FAQS
  1. Does dental insurance cover implants?

    Dental implants have become a widely used procedure in dentistry. Despite their popularity, however, they tend to not be ... Read Full Answer >>
  2. Does dental insurance cover dentures?

    Most full dental insurance policies include some restorative coverage, usually meaning that up to 50% of the cost of dentures ... Read Full Answer >>
  3. Can CareCredit be used for family members?

    CareCredit has become a widely used option when it comes to paying for medical procedures, primarily procedures not typically ... Read Full Answer >>
  4. Can a Flexible Spending Account (FSA) be used for dental?

    Flexible Spending Accounts (FSAs) can be used to pay for dental expenses including deductibles and co-payments with pretax ... Read Full Answer >>
  5. Does dental insurance cover braces?

    Most regular dental plans cover little to none of the costs of braces. The primary focus of regular dental plans is prevention ... Read Full Answer >>
  6. Does dental insurance cover crowns?

    Dental insurance coverage may vary according to the type of plan and the level of benefits that you have elected. Most dental ... Read Full Answer >>
Trading Center