ISO'S EMPLOYMENT-RELATED PRACTICES LIABILITY POLICY
by Gary Griffin
According to The Risk Management Letter, volume 18, issue 8, Insurance Services Offices' (ISO) new Employment-Related Practices Liability (ERPL) policy provides 'a benchmark for the insurance industry and will secure economies of scale that will benefit insurers and their customers.' The ISO ERPL helps solve problems associated with designing and pricing an Employment Practices Liability (EPL) when the full extent of the risk is difficult to measure. In the past, this limitation meant that only the largest or most adventurous insurers have written EPL coverage. The trick has been to offer a product that is broad enough to cover the kinds of exposures that organizations are concerned about and be competitive from a price standpoint, yet still allow the insurer to make a profit.
By using its vast technical and statistical resources, ISO seeks to offer insurers a standardized insurance policy and advisory projections of average future claim payments and loss-adjustment expenses. Many insurers who are unwilling or unable to design coverage and develop loss costs on their own can now compete in the burgeoning EPL insurance market by taking advantage of ISO's services.
The new ISO ERPL program provides coverage that is triggered by a claim first made during the policy period. The ERPL form is designed to be written as a stand-alone policy or made part of ISO's Commercial Package policy. ERPL coverage provides base limits of $100,000, with options to increase the limits to $10 million. This article reviews the most important coverage elements of the new ISO form.
Who Is Insured
Under the ISO-ERPL, the following may be insured under the policy when so designated in the declarations:
- Limited liability companies, including their members and managers
- Partnerships or joint ventures, including partners and members
- Organizations other than partnerships, joint ventures, or limited liability companies, including executive officers (when such positions are created by charter, by-law or other governing documents), and directors
- Employees who hold managerial or supervisory positions and those leased or temporarily employed (Keep in mind that non-supervisory or non-managerial employees are not automatically insured, and no person or organization is an insured with respect to any current or past partnership or joint venture not shown as the named insured in the declarations.)
Endorsements can extend coverage to all employees (EP 01 02 04 98), designated persons or organizations (EP 20 01 04 98), and newly acquired organizations (EP 01 01 04 98).
Insuring Agreement
After an injury covered by the policy, the insuring agreement promises to pay those damages for which the insured has become legally obligated. Even though the term 'damages' isn't defined, the insuring agreement states that there is no obligation to pay civil or criminal fines or to provide services or perform acts not specifically described in the policy. The policy also contains a broad Americans with Disabilities Act (ADA) exclusion, which denies coverage for ADA's requirement of equitable relief. The policy covers injuries arising only out of:
- Refusal to employ, termination, failure to promote, negative evaluation, reassignment, discipline, or defamation or humiliation linked to discrimination
- Coercive acts leading a person to commit a crime within the scope of employment
- Work-related sexual harassment
- Other types of work-related verbal, physical, mental, or emotional abuse targeting a class or characteristic protected by any federal or state law or local statute, rule, or regulation.
The covered items contained in the definition of 'injury' replace the terms 'wrongful termination,' 'discrimination,' 'sexual harassment,' and 'wrongful employment torts,' all of which are common in other EPL insurance policies. However, keep in mind that such terms have no standardized meaning. You should carefully review how these terms are defined in order to determine the actual scope of coverage.
Note that the ISO policy's coverage for refusal to employ, failure to promote, termination, negative evaluation, reassignment, discipline, defamation, and humiliation apply only when such claims are based on discrimination. Wrongful termination claims can be based on a wide variety of common law and statutory causes of action, including allegations of breach of implied contract, breach of the covenant of good faith and fair dealing, violation of whistle-blowing statutes, defamation, infliction of emotional distress, fraud, misrepresentations, invasion of privacy, or constructive discharge. There's no need to prove that discrimination occurred to make those types of claims.
Note, too, that the coverage grant extends to other forms of work-related verbal, physical, mental, or emotional abuse that's based on any protected class or characteristic. This grant is an important extension; however, employees may bring a host of alleged employment-related torts not specifically identified in the insuring agreement. When torts, such as negligent hiring, promotion, retention, invasion of privacy, or others, aren't specifically mentioned in the policy, it may be unclear how such claims will be treated.
