Avoid Buyer’s Remorse Over EPLI Coverage

Many employers purchase Employment Practices Liability Insurance (EPLI) to insure against loss as a result of employment claims. However, employers who do not carefully read their policies could be surprised by what is (or is not) covered and end up with buyer’s remorse when they realize they didn’t get what they thought they were getting.

EPLI policies may vary in coverage. Employers should read the coverage provisions closely to make sure that they are receiving coverage for claims that are important to them. Most policies will cover a broad range of claims, such as claims of discrimination, sexual harassment, and wrongful termination. Some, but not all, provide coverage for breach of employment contracts, and defamation or other workplace torts.

Claims that are often excluded include claims under the National Labor Relations Act (NLRA), Occupational Safety and Health Administration claims (OSHA), and claims of intentional torts. In addition, coverage is often excluded or very tightly constrained for wage and hour claims, such as those arising under the Fair Labor Standards Act (FLSA) and parallel state statutes for overtime and minimum wage violations.

Employers should also understand the dynamics relating to choice of counsel under EPLI policies. Some policies specifically provide that defense counsel will be selected by the insurance company. Others state that the employer may retain qualified counsel of its choosing. Understanding the difference between these clauses is very important. Employers would generally prefer to use their regular employment counsel, who is often someone who has represented the company for years and who knows the company’s business, culture, and people. Insurance companies, on the other hand, want to use panel counsel or have “captive” law firms that represent the insurance company in all or most of their matters. The insurers often have negotiated significant rate discounts in exchange for volume. These rates are often far below the lodestar rates the courts use for awarding fees to experienced employment counsel. In the past, some insurers were willing to allow employers to use their preferred counsel under certain conditions. However, many insurers refuse such arrangements and insist upon the use of panel counsel regardless of employer’s willingness to pay any difference in rates.

In addition, there can also be a potential of conflicting loyalty when panel counsel is used – since panel counsel’s stream of work comes fro m the insurance company, there may be a tendency to favor the insurance company’s interest over the interest of the employer. The quality of work may suffer as well - panel counsel may address the low fees by directing the bulk of the work to inexperienced and often-rotating junior associates.

Finally, employers should be aware of the possible divergence of interest when it comes to settlement of claims. Insurance companies are generally focused purely on the financial implications of a settlement, while employers will often be interested in reputational risk and the risk of being perceived as an “easy target” for employees considering claims in the future. Further, because defense costs generally are included with liability in the maximum coverage provided by the policy, an insurance company may not want to pay a high settlement early in the case, hoping that the demand will reduce as the litigation proceeds. However, as defense costs erode the total limits available fo r settlement, there may not be enough proceeds fro m insurance to fund a settlement later in the case. There is a potential of even greater conflicts when the insurance provides the cost of defense but not coverage fo r a settlement, as is often the case in wage and hour claims. In such cases, the goal of resolving the matter in favorable terms can be incompatible with keeping defense costs down for the insurer.  This is not to say that all insurance companies or panel counsel are unmindful of their ethical duties to the employer client. However, this scenario creates a conflict that employers should not overlook.

Employers looking to renew or purchase EPLI insurance for the first time should perform a careful review of the coverage they are purchasing and should determine whether EPLI, with its coverage limitations, premiums and deductibles, really is preferable to remaining self-insured. If EPLI is preferred, employers and their broker should use the leverage they have at the time or purchase to negotiate provisions such as choice of counsel. Employers who thoughtfully review the consequences associated with their various choices are much less likely to end up with buyer’s remorse.

This blog was written by Kristy Eriksson at Miles & Stockbridge.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.