Epl: Building A Three-Legged Stool Of Protection

by Gary Griffin, ARM, and Rachel McKinney

As the incidence of wrongful employment practice suits increases, savvy employers are taking proactive steps to control both the frequency and severity of claims. But even the most aggressive prevention measures won't completely insulate employers and others from loss. New insurance products covering employment-related liability can provide the backstop protection many employers need to avert catastrophe.

Over the last 20 years, wrongful employment practice claims have risen at a rate 18 times faster than the proliferation of the Federal Court docket. In just four years-fiscal years 1990 to 1993 -- the Equal Opportunity Commission (EEOC) and the Fair Employment Practices Agencies (FEPAs) have recovered over $735 million from employers for violations of employment law. In 1994, a California State court in Los Angeles awarded nearly $90 million to two former Hughes Aircraft engineers because of discrimination. Even the largest law firm in the world found itself the target of an embarrassing sexual harassment suit.

Today's businesses face not only the traditional obstacles of competition and keeping up with advances in technology, but must now face a whole new breed of potential adversary: one's own workforce. Even the best-run of companies are experiencing an explosion of employment-related claims. These can include:

• Wrongful discharge litigation
• Discrimination and sexual harassment claims
• Allegations of negligent hiring, retention, and supervision
• Wage and hour investigations
• Fringe benefit claims
• Increased unemployment, disability and Workers Compensation claims
• Unintended violations of Federal and state leave-of-absence laws

Human resource professionals have known for years that communication of the employer's rules, policies, and procedures to the employees, as well as an early intervention in employment disputes or complaints, are effective in limiting both the frequency and severity of suits. Now employment practices liability insurance (EPLI) can augment these traditional preventive tactics. Combined with insurance, loss prevention, post-incident investigation, and thorough follow-up can act to form a three-legged stool of protection against employment-related claims.

Here are a few tips to consider when developing your own defensive strategies.

While the incidence of employment-related claims has increased dramatically in recent years, one encouraging aspect regarding such claims is that both frequency and severity of loss can be controlled through prevention techniques. Two integral elements every successful employment liability prevention plan have are an effective employee manual program and awareness training.

Many employment-related claims arise out of ignorance. This may be the result of the employer's policies and procedures not getting communicated to the employee, inconsistent hiring and discipline practices, or the employer simply not knowing what the law requires. When employees or applicants have a dispute or complaint regarding their employment, they need to understand that procedures are in place to resolve those problems. Without an internal means of resolution, many employees will seek assistance outside the organization, and often that means an attorney. A well-designed employee handbook can be an effective tool in avoiding these all too common pitfalls. As a minimum, handbooks should include the following:

• The handbook should be non-discriminatory.
• The handbook should be prepared and reviewed by a knowledgeable labor-law professional.
• The handbook should be clear and understandable.
• The handbook should be translated or explained in the employee's native language.
• The handbook should be distributed to all existing and new personnel.
• The employer should also follow the employee handbook.
• The handbook should be regularly reviewed and updated.

Unless employees have received training in the corporation's policies, rules, and procedures, they should not be miraculously expected to know what those procedures and rules are. Even with a formal employee handbook, the contents must be clearly and periodically communicated to the firm's employees or else any potential benefit will probably be lost.

Beyond periodic formal reinforcement of the company's policies, awareness training focused on preventing sexual harassment (one of the more pervasive of employment problems) can also be an effective prevention tool. Managers and employees who have been trained and are aware of the kinds of behavior that might be construed as harassing have a better chance of preventing such behavior in the first place. In many instances, the harasser is not purposely malicious but simply unaware that such behavior is offensive to others.

To give further support to the employer's commitment to a non-discriminatory and harassment-free workplace, pre- and post-training testing can be used to document employee education and training. Testing verifies that employees understand the corporate rules and laws forbidding sexual harassment. Most important, though, is that both supervisors and employees are better able to detect and prevent such behavior before it turns into a problem.

