EPL Insurance Part 2

Tuesday, February 1, 2000

by Jackson Lewis

(second in a two part article)

H. Where Does Coverage Apply?

For companies with operations solely in the United States, having coverage limited to acts occurring in and claims brought in the United States may be adequate. However, when an organization has facilities abroad, EPLI coverage must extend beyond borders. Today, if a company is sued in another country for wrongful termination or sexual harassment, EPLI policies generally would provide coverage. While early EPLI policies typically restricted covered claims to those based on conduct occurring in the United States and, even then, only if the lawsuit was brought in the United States, the coverage has evolved. The employment laws of many foreign countries are expanding, as they are here in the United States, although not as rapidly. For example, in Japan, the word "sekuhara" meaning sexual harassment has become a "buzz" word in business and in the media. Japan and other countries may be at the same stage the United States was about 10 years ago. If so, the employment litigation explosion is in the offing, as perhaps is EPLI.

I. Defending the Claim

Stand-alone EPL policies tend to have "Duty to Defend" coverage, giving the insured several advantages: EPL claims handling experience and selection and retention of qualified employment counsel. The insurer agrees to provide legal counsel to defend all of the claims in the suit and, typically, access to an experienced in-house claims handler. The trade-off for an insured electing Duty to Defend is some element of control. When an insurance company agrees to defend the whole claim, including elements the policy was not designed to cover, it typically wants to manage the defense of that claim to ensure the claim is handled properly. To achieve those objectives, Duty to Defend policies tend to give the insurer the right to choose counsel to handle the lawsuit.

An insured should be concerned about the level of expertise and experience of the law firm that has been selected by the carrier. Moreover, even if the firm selected is a capable one, an insured may want to retain their own law firm due to the relationship and trust they may have developed. In this situation, there are options. First, an insured can request the policy be converted to an indemnity contract. This would enable the insured to select its own counsel. However, the insurer may not cover all of the defense fees (i.e., "uncovered" claims would be defended at the insured's expense).

Second, the insured may get its own firm pre-approved by the insurer. Some insurers are more willing than others to enter into this type of arrangement. They typically will look at two things in making the decision: the qualification of the law firm to handle EPL claims and the rates being charged by the firm. In the event both of these issues can be resolved to the satisfaction of the insurer, it may retain the Duty to Defend and pre-approve the insured's law firm. Last, the insured and the insurer may agree that the insured's law firm will be appointed for the defense work but the insured will pay the difference between the amount the insurer will pay and the firm's billing rate.

J. Reporting Claims

While an insured may want to withhold reporting some claims without losing coverage for others, this may put the insurer in a precarious position if it has the duty to appoint counsel, and the claim has proceeded without its knowledge.

EPL policies vary in claims reporting timing requirements. Many require a claim be reported as soon as practicable, while others specify a number of days within which the insured must notify the insurer of the claim. This is an issue that may be negotiated between the parties. Questions include:

  • Who are the individuals whose knowledge of the claim triggers the notice requirement;
  • Can the time period for reporting be extended;
  • Is there a minimal dollar threshold for reporting; and
  • Will the insurer agree to a quarterly reporting structure, with very minimal details about the claims being provided, perhaps combined with the dollar threshold option mentioned above.

K. Conclusion

As the demand for EPLI coverage has grown, the insurance industry has responded with products tailored to the specific needs and financial feasibility of insureds. Competition among insurers and their brokers also has grown, as the field has expanded from two or three major carriers to dozens. This trend is likely to continue and it probably is only good news for potential EPLI customers, the employers. Generally, coverage is broader, claims processing and handling is smoother, and cost is more proportionate to value.

Another recent development may make even the needs assessment and selection of EPLI insurers easier. Insurance Services Office, Inc., a major provider of policy forms and information services to property-casualty underwriters, has developed the Employment-Related Practices Liability Program. The ISO product is a standardized form for EPLI coverage and already has been approved by insurance regulators in more than half of the states with approval pending in all others. This allows carriers to see EPLI coverage without undergoing the timely and costly state regulatory approval process, thus automatically making the product available to a greater market. Carriers can make changes to the form, and only those changes would have to be approved.

Having a standardized EPLI policy form enables more carriers to sell the coverage in wider markets. It also eases the task for employers in comparing and evaluating the products being offered. As employers have access to more information, are better informed about their coverage needs, and have a greater selection of carriers, the EPLI products market will better serve the real needs and be more effective as a tool for employment litigation risk management.

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