Employment Practices Liability Insurance: Occurrence Forms versus Claims-Made Forms

Before the advent of specialized Employment Practices Liability (EPL) insurance policies, many employers sought coverage under one or more of their standard Liability insurance policies. Because some of the early EPL claims were paid under these general policies, it's fair to say that the first EPL policies provided coverage on an occurrence basis.

Squeamishness about how losses might pan out led underwriters to issue EPL policies on a claims-made basis. But recently there have been instances of EPL coverage being issued on an occurrence basis-in endorsements, or added onto General Liability, Umbrella Liability, or other Liability policies. Although many people think that claims-made coverage is inferior to occurrence coverage, there are arguments why this might not be true in regard to EPL coverage.

EPL insurance has changed greatly in recent years. Just a few years ago, EPL coverage was often severely limited by the use of retroactive dates or exclusions eliminating or restricting coverage for prior acts. What's more, coverage was not widely available for many of the common-law torts frequently alleged in EPL claims.[1] Today, however, nearly every major EPL insurer has done away with retroactive dates and offers claims-made coverage for prior acts. Most of the major EPL insurers also have expanded their coverage to include some common-law torts.

Because the EPL insurance market is undergoing rapid development, most insurance companies are modifying, and often improving, their EPL forms at least annually. This is good news for consumers, for whom every year is bringing a greater range of coverage choices and often lower premiums.

The limited availability of EPL insurance on an occurrence basis is a recent development. But before switching your clients to occurrence-based EPL insurance, consider the following issues:

Prior-acts coverage is a particularly important feature for insureds because many employment claims allege a pattern of wrongdoing that spans more than one year. It's not uncommon for sexual harassment suits and race- and gender-discrimination suits-class-action and individual claims-to allege that wrongful conduct occurred over the course of at least 10 years. Now that prior-acts coverage is widely available, if EPL coverage is written on a claims-made basis, the policyholder can capture the benefits of the most recent policy enhancements.

If coverage is written on an occurrence basis, the coverage might not be enhanced from year to year. Even if coverage is enhanced, it will be available only for the policy period dating from the enhancement. That is, there would be no enhanced coverage for prior acts. Under an occurrence EPL policy, a claim involving alleged wrongful conduct over the period of many years would probably make for complex coverage issues because the acts giving rise to an EPL claim might be covered under one year's policy and not by an earlier one. The result is likely to be coverage gaps and expensive litigation regarding the allocation of claims between covered and non-covered policy periods. The nature of EPL claims and the current state of the EPL market might actually make claims-made insurance more suitable than occurrence-based coverage.

Another important advantage that claims-made EPL forms may have over some of the occurrence-based Liability policies endorsed to provide EPL coverage is demonstrated in the treatment of claims involving intentional conduct. Intentional acts is an important issue because most employment claims allege some form of intentional wrongdoing. Having an EPL insurance policy that excludes intentional acts is highly undesirable; such exclusions eviscerate the coverage. Many of the occurrence EPL forms reviewed for this article excluded intentional acts outright. Some even excluded willful failure to comply with the law, malicious acts, and other wrongful acts that are in violation of the law.

Most claims-made EPL policies today are clearly meant to cover intentional conduct. Many of them routinely grant coverage for intentional acts, including but not limited to:

1. Termination-actual or constructive-of an employment relationship that is against the law
2. Allegations of wrongful demotion, retaliation, misrepresentation, promissory estoppel, and intentional interference with contract
3. Defamation, infliction of emotional distress or mental anguish, humiliation, false imprisonment, invasion of privacy, and other personal-injury allegations
4. Allegations of breach of an implied employment contract, or breach of the covenant of good faith and fair dealing in the employment contract
5. Employment terminations, disciplinary actions, demotions, and other employment decisions that violate public policy
6. Violations of the Uniformed Services Employment and Reemployment Rights Act
7. Breach of an employee's federal, state, or local civil rights, including but not limited to any violation of the Civil Rights Act of 1886 or 42 U.S.C. section 1983
8. Retaliation against any insured for filing under the Federal False Claims Act, in connection with whistle blowing, union activities, or strikes and lockouts
9. Wrongful deprivation of career opportunity or failure to grant tenure

Many claims-made EPL policies also cover economic damages such as front and back pay and insurance benefits, which are usually excluded under occurrence Liability policies with EPL endorsements.

EPL coverage attached to a General Liability or other occurrence-based Liability policy is not generally intended to provide extensive EPL coverage. Coverage under standard Liability policies is often limited to liability for bodily injury, property damage, and certain personal-injury offenses. Unless such a policy is properly endorsed, many of the allegations brought in an EPL suit would not be covered.

Writing EPL insurance on an occurrence basis has its advantages. For example, under claims-made policies, the limit of Liability may be more prone to exhaustion. Because a claims-made policy may cover prior acts, the limit of Liability might be spread over many years. It may be necessary to increase the limit beyond what might be considered sufficient under an occurrence policy. Another drawback of claims-made coverage is that as soon as the policy is canceled or expires, coverage ceases. This may require the purchase of Tail coverage, with no guarantee that such coverage will be available.[2]

Today, however, stand-alone EPL insurance written on a claims-made basis generally offers the broadest coverage available. Pricing remains highly competitive, and high limits of Liability are available for most insureds. The widespread availability of prior-acts coverage and the affirmative grant of coverage for intentional acts under most claims-made EPL policies represent important features that may be missing under occurrence-based EPL insurance.

[1] Employees may make various claims-assault, battery, false imprisonment, slander, libel, fraud, negligent misrepresentation, conversion, and so on-in conjunction with complaints alleging discrimination, sexual harassment, or wrongful discharge.

[2] Tail coverage is usually restricted to covered acts occurring during the policy period or retroactive period. There's usually no coverage for claims based on covered acts taking place after the policy expires.