Mitigating the Financial Risk of Employment Litigation: Employment Practices Liability Insurance

Kathleen Bonczyk, Esq.
July 1, 2009 — 1,485 views  
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Employment Practices Liability Insurance (EPLI) is the so-called new kid on the block in the insurance world.  In comparison to other forms of indemnity which have been around for decades, the first EPLI policies appeared circa 1990. Although EPLI constitutes a relatively new line of insurance, it is one that no employer of individuals should be without.  EPLI transfers the risk of losses associated with employment litigation during the entire employment life cycle, from recruiting through termination, to an insurance carrier. 

Unfortunately, however, statistics demonstrate that the vast majority of employers lack this important coverage despite the fact that in the contemporary economic climate, an employer is more likely to face an employment-related claim than a property or general liability claim.  So why do so many employers forego EPLI coverage? Perhaps some elect to go without EPLI based on the fact that they have never been slapped with an employment-related lawsuit.  This is risky business indeed, as disputes brought by employees, ex-employees, and job applicants are on the increase. 

Consider the statistical data for retaliation claims maintained by the United States Equal Employment Opportunity Commission (“EEOC”), the governmental agency responsible for enforcing several federal employment discrimination laws including Title VII of the Civil Rights Act of 1964.  Title VII prohibits five categories of employment discrimination, based on sex, race, color, religion, and national origin.  In Fiscal Year 2007, the EEOC received 26,663 charges involving retaliation claims, up from 22,555 the prior year. However, in Fiscal Year 2008, the EEOC received 32,690 charges of retaliation.

One of the reasons believed responsible for this dramatic increase in retaliation litigation is the United States Supreme Court’s ruling in the landmark case of Burlington Northern & Santa Fe Railway Co. v. White, 126 S. Ct. 2405 (2006).  This case gave rise to the White standard of retaliation, which is that the employee must only show that a reasonable employee would have found the challenged action materially adverse, and that the conduct likely would have dissuaded a reasonable employee from making or supporting a charge of discrimination. A successful Plaintiff in a retaliation lawsuit, therefore, need not prove that he or she was subjected to an ultimate employment action, such as being involuntarily terminated in retaliation for complaining about discrimination. The bottom-line is that the employee-friendly White standard has made it easier for prospective plaintiffs to bring and maintain retaliation claims against employers.

Another hot trend in the employment litigation arena involves wage and hour cases brought pursuant to the Fair Labor Standards Act of 1938 (the FLSA).  The FLSA was part of President Franklin D. Roosevelt’s sweeping “New Deal” reforms.  One of the FLSA’s goals was to address and prohibit the exploitation of child labor.  In addition to its child labor provision, the FLSA also sets forth certain record-keeping requirements, establishes the federal minimum wage rate, mandates overtime entitlement for certain employees, and includes an equal pay provision.

Employers may also be named defendants under state and local statutes.  For instance, New Jersey’s sweeping Law Against Discrimination (LAD) makes it unlawful to subject people to differential treatment based on race, creed, color, national origin, nationality, ancestry, age, sex (including pregnancy), familial status, marital status, domestic partnership status, affectional or sexual orientation, atypical hereditary cellular or blood trait, genetic information, liability for military service, and mental or physical disability, perceived disability, and AIDS and HIV status.

Additionally, as employers consider possibly engaging in a reduction in workforce in response to tough economic times and downturns in business, there exists a greater possibility of being faced with a wrongful termination lawsuit.  Consequently, uninsured entities should not be lulled into a false sense of security on the grounds that they have never been slapped with an employee-related claim in the past.

The Proverbial Bottom-Line

The final tab for employers who are named defendant in employment litigation can be astronomical.

By way of example, in March 2009, the EEOC announced that Judge Harold Baer of the United States District Court for the Southern District of New York provided final approval to a sweeping consent decree between that agency and B & H Foto and Electronics Corp. (B & H).  The EEOC’s lawsuit, brought pursuant to Title VII of the Civil Rights Act of 1964, alleged that B & H paid Hispanics in its Manhattan and Brooklyn warehouses less than non-Hispanic workers and failed to promote them or provide health benefits because of their national origin.  Under the court-approved consent decree, B & H agreed to cooperate with the EEOC in a claims process to distribute $4.3 million in monetary relief to 149 employees who were paid less, not promoted, or denied benefits because they are Hispanic.

But even in those cases where an employee drops an action or if a jury returns a defense verdict at trial, the employer may still end up feeling that it has not won.

A single employment lawsuit can be extremely disruptive and challenging to a business, most particularly in situations where the employee still works for the company.  Then there are the expenditures associates with attorney’s fees, court courts, and other expenditures, such as expert witness fees.

No employer, whether a for-profit company, a not-for-profit organization, or a governmental entity, is immune from employment litigation.  Given the potential exposure involving a single claim, adequate EPLI protection is a necessity, not a luxury.


