Employment Practices Insurance: An Emerging Risk Management Tool

                Historically businesses in nearly every industry have looked to Comprehensive General liability (“CGL”) Policies as the centerpiece of risk management efforts. The CGL Policy normally purchased through a broker and was the lynchpin of every conventional risk management strategy. If there was anything arising out of the products or operations of the insured that exposed the company to and exposure, even a “nucliear verdict” the CGL policy and one or two layers of excess coverage were integral in coveraing legal expense and paying legitimate claims.  Savvy business owners could purchase this product through their broker, and they would renew their coverage slightly.

In incident of occurrence occurred ausing physical damage to the persons or property of others the ownersip cold rely on and work with the Insurnace pofessionals and sizable losses could be managed using the insurenace company’s pesonell and resources.  This would allow the company to conntue doing business while a catostrphic claim was resolved through negotiation, litigation, or trial.  This was a novel insurance product, and the risk management and insurance professionals knew what claims were covered, what claims were defended, and the company leadership could normally move forward with strategic planning and growth or evolve the business while an enormous bodily injury or property claim is taken care of by the insurance company.  Depending on type of work and exposure to the public, many businesses are legally required to carry CGL coverage, and in some cases, a bond.

                Unfourtunately, there are other risks that companies face other than those that arise from their operations or their orducst. There are also those that aise from their own people.  Claims by employees directly against their employer for injuries are barred by Title 51 RCW; however, claims by employees for wrongful termination arising from discrimination, retaliation, and certain activities give rise to a claim based on creation of a hostile work environment. These employee risks are not covered under a CGL policy historically have been managed by an HR Department and/or retained counsel.

In fairly recent years many CGL carriers have begun to offer Employment Practices Liability (“EPL”) Insurance which provides defense and indemnity (reimbursement) to an employer that is forced to defend employee claims for wrongful termination based on discrimination.  Statistically, the number of employment cases of all kinds, primarily based on some form of alleged discrimination has risen dramatically.  The emergence of EPL insurance in the marketplace allows companies to outsource the risk and administrative burden of handling a claim brought by a disgruntled current or former employee.

This fairly new insurance product has a number of advantages over simply retaining the risk and hoping for the best:

(1)    Decreased expense of retaining outside employment counsel which are normally  charging at a much higher rate than other litigation attorneys;

(2)    Administrative burden on the company, its officers, and employees is decreased because any investigation is carried out by either the insurer or its retained (or in some cases inside staff counsel.)  Additionally, the litigation discovery burden is decreased as depositions, production, and other tasks necessary for successful litigation are removed from the workplace, which is often the origin of allegation minimizing the impact on day to day operations

(3)    Interviews with key employees and managers who have direct knowledge of the facts and circumstances surrounding the employees’ complaints can be carried out off site by non-employees.

(4)    The overall costs or risk management operations in an HR department can be consolidated and, in some cases decreased even as the overall insurance premiums increase downsized as, ideally, litigation management can be carried out by the insurer or its retained counsel.

There are a few unique issues posed by EPL coverage that a business owner should understand before he or she attempts to procure EPL insurance for its next policy period to purchase coverage for this employment related claims;

(1)    Wage and hour claims, often brought as an adjunct to discrimination or hostile work environment claims are not covered and depending on the law of the State, may not be defended by insurer retained counsel.  In Washington State an insurance carrier will normally ask its defense counsel to defend uncovered claims after it assumes the defense under a reservation of rights;

(2)    The attorneys retained by an insurer are often treated as vendors by insurers who often select counsel based on cost and past outcomes on more conventional “insurance defense” claims on non-employment cases involving torts; and

(3)    Occasionally it is the case that a business buys an entire suite of insurance products from their insurance broker including CGL, first party property, EPL insurance, builders risk, and business interruption at the same time.   Since employment cases arise with less frequency than conventional tort claims, whoever oversees risk management and procuring insurance may have forgotten about its existence.  Obviously, keeping track of the insurance purchased and tendering to every insurer that arguably has some time on risk whenever possible is an important best practice in the field of risk management.

A business owner or risk manager approaching its broker about procuring EPL insurance needs to negotiate with an eye towards having the insurance placed with a highly reputable and well rated insurer.  A number of questions may be directed towards the broker in order to ensure the risk of employee claims is shifted to the insurer: (1) ask what claims in a typical employment claim may not be defended, and if that is the case, can retained defense counsel defend those uncover clams; (2) is it common practice for the insurer to look towards its insured to contribute towards settlement because of the pending claims are not covered under the EPL policy; and (4)  how long has the insurer been offering EPL coverage to its customers, and are there adjusters specially assigned to employment cases only; and (5) find out which attorneys or firms are retained by the insurer to defend EPL claims, including an inquiry into whether the Company is using the same “staff attorneys” or panel counsel that it has used for years to defend auto accidents and work site accidents. 

It is often the case, especially where a particular insurer enters the EPL market, that the insurer relies on the same lawyers that handle less specialized cases to defend the employment claims. This situation should be brought up and made part of the negotiations with the broker and insurer. Depending on the insurance company, and the law of a particular jurisdiction, the use of panel or staff counsel on a case they may not be qualified to handle can create conflicts among the various stake holders giving rise to stress and anxiety beyond that normally involved in a substantial or complicated litigation.  If a lawyer in an employee of an insurance company or is a partner in a panel firm designated by a particular insurer, the interests of the insurance company may have been paramount to that attorney for many years. As a result, they are not going to change the way they do their job in your specific case.  When these issues are discussed with the broker and the insurer the risk manager or whoever else has been assigned to work with the insurer can, and sometimes should, insist on a choice of counsel provision.  This is sometimes available as a policy form or addendum and allows the purchaser of the EPL coverage to select an employment attorney with significant experience in litigating employment cases.

The lawyers at the Seattle Litigation Group have many years of litigation experience in the area of employment law, and have litigated extensively and aggressively on behalf of both employers and employees.  In addition, there are recent attorneys additions to the firm that have worked as both panel and staff counsel doing insurance defense work, as well as the defense of employees the defense of EPL claims.  Their experience includes extensive communications with insurance company employees about billing, case management and litigation tactics and strategy.