Defense
The policy promises to defend the insured against any suit seeking damages because of those injuries described by the insuring agreement. Under this promise to defend, the insurer normally has the right to choose counsel and control defense procedure and strategy. The limit of liability includes defense expenses. 'Suit' is defined as a civil proceeding in which damages from a covered injury are alleged. Suit can include, but is not limited to, certain arbitration proceedings, alternate-dispute-resolution proceedings, and any administrative proceeding or hearing.
The insurer may also settle claims with the insured's consent. Failure of the insured to consent to a settlement will limit the insurer's liability to an amount no greater than the proposed settlement.
There is no duty to defend the insured against any suit seeking damages because of an injury not covered by the policy. Policy conditions also stipulate that if the insured is permitted by court order or the insurer to retain separate defense counsel, then an allocation between covered and non-covered defense expenses may be made.
Exclusions
The ISO-ERPL policy form contains 10 exclusions. A few of the exclusions (ADA, contractual liability, Workers Compensation, and similar laws) appear to be similar or identical to those found in many other EPL policies, while others warrant comment.
Criminal, Fraudulent, or Malicious Acts
The ISO criminal acts exclusion reads as follows:
This insurance does not apply to:
An insured's liability arising out of criminal, fraudulent, or malicious acts or omissions by that Insured, or arising out of that insured's knowing acquiescence or failure to act, or instruction, direction, or approval given to another concerning such acts or omissions.
This exclusion appears to exclude coverage only for the liability of that individual insured committing fraudulent or criminal acts or the liability of any other insured who fails to act (for example, a supervisor who is aware of wrongful conduct but fails to stop it). However, note that this exclusion might be the basis for excluding punitive damages. In this situation, damages are often only awarded when the insured's conduct is found to be malicious, fraudulent or willful.
The exclusion does not affect the insurer's duty to defend before the appropriate legal process has determined that the insured is responsible for such fraudulent, criminal, or malicious acts.
Violation of Laws Applicable to Employers
The ISO violation of laws exclusion reads as follows:
A violation of your responsibilities or duties required by any other federal, state or local statutes, rules or regulations, and any rules or regulations promulgated therefore or amendments thereto, except for the following: Title VII of the Civil Rights Act of 1964 and amendments thereto, the Age Discrimination in Employment Act, the Equal Pay Act, the Pregnancy Discrimination Act of 1978, the Immigration Reform Control Act of 1986, and the Family and Medical Leave Act of 1993 or any other similar state or local statutes, rules, or regulations to the extent that they prescribe responsibilities or duties concerning the same acts or omissions.
Because responsibilities and duties that are excepted from an exclusion are listed, the resulting list might not completely address all the laws for which the insured may be found liable. Furthermore, such an approach might not contemplate changes in the law or entirely new laws coming into effect. These concerns are partially assuaged by the inclusion of a qualifying statement that makes an exception for 'any other similar state or local statutes, rules or regulations to the extent that they prescribe responsibilities or duties concerning the same acts or omissions.' Although this qualifying statement reduces the impact of the exclusion, the statement may be open to differing interpretations. Narrowly construed, it might broaden the exclusion to the detriment of the insured in respect to laws not specifically listed, new laws, or changes to existing laws.
Strikes and Lockouts
The ISO strikes and lockouts exclusion reads as follows:
'Injury' to any striking or locked-out 'employee,' or to an 'employee' who has been temporarily or permanently replaced due to any labor dispute.
While many EPL insurance policies contain a strike and lockout exclusion, the ISO exclusion encompasses claims based upon injury not only to striking or locked-out employees, but also to employees who have been temporarily or permanently replaced due to any labor dispute. The phrase 'any labor dispute' could conceivably encompass any kind of dispute in which an employee was fired and replaced. Such an interpretation could severely limit coverage. While such a broad interpretation might not be intended by ISO, the current wording is nonetheless ambiguous. Insureds should seek clarification as to the intent of this exclusion, preferably in writing, from the issuing insurer.
Sexual Harassment
The ISO sexual harassment exclusion reads as follows:
Liability of that insured who commits a 'sexual harassment' offense.
This exclusion does not affect our duty to defend that insured prior to determining, through the appropriate legal processes, that that insured has committed a 'sexual harassment' offense, other than an assault or battery.