EPLI is a loss-limiting insurance policy which covers a broad spectrum of losses arising from the employment relationship involving actual or alleged violations of federal, state, or local common or statutory law.  These policies typically shield the insured from such claims as those alleging discrimination, harassment, retaliation, failure to hire, wrongful termination, inappropriate discipline, and mismanagement of benefits programming.

Without appropriate EPLI coverage, the employer, at a minimum, is on the hook for the expense of defending the action.  In situations where the parties reach a settlement or the plaintiff prevails at trial, the employer will also need to cover the cost of monies awarded to the plaintiff (including any pre and/or post-judgment interest) and also possibly also be responsible for covering for the plaintiff’s attorney’s fees and costs. Indeed, once filed, these claims tend to be a financial drain on the organization in question.

Like other insurance policies, EPLI is a contract between the carrier and its insured. The risk of losses involving employment-related claims is transferred from the employer to the insurer.  The carrier agrees to defend and indemnify the employer for covered losses in return for the premium paid.  The insurer’s duties to its insured, and vice versa, arise from the contractual language of the policy.

Typically, EPLI are “claims made” not “occurrences” policies. Thus, in accordance with the insurance contract, the employer must report the claim within a specific time period. In other words, the policy will only cover losses that the employer knew or should have known about during the timeframe that the policy was in force, and for perhaps a short period after the policy expires, so long as the claim was made in a timely manner. An insured may be able to purchase an amendatory endorsement which includes an extended reporting period within which to report these claims. The contract also outlines those employment practices that are included and excluded from coverage.

EPLI provides protection to the employer who must defend itself in an arbitration proceeding, administrative action such as the EEOC, or a lawsuit brought in state or federal court.  Certain policies also offer free consultative or risk management services which are designed to identify prospective shortcomings in the insured’s employment process, and thus remedy a problem before it manifests.

The insured should consult the policy’s definitions to identify how, for example, “employee” is defined.  Given today’s flexible workforce, the employer will want to determine whether the policy affords coverage for independent contractors as well as leased employees or not.  Additionally, policy language should be reviewed to evaluate the scope of indemnity afforded under the contract.  The insured should endeavor to obtain the most expansive coverage possible. In other words, the goal is to get as much bang for the EPLI buck.

Employers who believe they have insurance coverage for employment litigation should carefully audit their policies and all amendatory endorsements.  Some employers have found out the hard way what while they have Directors and Officers or workers compensation coverage that the policy in question excludes coverage for losses that arise out of the employment relationship.

Identifying the Best Fit for the Insured

No organization that employs individuals can afford to go without EPLI coverage. In these treacherous economic times and considering the explosion of employment-based disputes, EPLI is a must.  End of story.

Employers who wholly lack EPLI coverage should conduct research on various providers and determine which carrier provides the best fit for the organization. Today, dozens of carriers offer this line of coverage. However, the cost of coverage should not be the determining factor for businesses in the market for this protection.

Employers should only do business with carriers that specialize in EPLI.  They should also consider whether the carrier offers risk management and loss control services, whether higher coverage limits are available, whether the policy includes coverage for lay-offs, and whether prior and/or intentional acts are covered.

Premiums are typically based on the numbers of employees, the type of business the insured is in, as well as the insured’s loss history.  When shopping for EPLI coverage, however, the employer should take note that the policy offering the lowest premium may not be the bargain that it appears to be if the carrier is having financial problems.  An employer should only deal with companies that are reputable and established.

Efforts should be taken to avoid situations where the insured finds out the hard way that it has purchased insufficient or inappropriate coverage for its company.  In other words, the employer should not learn when it has been served with a Summons and Complaint that there is no coverage for the loss.

For more information please contact Kathleen M. Bonczyk, Esq. at Rubinton & Laufer, LLC, 2200 NW Corporate Blvd., Suite 404, Boca Raton, Florida  33431 (561) 994-6656, [email protected], or consult with your company’s in-house counsel or outside counsel.

Court Approves Payment of $4.3 Million to Hispanic Workers in EEOC Lawsuit Against B&H Foto.  United States Equal Employment Opportunity Commission.  EEOC Press Release 3-24/09.

Critical Issues in Employment Law…And Their Impact in the Workplace.  Bonczyk, Kathleen M.  Lorman Education Services Employment Law from A to Z Seminar.  March 4, 2009.

Enforcement Statistics:  Enforcement Statistics and Litigation.  Unites States Equal Employment Opportunity Commission.

About the Law Against Discrimination (LAD), State of New Jersey, Department of Law & Public Safety, Office of the Attorney General

Managing and Investigating EPL Claims, Bonczyk, Kathleen M.  Claims Magazine.  June 1, 2005.

Kathleen Bonczyk, Esq.

Rubinton & Laufer, LLC