Employment practices liability insurance (EPLI) is a popular product for employers of all sizes. Many companies obtain EPLI coverage by purchasing a package of insurance policies covering a variety of management risks, such as directors and officers liability, professional liability, and cyber security. Once the policies are in hand, reviewing your company’s voluminous insurance terms and conditions might not be at the top of your to-do list. It is important, however, to take the time to understand your EPLI coverage before you need it. Doing so will help avoid costly reporting mistakes and maximize your benefits. Here are some common questions and answers about EPLI coverage:
What does EPLI typically cover?
EPLI provides coverage for specified employment-related claims that are listed and defined in the policy. Covered types of claims usually include employment discrimination, harassment, and retaliation, wrongful termination, and workplace torts like defamation, invasion of privacy, and negligent employment. Coverage is usually also afforded to certain breach of contract claims.
EPLI offers protection from both the risk of paying claims as well as the cost of defending them. As discussed below, your policy will either require the insurer to assume the defense of the claim by appointing counsel of its choice (a “duty to defend” policy), or to reimburse the expenses that you incur in defending the claim with counsel of your choice (a “defense expenses” policy). Your EPLI policy may provide coverage for amounts that you become legally obligated to pay as a result of a claim, such as compensatory damages, back pay, or front pay, but there are also amounts that are not covered.
What does EPLI typically exclude?
EPLI policies usually exclude coverage for risks covered by other types of insurance, such as directors and officers liability or unemployment insurance, as well as bodily injury and property damage covered under commercial general liability or workers’ compensation policies. EPLI policies also usually exclude coverage for intentional acts, labor disputes, and the cost of complying with injunctive relief. Most EPLI policies exclude coverage for wage and hour claims unless the insured purchases a separate endorsement (i.e., an amendment) that expands coverage to include them.
Many EPLI policies will cover the defense of claims for breach of contract, wrongful termination, and loss of benefits, but they will often exclude coverage for amounts that you become legally obligated to pay as a result of such claims. An exception to this exclusion for breach of contract damages are amounts that you would be liable for even in the absence of the contract. In these circumstances, the insurer may agree to defend you subject to a reservation of rights to deny coverage for the claim, and as discussed below, this circumstance requires you to carefully consider your rights under the policy and the risks associated with the lawsuit in order to maximize your insurance benefits.
What is “claims made” coverage?
EPLI policies typically provide “claims made” coverage, which means that the claim must be made against you during the policy period in order to trigger coverage under the policy. This is different from general liability insurance, which is “occurrence” based, providing coverage so long as the damage occurred during the policy period even if a claim does not arise until later.
Many EPLI policies that provide claims-made coverage also contain an important additional requirement: that the insured report the claim to the insurer as soon as practicable during the policy period or during a specified extended reporting period after the policy’s expiration. This requirement is often enforced by insurers and many courts if the late notice causes the insurer prejudice, so it is critical that you timely report claims. Insurers will deny coverage for costs incurred and settlements agreed to by the insured prior to receiving notice of the claim.
What is the difference between the insurer’s defense and indemnity obligations?
Liability insurance policies place two obligations on the insurer: the duty to defend (or alternatively, to reimburse defense expenses) and the duty to indemnify. The former is triggered if the claim merely alleges any facts regardless of merit that are “arguably” within the scope of the policy’s coverage, while the latter is triggered only if the actual facts ultimately establish coverage. This means that an insurer may be obligated at the outset to defend you from claims even if it may not ultimately be obligated to pay any judgments or damages resulting from them.
In such cases, the insurer will typically issue a “reservation of rights” letter, agreeing to provide you with a defense, but reserving the right to withdraw from it and deny coverage for any resulting judgments or damages if the facts ultimately do not establish coverage. This is particularly common under EPLI where employees allege many facts, plead alternative causes of action, and request a variety of forms of relief. A duty to defend is triggered if at least one claim is arguably covered under the EPLI policy, but its many exclusions, such as those for intentional acts, loss of benefits, breach of contract, wrongful termination, and injunctive relief, may ultimately eliminate the insurer’s obligation to indemnify you from any resulting judgments or damages.
If you are receiving a defense subject to a reservation of rights, it is important to consult with independent counsel about your policy’s coverage because it may affect your litigation and settlement strategies. An insurer’s reservation can also, at times, entitle them to seek to recoup defense costs paid if the policy holder does not properly respond. You should not assume that your insurer-appointed defense counsel will be willing, interested, or capable of providing you with objective advice about your policy’s coverage. An insurer providing a defense subject to a reservation of rights may have interests that do not align with yours and this could affect how it controls the defense, its willingness to contribute to a settlement, and its expectation that you will do so as well.
Am I covered?
Unlike commercial general liability policies, there is very little uniformity among EPLI policies, meaning that the terms and conditions of each policy often vary from insurer to insurer. Endorsements to the policy may add, remove, or modify the scope of EPLI coverage. EPLI policies often have claim-specific limits, which is particularly common for wage and hour claims, and the limits may or may not be eroded by defense expenses. Depending on your particular business, it is important to consider who qualifies as an “insured” and an “employee,” whether the EPLI policy provides coverage for claims made by third-parties, whether exclusions for “intentional acts” apply before a judicial finding is made, and how your EPLI coverage works with other insurance that may be available to you.
You can contact us if you have more questions about your EPLI coverage. We are experienced in assisting our clients with choosing the right EPLI coverage options, explaining the scope of coverage afforded by their EPLI policies, reporting claims to insurers, and evaluating your options if your insurer is providing a defense subject to a reservation of rights or has denied coverage for your claim.