If there is one type of risk that confronts almost all employers in the United States and has been historically difficult to insure, it is employment practices liability. As the United States becomes increasingly litigious, employees and former employees are quicker to take legal action against actual or implied discriminatory practices.
A new insurance market has opened up in the last two years, but particularly during 1992, to provide insurance against this risk. Generally referred to as employment practices liability insurance (EPLI), this coverage can now be readily obtained for a wide variety of potential claims at a reasonable cost. As with any new insurance line, however, there are substantial differences in coverage, rating plans and value added services among the insurers offering policies. Consequently, risk managers interested in purchasing EPLI policies should review the various available coverages, important terms and conditions, and underwriting and pricing of each of these policies.
First, what exactly is employment practices liability insurance? Although the definition of employment liability can mean different things to different people, it is generally defined as any liability resulting from actual or alleged wrongful termination, sexual harassment or discrimination against an employee. Examples of employment practices liability include the promise of a promotion or raise in return for sexual favors, breach of employment contracts and wrongful discipline. EPLI, then, is any insurance policy that covers any of these types of employment-related risks.
Although many companies take proactive measures to prevent employment discrimination or liability, even the most effectively managed companies can get sued--and sometimes successfully --for employment-related practices. Managing people is such a complex and demanding task that it creates numerous opportunities for errors of judgment or misunderstandings. Additionally, continued strains on the economy and increased performance demands on employees can heighten tensions between supervisors and their workers. Increasing legislative and regulatory requirements on employers serve only to add to any antagonisms existing between companies and their employees.
Historically, some EPLI coverage existed in general liability and umbrella liability personal injury coverages and in directors' and officers' liability insurance. For example, some EPLI claims allege libel, slander or defamation of character, all of which were traditionally covered in the personal injury section of a general liability policy. Wrongful termination suits were often covered under directors' and officers' liability insurance policies, at least to the extent that they named the directors and officers of the employer. However, because of the explosive increase in these suits, general liability, umbrella liability and the directors' and officers' market have substantially restricted the coverage for EPLI suits.
THE EPLI MARKET
Just as the likelihood of employment-related claims has increased dramatically in the last several years, so too has the marketplace for employment practices coverage. Although discrimination was increasingly excluded from general liability and directors' and officers' policies, legal expense coverage was the only type of employment practice coverage available until the early 1990s. Today, there are at least four U.S. markets and a number of London syndicates that offer EPLI, covering not only the defense costs, but actual damages and awards as well. There are also two insurers that are contemplating offering an EPLI product. The market should remain open as long as the demand for coverage remains high and losses continue to be acceptable.
Of the four major U.S. EPLI markets, two are American International Group (AIG) companies (Lexington and the New Hampshire Insurance Co.), with the Chubb Group and the Reliance National Insurance Co. …