Negotiate your employment practices liability insurance policy to dramatically enhance its coverage.
In my last column ["Think Dual Coverage" Summer 2000], I alerted you to the fact that if you focus solely on directors’ and officers’ liability insurance coverage, you may overlook another form of insurance vital to protecting your personal assets – employment practices liability insurance (EPLI). Those of you who are now considering EPLI likely will have the following questions:
Are all EPLI policies basically the same in terms of price and coverage?
Definitely not. How, then, do you select the best policy? Comparing policies on the basis of price is relatively easy. The difficulty lies in figuring out which has the broadest coverage. The problem exists because there is no standard EPLI form. There are dozens of insurers in this market with each using a different form.
The problem is exacerbated by the difficulty of quantifying the risk-management value of particular policy provisions. For comparative valuation purposes, how do you properly account for the fact that the Good Hands Co. policy covers six employment practices violations, and has six exclusions and restrictive definitions, whereas the Solid Rock Co. policy covers 15 employment practices violations but has 15 exclusions and restrictive definitions?
Are EPLI policies negotiable?
Absolutely. They are more akin to a commercial contract than an off-the-shelf insurance product. This does not mean that you should negotiate every EPLI policy presented for consideration by your broker and then, at the end of the process, pick the best. That would be too time consuming. Our preferred approach is to select one of the offered policies that is generally regarded as providing good coverage and that is competitively priced. We then negotiate that policy until we obtain the modifications considered essential to managing the client’s risk.
If negotiable, what coverage enhancements should I seek?
All EPLI policies in the marketplace today have significant coverage shortfalls that you should try to eliminate. Two such shortfalls are described below as examples of policy provisions that should be improved.
- Definition of Wrongful Act. Coverage under an EPLI policy is limited to named perils - that is, conduct expressly identified in the definition of "wrongful act." The broader the definition, the broader the policy’s coverage. At the risk of oversimplifying, a good "wrongful act" definition is a long definition. This term should be one of the principal targets of any policy negotiation.
All or virtually all policies cover traditional wrongful employment practices such as harassment, discrimination, and wrongful termination of employment. However, employment practices law is rapidly evolving and the definition of "wrongful act" in many policies has not kept pace with the creation or popularization of additional causes of action. This leaves coverage gaps. For example, we are seeing more claims alleging "negligent hiring, training and supervision," which most EPLI policies do not cover. And, we are likely to see more because of the publicity attending a $1.5 billion suit of this type filed against Coca-Cola Co. in June 2000.
- Punitive Damages. Many EPLI policies expressly disclaim coverage for punitive damages or provide inadequate coverage. The purchase of such a policy is poor risk management for two reasons. First, awards in employment practices cases often include such damages. Second, punitive damages may dwarf the compensatory damages component of the award. In the famous 1998 case against the law firm of Baker & McKenzie, even after the jury’s punitive damages award was reduced to $3.5 million, punitive damages were 70 times larger than compensatory damages. An EPLI policy without punitive damages coverage is like using a five-inch wide umbrella in a heavy downpour. Why bother?
The first step to enhanced coverage is to negotiate the covered-loss definition to include punitive damages. Another step is necessary, however, because "punitives" are not always insurable. Insurability depends on a number of factors, including the nature of the offending conduct as well as applicable law, which varies greatly from state to state. In view of these variations, you should negotiate for a provision that requires the insurability of punitive damages to be decided under such applicable law as most favors such coverage.
The elimination of the punitive damages and the wrongful-act-definition shortfalls usually is achieved without the payment of additional premium.
If you decide to purchase an EPLI policy, negotiate, negotiate, negotiate. The current soft insurance market provides an outstanding opportunity to meaningfully enhance your coverage.
Reprinted from Directors & Boards® Fall 2000 © MLR Holdings
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