Even the most rigorous of prevention techniques cannot guarantee that claims of wrongdoing will not occur. But once a claim or allegation is made that will conceivably result in a formal charge, it is imperative to have a plan of action and to implement that plan at the outset of a problem becoming known. Many employees who complain of wrongdoing may only want the offending behavior or practice to cease-money damages might not be requested or demanded. Therefore, employee complaint procedures should also be contained in the employee manual. At a minimum, the employer should:

• Document all complaints, noting relevant facts, dates, and persons involved. Treat all complaints or incidents seriously.
• Have a procedure to investigate the complaint thoroughly and objectively. Remain impartial, and avoid making premature judgments.
• Stay in contact with the claimant, advising them of the progress of the investigation and what actions will be taken. Keeping claimants in the dark only causes emotions to fester and increases the likelihood of litigation.
• Follow up to ensure that the decided course of action is carried out.

Because of the complexities of employment law, many employers seek the guidance of labor law professionals in developing prevention planning and post-incident investigation techniques.

Loss prevention and control techniques like those just mentioned should be made part of any overall employment policy, but they are not complete protection from the risk of financial loss. Any claim or incident can involve litigation. And once in litigation, even nuisance suits can cost up to $25,000 or more to dispense with. To defend against more serious claims can cost even more. While many large organizations may find it economically feasible to self-insure much or all of this exposure, smaller or thinly capitalized firms may be severely hit by even a single modest loss. Even some larger firms might find it difficult to absorb the cost of multiple suits.

In the last few years, insurers have been queuing up to provide a specialized form of insurance specifically designed to protect against loss incurred in litigating and settling wrongful employment practices liability claims. The generic name for this new coverage is Employment Practices Liability insurance (EPLI).

It should be noted that insurance coverage for some kinds of wrongful employment practice claims may be available under standard business policies, such as the Commercial General Liability policy or even, to some extent, Personal Umbrella or Homeowners' policies. But relying on these sources for protection is likely to lead to disappointment or, at minimum, a protracted coverage dispute with your insurer. For several years, it has been the practice of insurers to incorporate language into these policies that eliminates or severely restricts coverage for employment-related claims. While some attempts at seeking coverage under these policies have been successful, insurers usually will vigorously deny coverage.

For many employers unable to absorb the risk of loss from an employment practices claim, EPLI insurance may offer a viable alternative. In recent years there has been increased availability of products specifically designed to insure against employment hazards. Also the number of insurers offering such coverage has increased dramatically.

Because the coverage offered is relatively new and there is much variation in the degree of protection offered, employers must be cautious in their evaluation of such policies. Seemingly minor differences in policy wording can drastically affect coverage. One of the benefits of purchasing insurance is that it reduces the uncertainty of loss. But because of the wide variation in EPLI policy forms, knowing what you are actually buying can be difficult unless you know what to look for. Here are just a few of the many factors to consider when evaluating EPLI coverage:

Specific coverage for wrongful employment conduct can actually be purchased in a number of ways. The most common are individual stand-alone policies covering your liability for specifically enumerated wrongful practices. EPLI coverage can also be obtained by the attachment of riders or endorsements to other policies such as Directors & Officers policies and others. The benefit of purchasing coverage under a unitary contract, however, is that the coverage provided is usually broader and the limit of liability is not eroded by the payment of unrelated coverage. Endorsements to other kinds of policies sometimes only provide limited protection and often lack a duty to defend. But criticism of the stand-alone policy approach is that the coverage can be expensive and it may be difficult to purchase policy limits greater than $10 million. Yet another approach is to purchase coverage for defense expenses only. This approach has the benefit of protecting against the often enormous cost of defense but keeps the price down by precluding coverage for judgments and settlements.

The promise by the insurer to defend the insured is arguably one of the most desirable features under any liability policy, and this holds true for EPLI coverage. But as previously mentioned, not all policies provide an affirmative duty to do so. The advantage of having a duty to defend is that the insurer may be required to defend the insured even if some of the allegations are in dispute or are not covered by the policy. An early defense is often crucial in resolving employment-related claims, and any disruption or conflict with the insurer over what is or is not covered can drive the claims process into low gear.

EPLI policies usually cover a wide range of wrongful acts. Under most EPLI policies these include wrongful termination, discrimination, sexual harassment, and other employment torts. But the definitions of these terms varies, and subtle differences in wording can limit coverage.

