What Employers Need in Employment Practices Liability Insurance Today

Over the past 10 years, the number of employees filing individual discrimination charges against their employers has increased by 20 percent, resulting in $274.4 million in monetary benefits paid out in 2008, according to the Equal Employment Opportunity Commission (EEOC). This year in one month alone, there were 140 discrimination lawsuits filed either by the EEOC or an individual employee. This trend has made employment practices liability (EPL) insurance an integral piece of risk management strategy for all companies, whether a Fortune 500 giant or a small, local enterprise.

This rise in EPL litigation is compounded by several recent legislative and societal changes that have altered employers’ exposure to EEOC claims. In 2008, Congress expanded the definition of disabilities under the Americans With Disabilities Act, giving employees broader definitions of discrimination and lowering their burden of proof. Additionally, the EEOC has recently turned its attention to discrimination against employees with caregiving responsibilities for children and/or elderly parents. In 2007 the EEOC issued guidance explaining when discrimination against workers with caregiving responsibilities “might constitute discrimination based on sex, disability or other characteristics protected by federal employment discrimination laws.”

While businesses are not mandated to have this insurance, an EPL policy can help protect them against many new legal minefields.

How to Choose EPL Coverage

Due to the legal environment, a company with broad coverage within its base EPL policy will spend less time negotiating claims with its insurer than one with a policy that includes multiple endorsements.

When shopping for a policy, companies should first look for one that includes a clause that details the percentage that the insurer and policyholder will contribute to a settlement or judgment that is higher than an earlier settlement the policyholder rejected. Many insurers offer 80/20 or 70/30 percentages but there are insurers that offer 90/10 and companies should seek them out.

Second, the policy should include coverage for wrongful termination acts, definition of a contractor, domestic partners as insureds and third-party claims. These coverages are especially important for smaller operations – such as a hair salon that rents out chairs to individual stylists – where, for example, having an expanded definition of independent contractor will save time determining if someone is covered under the policy. An EPL policy can also protect a spouse or domestic partner against claims that seek ownership of the property of an employer and an employer’s spouse.

Third, especially in this economy, a company may want coverage for defense costs for claims alleging violations of the Worker Adjustment and Retraining Notification Act, which requires employers to inform employees and the local government 60 days before a plant closing or a mass layoff.

Tailoring EPL

Other aspects of an EPL policy can, and should be, tailored specifically for a company depending on the company’s size and exposures. For example, a larger company will want to have endorsements for choice of counsel and reporting requests as well as a clause stating that any claim must be filed with an insurer as soon as practicable. For a Fortune 500 corporation with 50,000 employees, the “as soon as practicable” wording is important because it might take a much longer time for the director of risk management or human resources of such a business to see a claim than it would for someone with insurance responsibilities at a smaller company.

Other exposures exist when a company merges departments or conducts layoffs that have a disproportionate impact on women, minorities or older workers. If, for example, a department has six people and a company decides to let two or three go – and those who are released are in a protected group — that can lead to problems. Depending on how the EEOC views the action, the company may find itself with an unforeseen claim risk.

Companies with EPL policies are better prepared to handle – and deflect – claims because they have access to lawyers and brokers who can provide advice about how to avoid or reduce these risks through proper record retention and management training.

A company’s location also impacts the probability it will be subject to an EPL lawsuit. If a company operates in the key litigation states of New York, Florida, New Jersey, Georgia and California, the likelihood of having an EPL claim filed against it is far greater than for businesses outside these states. With an average lawsuit seeking from $150,000 to $250,000, it is not an exposure that most companies can afford to ignore.

By working with a broker to find an insurer that will consider each risk individually and drill down to a company’s specific operating exposures, businesses can put in place an EPL policy that fits their operations.