This exclusion specifically precludes coverage for liability of that insured committing sexual harassment and does not appear intended to exclude any liability that the organization may have because of sexual harassment. The exclusion presumably also applies to instances in which sexual harassment exists simply out of ignorance by the insured committing the sexual harassment offense. The exclusion goes on to state that the insured has a duty to defend that insured 'prior to determining, through the appropriate legal processes, that the insured has committed a sexual harassment offense other than assault and battery.'
Employment Termination or Relocation Due to Business Decisions
The ISO employment termination exclusion reads as follows:
'Injury' arising out of termination of employment, job relocation, or reassignment, if the action is taken for one of these reasons:
- You have filed for bankruptcy protection, or you are placed in receivership or liquidation.
- You have merged with or been acquired by another business entity.
- You have closed an operation or a business location.
- Your business location is partly closed or the size of an operation must be reduced because of fire or other disasters beyond your control.
Keep in mind that not all EPL insurance policies exclude claims based on downsizing or reductions in force, and even those EPL insurance policies that do exclude such claims do so only if such reductions in force exceed a certain percentage of the workforce within a specified period of time. The ISO exclusion applies to any claims arising out of the actions just described, regardless of the number of persons affected or time period involved.
Intentional Injury
The ISO intentional injury exclusion reads as follows:
Liability of that insured who commits an act of intentional 'discrimination' or coercion.
This exclusion does not affect our duty to defend that insured prior to determining, through the appropriate legal processes, whether the insured committed such act.
Liability of the insured who commits an act of intentional discrimination is excluded. In addition, intentional coercion is also excluded, thereby limiting the coverage for coercion found in the definition of injury. The insured has a duty to defend the insured prior to determining whether the insured committed such acts.
Retaliatory Actions
The ISO retaliatory actions exclusion reads as follows:
Liability arising out of an insured's retaliatory action against a person because the person has:
- Declined to perform an illegal or unethical act;
- Filed a complaint with a governmental authority or a 'suit' against you or any other insured in which damages are claimed;
- Testified against you or any other insured at a legal proceeding; or
- Notified a proper authority of any aspect of your business operation that is illegal.
This exclusion eliminates coverage for some of the most serious charges that employees can level against their employers. Given the emotional nature of claims of retaliatory discharge or of discharge in violation of public policy, these claims also frequently result in substantial jury verdicts and/or settlements.
Keep in mind, however, that the definition of 'injury' as used in the insuring agreement provides coverage for 'coercing that person to commit an unlawful act or omission within that person's scope of employment' providing some limited coverage not affected by this exclusion.
In respect to the reference to unethical acts, it should also be noted that the employee, employer, and underwriter might all have different notions of what represents unethical behavior.
Endorsements
In addition to the coverage features just outlined, a number of optional endorsements enable you to add the following:
- Extended three-year claim-reporting period
- Coverage extension to all employees
- 90-day automatic acquisition clause
- Coverage for persons or organizations who have financial control over the insured's employment-related practices
Conclusion
Many current non-ISO forms offer coverage features that go well beyond those available under the new ISO form and endorsements we reviewed. Nevertheless, the ISO-ERPL policy provides many important coverage features for those insureds not requiring or able to purchase state-of-the-art coverage.
ISO's position has been, and continues to be, that the policy wording speaks for itself. But because we found some of the language to be ambiguous, we recommend that those ambiguities be clarified with the issuing insurer, preferably in writing. The unfortunate reality for many small or medium-size insureds, however, is that such requests are often ignored.
While ISO's venture into this new line of coverage may benefit insureds by allowing a greater variety of insurers to compete for both existing and new EPL business, we expect that most insurers currently offering EPL insurance will continue to do so using non-ISO policy forms.
Editor's Note
This article includes copyrighted material of Insurance Services Office, Inc. and is used with its permission. Copyright Insurance Services Office, Inc. 1997.
This article is presented only as an overview of coverage as interpreted by the author and is not a legal analysis or recommendation of any particular coverage feature. All policyholders or potential policyholders are cautioned to read through any insurance policy carefully, placing priority on identifying features or passages that are not fully understood. The issuing insurer or other insurance company representative is best equipped to clarify any characteristics of coverage.
Gary Griffin, CPCU, is a consultant with Warren, McVeigh & Griffin, Inc.