In its everyday usage, the term "discrimination" can encompass a wide variety of acts. In an EPLI policy, though, the definition is more focused and can be narrowly defined. Under some policies, the term may only relate to specific kinds of discrimination subject to specifically listed laws. Unless every known type of discrimination or applicable law is listed, chances are good that not all claims will be covered. A better approach is to seek coverage for any form of discrimination, including any discrimination prohibited by law, whether it be state, local, or federal. This approach prevents the possibility of failing to list one or more specific kinds of discrimination.

Most EPLI policies specifically exclude coverage for breaches of express written employment agreements. This is an important element of the definition, and care should be taken to ensure that breaches of implied employment contracts are covered. Some definitions that address the issue of implied contracts might not be clear regarding the insurer's intent, and in such cases clarification in writing should be sought. Some policies define "wrongful termination" to mean "termination that is against the law and wrongful." Such a definition, while seemingly broad, may actually be onerous because in some states public policy can form the basis for a wrongful discharge claim only when such a prohibition is set forth in a statute or regulation. In other states, public policy may also be established by court decision and might not necessarily be prohibited by law. However the term is defined, it should include all discharges that are against public policy or wrongful, whether such termination is alleged, unlawful, or constructive in nature.

Allegations of sexual harassment are often based on a theory of "quid pro quo" harassment, where sexual favors are demanded before the employee can obtain favorable work benefits or avoid unfavorable treatment. Sexual harassment may also be based on a theory of "hostile work environment." Such an environment can exist where an employee is subjected to conduct that interferes with work performance. But not all EPLI policies cover both forms of harassment, so it is important to check definitions carefully. In addition, some definitions may contain qualifying clauses enumerating specific acts to which the definition applies.

Often claims of discrimination, sexual harassment, and wrongful termination contain or are accompanied by a host of other alleged common-law violations. These can include defamation, infliction of emotional distress, invasion of privacy, negligent hiring, negligent supervision, or any number of alleged wrongs arising out of the underlying complaint. The broadest definitions specifically grant coverage for such acts, but other policies may be silent or otherwise unclear.

It may be surprising to know that not all EPLI policies provide coverage for the employer. But because the employment relationship is generally considered to exist between the employee and the corporation, the employing entity is nearly always named as a defendant in a wrongful employment practice suit. Also, some state laws, such as those in California, will hold the corporation responsible for the actions of supervisors and managers who are carrying out the day-to-day activities of the corporation and who often have authority to hire and to fire. For these reasons, EPLI policies that do not cover the entity should be avoided. The broadest policies will also cover the organizations' directors, officers, supervisors, managers, and any other employees of the organization.

All employers will benefit by at least going through the application process for EPLI coverage. This often involves completing an application and providing the underwriter with detailed information regarding your employment practices. In many respects, applying for coverage is a self-assessment of your employment policies and practices-a form of self-audit. If an insurer hesitates to release a quotation to you or quotes a very high premium, chances are good that they consider you a high risk.

Getting denied coverage is a clear wake-up call, indicating that immediate review of your employment policies is warranted. Even if you do receive a quote but choose not to purchase the coverage, you will have a record of your due diligence documented on file. Either way, the exercise is usually worth the effort.

Whether public awareness of wrongful employment conduct has been heightened by the Clarence Thomas Congressional hearings or for other reasons, the risk of loss from such conduct is now undisputed.

Some employers view these unfortunate developments with fear, choosing to ignore the problem. In the Chinese language, the character for the word "danger" also connotes "opportunity." Similarly, the risk of employee suits carries the same overtones of danger-that of uncovered loss. But when viewed in a more positive light, such risk, once recognized, can be dealt with in an effective manner.

While new forms of insurance are effective at reducing the uncertainty of incurring loss, insurance by itself is a poor substitute for sound employment policies. Remember, it may be impossible to secure insurance for employment claims unless at least rudimentary prevention and post-incident investigation plans are in place. But once preventive measures are firmly established, insurance can play a cost-effective role in protecting against catastrophic loss.

Excerpted with permission from the Risk Management Letter, a subscription information service of risk and insurance topics. Copyright 1996 by Griffin Communications, Inc. and Warren, McVeigh & Griffin, Inc. For a sample free trial subscription, fax the following activation form.

 

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