Employment Practices Liability Insurance: Second in a Four Part Series

Claims: The language defining what constitutes a “claim” is very important. While lawsuits constitute claims, employers typically want coverage that treats administrative and regulatory investigations and arbitration proceedings as claims as well. The policy will state what type of claims are included and excluded, and may set particular limits for certain types of claims. For example, if wage and hour claims are included, what limits are imposed on the costs that must be covered by the carrier? Many times, the available coverage will only cover a fraction of the potential costs, and the employer is still must pay a judgment or settlement.

Claims Made Basis: A liability policy that was written on a “claims made” basis requires the insurance carrier to pay only those claims that were received during the policy period.

Occurrence Basis: A coverage option which provides that if an event causing a claim occurs during the policy period, there is coverage regardless of when the claim is actually made.

Notice/Tender of Defense: Language setting establishing the employer’s obligation to notify the carrier of claims and tender the defense is very important. Failure to comply with required notice provisions can deny coverage in some cases. Given the cost of litigation, employers should examine the coverage language to determine whether the policy covers defense costs in addition to the specified limit of liability for each eligible insured.

Reporting Period: The reporting period is the period of time in which an insured must report a claim to the insurance carrier after discovery of the claim.

Directors and Officers Insurance (D & O): D&O coverage is insurance that indemnifies directors and officers of an entity if they are sued personally in conjunction with the performance of their duties. Coverage can extend to claims arising out of alleged errors in judgment, breaches of duty, and wrongful acts related to their organizational activities. Since a director can be held personally responsible in some cases, most directors and officers want their organization to maintain D & O Insurance to protect their personal assets.

Tail Coverage: “Tail” coverage is also an important consideration. Tail coverage is a coverage option which extends the policy period of an insurance policy written on a “claims made” basis. Sometimes, claims arise long after the event that causes the claim. Tail coverage protects against claims that the insured does not know about at the end of the policy period, as long as the act, error or omission giving rise to the claim occurred during the covered period of time under the policy.

Discovery Tail: A coverage condition whereby an individual or entity whose policy is cancelled by the insurance carrier has the right to purchase additional time to report a loss that occurred during the policy period, even if it was discovered after cancellation. A discovery tail is usually offered for an additional premium equal to a percentage of the policy’s annual premium. A bilateral discovery tail gives the insured the right to purchase a discovery tail regardless of whether it is the insurance carrier or the insured that cancels the policy.

Hammer Clause: This clause comes into play where an offer to settle is rejected by the employer. If an offer to settle is made, and the insurance carrier finds the settlement acceptable but the insured company does not, a hammer clause will require the company to be responsible for all expenses and liability in excess of the proposed settlement amount.

Duty to Defend: Some policies allow the insurance company to select its own attorneys. A company which prefers to work with attorneys with whom it has a trusted relationship may want to seek out a policy which allows for the option to select its own representation.

Retention (Deductible):A provision which states that the insured must pay a pre-determined amount of money in the event of a loss

COUNSEL TO MANAGEMENT: Before you purchase an EPLI policy, carefully review its terms and make sure that it suits your organizational goals. Understanding the terminology used in the policy is essential to purchasing a product that provides the protection that you desire.

Next in the series: What terms should employers look for when purchasing coverage?

The goal of this article is to provide employers with current labor and employment law information. The contents should not be interpreted or construed as legal advice or opinion. For individual responses to questions or concerns regarding any given situation, the reader should consult with The Saqui Law Group at (831) 443-7100 in Salinas, or (916) 782-8555 in Sacramento.