One of our executives has asked me to look into employment practices liability insurance (EPLI). Can you comment on the pros and cons of these policies and whether you recommend them? — Ellen M., HR Specialist in Riverside
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Many organizations will ponder this question at one time or another. For an answer, we sought out the expertise of Allen Kato.
It is increasingly common for employers to obtain employment practices liability insurance. These policies generally cover the most common employment claims, such as employment discrimination and wrongful discharge claims. Coverage, however, is defined by the the insurance policy’s terms. Following are the pros and cons of EPLI policies, based on my experience in advising employers who have needed to make a claim on the policy when an employee sues.
The Deductible
EPLI policies (universally, in my experience) have a deductible. The deductible is the amount the employer must pay in the event of an employment lawsuit before the insurance company starts paying. The EPLI deductible amount includes attorneys’ fees.
EPLI policy deductibles are relatively large. In general, a larger deductible means a correspondingly lower EPLI insurance premium. Common deductible amounts that I have seen are $25,000 and $50,000 for smaller businesses and upwards, into six figures, for larger businesses.
Regarding attorneys’ fees, let’s assume, for example, that a company buys a $1,000,000 EPLI policy with a deductible of $100,000. If an employee sues the company for discrimination, the employer must pay the first $100,000 in defending the lawsuit, which includes attorneys’ fees, costs, any amount to settle, etc. Only after the employer has paid the first $100,000 and exhausted the deductible will the insurance company start paying defense costs, and any settlement or court award to the employee, up to the $1,000,000 policy limit.
Accordingly, if EPLI policies are viewed as akin to excess liability insurance or insurance for catastrophic claims, they may be worthwhile. However, the employer must understand that it will remain responsible for the entire cost of defending and settling smaller claims that do not exceed the deductible amount.
Selection of Defense Counsel
EPLI policies (again, universally in my experience) give the insurance company the right to select the attorney who will defend the lawsuit, regardless of whether the employer has exceeded its deductible. The insurance companies regularly enter into agreements with law firms that serve as “panel counsel” to defend claims that the insurance covers. Panel counsel attorneys agree to work for lower rates in return for the volume business that may be directed to their law firm by the insurance company. If the employer is sued by an employee, the insurance company will provide the employer with its list of one or more panel counsel in the area who will defend the lawsuit on the employer’s behalf. As mentioned above, the employer must pay these attorneys’ fees within the policy deductible, albeit at the lower rate the insurance company negotiated with such panel counsel.
Most attorneys and law firms do not enter into panel counsel agreements, so it’s unlikely that an employer’s regular employment counsel will be among the panel counsel selected by the insurance company. If this is a problem, the employer can ask the insurance company for permission to continue to use its regular employment counsel. However, if the insurance company agrees, the attorneys’ fees and how to account for such fees in calculating the deductible will need to be negotiated with the insurance company and the employment attorney. For example, you may have to pay the difference between your attorney’s fees and the negotiated panel counsel fees without that expense counting toward your deductible.
Scope of Policy Coverage
EPLI policies will cover most common employment claims, such as employment discrimination and wrongful discharge lawsuits. However, the employer should carefully review the policy terms to understand what is and isn’t covered. Before purchasing a policy, the employer should be satisfied that the policy will cover the types of claims the company is most concerned about and then make a reasoned decision as to whether the policy will meet the employer’s needs. For example, if the employer has large numbers of hourly workers and low-level exempt workers, it should check carefully to be sure that the policy covers increasingly common class action and individual claims for wage and hour violations (e.g., for misclassifying employees as exempt or not providing meal and rest breaks).
In closing, keep in mind that EPLI insurance does not, of course, replace good HR practices that help the organization avoid lawsuits from arising in the first place. For instance, training managers to operate within the law is critical to lawsuit avoidance. EPLI insurance, however, may be another effective tool for employers to manage employment-related risks.
Allen M. Kato is an associate at the San Francisco office of law firm Fenwick & West.