Uninsured employment practices claims can devastate a company. Many organizations find Employment Practices Liability Insurance essential to their risk management programs. Once a firm decides to buy EPL coverage, it must weigh several important coverage options.
A business can buy a stand-alone EPL policy or as an additional coverage on a Directors and Officers Liability policy. Adding it to a D&O policy may be less expensive, easier to manage, and the defense provisions for the two coverages will be consistent. However, a stand-alone policy provides additional limits, offers more flexibility in terms of defense provisions, and may offer broader coverage.
The firm also must choose the deductible amount (also called the “self-insured retention.”) A relatively low deductible means lower out-of-pocket costs when a loss occurs but a higher premium. It can also mean even higher future premiums or policy non-renewal if the firm suffers frequent small losses. A higher deductible reduces the immediate premium and may help lower future costs, but can also be a strain on a firm with frequent losses or troubled finances.
Policies can either obligate the insurance company to provide defense when a loss occurs or they can relieve the company of that duty. With a “no duty to defend” policy, the firm controls the selection of legal counsel, decides which claims to contest, and manages its reputation. However, this can involve considerable upfront expense — the firm must pay for the defense and settlement first, then seek reimbursement from the company. Also, the firm may lack the expertise in claims handling that an insurance company can offer.
Some firms, such as retail stores, medical offices, and restaurants, have frequent exposure to customers. These firms may be susceptible to claims that an employee harassed customers. Standard EPL policies and Commercial General Liability policies do not provide third party coverage for claims made by people other than employees or job applicants. Therefore, firms like these may want to add this coverage to their EPL policies. This will cost an additional premium, but the additional cost may be much less than the cost of uncovered claims.
Studies have shown that courts award punitive damages in a large number of employment practices cases. These damages can run into hundreds of thousands of dollars. While not all states permit insurance to cover punitive damages, firms in those states that do may want to consider buying it. Insurance companies may offer it subject to the regular policy limits, or only with reduced limits. The cost is normally some percentage of the standard policy premium.
EPL policies provide coverage on a “claims made” basis, meaning that they cover claims submitted to the insurance company during the policy term. The policies normally contain a “retroactive date;” they will not cover claims for incidents that occurred prior to that date. For example, a policy with a retroactive date of January 1, 2004 will cover claims submitted during the policy term if they occurred on or after January 1, 2004. The retroactive date can be the same as the policy’s inception date or some prior date. The earlier the retroactive date, the more claims the policy may potentially cover and the higher the policy premium will be. Firms buying EPL coverage for the first time or switching insurance companies may want to purchase early retroactive dates.
The correct choices for these options will vary greatly, depending on a firm’s characteristics and needs. An insurance agent experienced with EPL policies can provide guidance for these decisions. Because employment practices claims can be so costly, it is worth it to weigh these options carefully.