CPAs, financial advisors, and risk managers should have a basic understanding of the market for employment practices liability (EPL) insurance. The key is being able to judge whether the benefits of EPL insurance are greater than the costs for a specific employer. From my experience working with a broad cross-section of employers on preventative measures, I have found that five simple but fundamental principles of EPL will identify employers with the greatest need for prevention and for EPL insurance.
Follow the Money
An analysis of claims paid on employment disputes will reveal which risks are the most significant. Although there are a mind-numbing number of possible charges in any employment-related lawsuit, such as implied contract claims and common law torts, the real money is awarded because of statutory claims. Statutory claims are employment-related lawsuits claiming a violation of Federal statutes such as Title VII of the Civil Rights Acts, the Americans With Disabilities Act, the Age Discrimination in Employment Act, and corresponding state fair employment statutes. Typical statutory discrimination and harassment lawsuits are based on claims that termination of employment or some other adverse employment action was based on physical or mental disability, age over 40, ancestry, color, national origin, religion, race, or sex.
The class of employment-related lawsuits that cost employers the most money are statutory claims caused by the actions of relatively inexperienced supervisors. If a lawsuit goes to trial, the typical minimum cost to the employer is $100,000 for attorney and expert fees. A sexual harassment lawsuit with allegations of retaliation can easily cost upwards of $250,000 to defend if it goes to trial. If the employer is found liable, damage awards can range from $20,000 to millions of dollars. Damage awards are highly unpredictable, in part because most cases involve the evaluation of a great deal of seemingly contradictory evidence and because decisions are rendered by juries of the plaintiffs peers. If you add in the value of senior management time spent in depositions and other litigation tasks and other disruptions and loss of privacy, the true economic costs can be astronomical. As a consequence, employers find it cost-effective to settle most cases, even those that could be won in court. Very few cases go to trial.
Look for the Holes in Coverage
Employers without EPL insurance can sometimes get coverage for employment-related risks from their other general business policies such as commercial general liability (CGL), employer liability (EL), errors and omissions (E&O), directors and officers (D&O), or umbrella policies. The opportunity in these policies is usually the coverage for bodily injury or personal injury. Claims of emotional and/or physical injury have been used to get insurers to pay the entire defense in complex employment-related lawsuits.
Insurers may have to pay all the defense costs because, under insurance law, the insurance company has a broad duty to defend the entire lawsuit when there is a possibility that even one of the myriad charges might be covered by its policy. For example, President Clinton's personal liability umbrella insurers paid out $1.5 million for his defense of sexual harassment charges brought by Paula Jones because of the potential personal injury due to defamation of character. Nevertheless, coverage has become much harder to get under recently written conventional commercial policies because of exclusions.
The role of EPL insurance is to fill in the holes in coverage caused by employment, employment-related, and other exclusions in conventional insurance policies. In fact, an employer's need for EPL insurance will depend upon the employment-related exclusions written into the employer's insurance policies.
Consider CGL Insurance.
Commercial general liability insurance is usually the employer's most important source of insurance coverage. …