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EMPLOYMENT PRACTICES LIABILITY insurance has quickly become an important concern of many risk managers, human resource directors, and corporate counsel due to the onslaught of allegations of workplace discrimination and the recent multimillion dollar settlements reported in the news media.

In the aftermath racial bias suits involving major U.S. corporations, risk managers and chief executive officers are reviewing their internal practices and looking at their general liability and directors and officers liability policies to determine the extent of their coverage. Most are finding that employment discrimination, wrongful termination and sexual harassment either are completely excluded from coverage or that only limited coverage is provided.

Insurers introduced stand-alone EPL coverage in 1992 with narrow coverages and high premiums for the low liability limits. Broadly defined, EPL policies cover workplace discrimination, sexual harassment, and wrongful termination claims brought by past, current, and prospective employees. In the past year, certain coverages have become standard; many EPL insurance markets now are endorsing other coverages that formerly were unobtainable.

In today's corporate environment, acquisitions, office closings and downsizing have increased employers' liability risks and placed enormous responsibility on the human resource and risk management departments to effectively manage an ever-changing workforce. Many of these executives view EPL coverage as insurance against perils such as sexual harassment, discrimination and wrongful terminations that they were hired to prevent, meaning the coverage should be unnecessary if they are doing their jobs well.

However, EPL coverage was designed to transfer risk unknown, unseen, or unmanageable, not to be a substitute for sound risk management practices.

Sexual harassment often goes undetected by human resource personnel and risk managers until the allegation or claim. Anti-sexual harassment postings and sensitivity training may mitigate potential damages, but liability that the harasser creates is likely to be imputed to the employer.

Insurance markets have developed coverages to correspond with the way companies do business while protecting the employer from the unknown. Broad EPL coverage is more readily available today. However, insurance buyers should review these coverage components carefully before binding coverage:

Full prior acts coverage.

As a hypothetical example, sexual harassment, corporate layoffs and branch closings occurred last month at XYZ Corp., a high-technology company. No allegations or claims of sexual harassment, hostile workplace, discrimination or wrongful termination were brought until today. Risk management and human resources never saw it coming. All practices and procedures were in place. The layoffs, XYZ Corp. thought, were handled with strict adherence to federal guidelines with respect to the protected classes.

If XYZ Corp. had purchased EPL coverage prior to knowing of the allegation or claim, there would be coverage under many EPL policy forms. EPL coverage should not be procured without full prior acts coverage. All incidents-sexual harassment, wrongful termination, etc.-occurring prior to the inception of EPL coverage with the allegation or claim arising subsequent to the purchase of coverage are covered with full prior acts coverages.

Acquisitions (full prior acts).

XYZ Corp. last month acquired ABC Corp., contingent upon the assumption of liabilities, including ABC Corp.'s employment practice liability risk. XYZ Corp. knew little about ABC Corp.'s human resource department or risk management practices; its intent was to obtain a greater market share in the high-tech industry. Today, John Doe,formerly employed with ABC Corp. and currently employed by XYZ Corp., filed a lawsuit alleging, for the first time, workplace discrimination. The suit claims the discrimination began more than two years ago, when Mr. Doe was an employee of ABC Corp. and continued to this date and his employment with XYZ Corp.

A risk manager/human resource director could defend XYZ Corp. based on the corporation's employment policies and procedures, but XYZ Corp.'s assumption of liabilities with the acquisition created an exposure of risk over which XYZ Corp. had no control.

A few EPL underwriters have extended full prior acts coverage to acquisitions. If a corporation is growing the top line and its employee base through acquisitions, full prior acts coverage for the acquisition is needed to provide a safeguard for management in the transitional process.

Potential-claim reporting.

During the EPL policy period, XYZ Corp. terminated two African-American employees. Though it was rumored the employees would file civil suits alleging racial discrimination, neither employee actually made an allegation or brought a claim against XYZ Corp.

Some EPL markets let policyholders choose whether or not to report the incident as a potential claim in the current policy period. If the policyholder exercises that option and a claim arises after the expiration of the policy period, the claim will trigger coverage pursuant to the date of notice of the potential claim.

The decision to report the incident as a potential claim would be made near the expiration of the policy period, when an employer was in position to assess whether available coverage would satisfy the potential exposure arising out of the incident.

