Recent statutory enactments such as the Americans with Disabilities Act (ADA) and the Civil Rights Act of 1991, combined with case law developments, have significantly increased litigation and administrative filings charging discrimination, wrongful termination, sexual harassment, and similar employment practices-related allegations. As of January 31, 1994, the U.S. Equal Employment Opportunity Commission (EEOC) reports that 21,483 discrimination complaints have been filed since the July 26, 1992 enactment of the ADA. A number of recent employment liability cases have resulted in multi-million dollar settlements or judgments. Under the Clinton administration, the Family and Medical Leave Act has been signed into law, and legislation has been proposed in both Houses of Congress that would eliminate the caps on damages for violations of the Civil Rights Act.
These developments signify an increasing liability for employers in the employment practices arena. They also create an opportunity for risk managers to proactively address the major liability issues through the use of risk financing tools, including employment practices liability insurance products. Addressing these top management concerns will facilitate the operational and financial success of any organization operating in today's litigious society.
While many actions can be taken from a risk control standpoint to mitigate the employment practices liability exposure (e.g., modification of the job interview process to assure compliance with ADA requirements, development and enforcement of a sexual harassment policy, etc.), there is always the potential for a lawsuit against an employer. Although risk control mechanisms can afford some protection, the use of one or more risk financing methods is also recommended to address the explosive liability area.
Traditionally, risk financing alternatives have included: risk retention, non-insurance transfer and insurance. While risk retention may be appropriate for certain types of employment practices liability claims, such as an individual employee's allegations of wrongful termination, the increasing frequency of multi-million dollar claims makes this risk financing vehicle more and more unattractive. The use of non-insurance transfers through indemnity agreements or hold harmless agreements is limited in an employment setting because of the absence of potential third-party indemnifiers. Consequently, many risk managers are beginning to focus on insurance policies as a potential method to transfer the risk of employment practices liability losses.
There are several standard commercial insurance policies that are often reviewed to determine what, if any, protection is afforded for employment practices liability. These contracts include: comprehensive general liability (CGL) insurance; umbrella/excess liability insurance; directors' & officers' (D&O) liability insurance; workers' compensation insurance; and fiduciary liability insurance. Although all the policies may provide (or at least give the appearance of providing) partial coverage for employment practices liability exposures, because each contract has policy limitations, none of the policies is wholly sufficient. The limiting terms and conditions of each contract are summarized in the following paragraphs.
The Standard CGL policy responds to "occurrences" resulting in "bodily injury" or "property damage." "Occurrence" means "an accident, including continuous or repeated exposure to substantially the same general harmful condition." While "accident" is not defined in the policy, it generally is interpreted to include only unintended actions as reinforced with a specific exclusion for bodily injury "expected or intended from the standpoint of the insured." Thus, it is questionable whether an employment practices-type claim could qualify for coverage. In addition, the definition of "bodily injury" means "bodily injury, sickness or disease sustained by a person, including death resulting from any one of these at any time," thereby further restricting any potential recovery under a CGL contract. …