The potential claim reporting coverage is necessary to help employers manage their aggregate liability limits more effectively from one policy period to the next.

Restrictions on downsizing.

Two-hundred fifty of the 921 total employees of XYZ Corp. were laid off last month due to a sudden downturn in sales of the company's high-tech products and services. Yesterday, three of the terminated employees filed lawsuits alleging breach of implied employment contract, wrongful termination and gender-based discrimination.

Until recently, the claims would not have been covered under most EPL policies, which excluded claims arising out of downsizing of more than 20% of the workforce. Many of the markets do not exclude such claims today, but a careful review of the policy's exclusions is recommended.

Consent to settle-"hammer clause."

XYZ Corp. is defending against John Doe's discrimination claim. The EPL insurer's claims examiner advises XYZ Corp. that it wishes to settle the matter for $2 million. XYZ Corp. vehemently opposes settlement and wishes to continue the case to trial. There is an impasse.

Traditionally, the insurer has had the right to settle under a duty-to-defend policy. The claims examiner would settle, essentially cutting the losses within the policy limit. The business relationship/partnership would be damaged.

The "hammer clause" will allow XYZ Corp. to continue to trial but forfeit coverage for damages assessed through adjudication over and above $2 million plus defense costs incurred post-impasse.

One EPL market has agreed to pay-and another market is considering paying-70% of the adjudicated damages and defense costs over and above the $2 million. The concession maintains the partnership, but XYZ Corp. will assume a portion of the risk. The coinsurance approach is considered only with employers willing to take high deductibles or retentions.

Coverage for outsourced employees.

XYZ Corp. outsources 355 of its employees to work with XYZ clients at the clients' premises. An outsourced employee could be with the client company for a few months or a few years and is instructed to follow XYZ Corp.'s employment policies and procedures while working with the client company's employees. With the outsourced employee not working or interacting with XYZ Corp. employees, the employer-employee EPL risk is reduced, but a third-party risk is created.

High-tech companies are moving more of their workforces into outsourcing roles to provide greater service to their client companies. Some EPL insurers have responded to the changing employee role by providing coverage for claims brought by the outsourced employee against the client company and its employees, and claims made by the client company and its employees against the outsourced employee and XYZ Corp.

Intentional harm exclusions.

A federal jury determined her supervisor sexually harassed Jane Doe, a programmer at XYZ Corp. The jury also found XYZ Corp.-though having posted its anti-sexual harassment corporate policy-was vicariously liable for the supervisor's actions. All damages assessed against the supervisor were imputed to XYZ Corp.

EPL coverage could have protected XYZ Corp. from this risk. The breadth of coverage ranges from: no intentional harm exclusion; to exclusion for individuals found to have intended harm but not for vicariously liable policyholders; to an absolute exclusion for all intentional acts.

A court could find discrimination, wrongful termination or sexual harassment to be "intentional" conduct. In these instances, an absolute exclusion would remove all EPL coverage. Many EPL insurers exclude coverage for individuals in situations where harm is intentional but do not exclude coverage for the insured entity. Defense coverage of alleged intentional conduct always should apply until the act is determined judicially to be committed with malicious intent.

Punitive damages.

The jury of Jane Doe vs. XYZ Corp. assessed compensatory damages of $200,000 and punitive damages of $2.3 million.

XYZ Corp. will appeal the decision, but is there coverage under the EPL policy? In this example, XYZ Corp. had the option to purchase punitive damage coverage. There are different forms of this protection with varying degrees of coverage. Most EPL insurers provide punitive damage coverage only where it is insurable-certain states deem insurability of punitive damages to be against public policy. Only a few insurers provide punitive damages coverage without restrictions of state laws. When reviewing the options, employers should consider the laws of the states where the majority of their employees work.

Eight key coverages have been reviewed here. The EPL insurers have incorporated some of the language in their standard forms; the other coverages, either all or some, will be endorsed by many insurers. Another sign of the EPL markets working with the employer is the insurer's consideration of the policyholder's employment counsel as defense counsel.

With the media creating awareness, many employees are turning from internal resolution to the administrative bodies, including the U.S. Equal Employment Opportunity Commission and the courts.

Corporate counsel, risk management, or human resource directors have a limited ability to control these situations. However, EPL policies give them the ability to reduce or mitigate the damage the situation causes.