Many insurance products grow better with the passage of time, as good underwriters look for ways to structure the policy language to be more response to evolving claims scenarios, legislative and judicial developments and general consumer demands. Employment practices liability insurance, which had its origins almost 20 years ago, has seen both survival and enrichment through at least a couple of minor underwriting cycles, and continues to thrive in an environment which is increasingly litigious. In fact, some insurance “purists” would say that the only general exposure area (for many larger employers, at least) with more potential claims frequency, would be workers’ comp insurance.
The birth of the product
Prior to the late 1980s, there was no specific insurance product to respond to employee allegations of discrimination, harassment or wrongful termination of employment. Workplaces were different then–more casual (and not just in employee dress alone), and employee litigation was far from the collective cognitive process of employees. Although most buyers of comprehensive general liability insurance–later, the name was more accurately changed to “Commercial General Liability” in recognition of its “non-comprehensiveness”–understood that employees claims were not intended to be covered. But with the evolution of EPL insurance, CGL underwriters confirmed and clarified such coverage with corresponding endorsement language.
Directors and officers liability insurance had originated following the Great Depression, but there was never any intention to cover claims brought by employees. The product was originally envisioned by the original authors of D&O insurance in London. Lloyd’s developed the D&O product for U.S. consumption, but it was not until the 1960s that St. Paul Cos. wrote the first domestically produced D&O insurance product.
So there was no real insuring mechanism to cover allegations from employees involving harassment, discrimination and/or wrongful termination until Underwriters at Lloyd’s developed a new product in 1988. The product carried a heavy premium, provided defense costs only (initially), had both a per claim deductible and a coinsurance participation by purchasing employers, and was a very difficult sell for retail insurance agents. Few sales were recorded in the first couple of years, but the concept was intriguing. Would employees, even if openly unhappy, actually bring suit against current or former employers? Not many were willing to risk it.
Three critical developments
As the country entered into the 1990s, there was increasing employee restlessness. Economic developments resulted in plant closings with worker layoffs, and there was an emerging move for workers to more readily challenge management authority. There were three critical events which shaped the demand for EPL insurance in 1991: the Clarence Thomas hearings, the military aviators’ ‘Tailhook Convention,” and the passage of the Civil Rights Amendments of 1991.
The Clarence Thomas Supreme Court confirmation hearings broadcasted by television in the fall of 1991 had crucial developments. Allegations from a former subordinate of Thomas involved improper employee-superior relationships, activity and other related issues.
The military aviators’ ‘Tailhook Convention”, which took place in Southern California, resulted in allegations of improper conduct of several types, mostly from persons attending the event. The U.S. government eventually agreed to pay more than $8 million to settle these allegations, sending an interesting message to both employees and employers.
Lastly, the passage of the Civil Rights Amendments of 1991, which amended and supplemented the Civil Rights Act of 1964, had several crucial aspects, but one with resounding implications was the virtual guarantee of jury trial for any employee wishing to bring formal charges of harassment or discrimination in the federal courts.
Arguably, the most severe (and long term influence) of these developments was the guarantee of a jury trial for employees wishing to bring formal allegations usually, after an informal review of the potential allegations by the Equal Employment Opportunity Commission.
No employer with full grasp of the potential ramifications would want a jury trial. Thus, the “balance of leverage” could be said to have shifted to employees, and the courts were gradually filled with potential allegations (see the history of “filings” and “monetary benefits” at www.eeoc.gov).
So, as the 1990s unfolded, there was increased litigation (and threatened litigation), and employers, seeing the realities of potential litigation and available insurance coverage, became much more interested in the insurance product.
Sales increased, as did competition. AIG and Chubb emerged as the largest writers of the coverage, with a variety of additional EPL-related insurance products hitting the market. By the end of the 1990s, EPL insurance had become important to many employers, and claims and defense expenses were beginning to rise. To help offset rising claims expenses, underwriters accepted more risks, increasing premium writings.
There were a variety of underwriting approaches. At least one prominent insurer even offered a minimal limit of EPL insurance without cost when a related property/liability insurance package was purchased. The benefit of such an approach was dubious, due to the low limit of protection provided and the potential of future allegations against the agent providing coverage with doubtful protection.
EPL insurance in the 21st century
As EPL insurance has become more readily available, and perceived as more necessary for many employers. Various insurance options have emerged for underwriters’ consideration, representing evolving exposures. Some good examples include: third-party extension, punitive damages, breach of privacy, duty to defend or no duty to defend, and policy definition of subsidiary.
“Third-party” extension. Gradually, underwriters acknowledged that persons other than employees could bring allegations of harassment and/or discrimination, and seeking to address this exposure, were often willing to provide an extension of coverage for claims brought by customers, vendors and sometimes other relevant parties. The broadest approach in this regard would cover allegations brought by any person other than an employee, which a couple of insurers are willing to do.
Punitive damages. It has become recognized that some situations are so egregious as to warrant the awarding of punitive damages. The best possible approach in this regard would be for an EPL policy to utilize an affirmative coverage grant for punitive damages, and with the “most favorable jurisdiction” applicable. It should be understood in a global economy that several possible legal jurisdictions could potentially apply to a covered EPL claim situation.
Breach of privacy. Although not immediately thought of as being critical to the overall EPL exposure, the passage of legislation such as the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as well as increased focus on protection of employee medical and personal information, places ever increasing pressure on employers to guard employee privacy. Thus, to have included within policy coverage a provision for breach of privacy allegations, could prove extremely valuable.
Duty to defend or no duty to defend.Although one approach is not necessarily better than the other, it is important for the buyer to understand which approach will be invoked in the event of a covered claim. As EPL insurance has evolved, the general trend has been for insurers to provide coverage on a duty to defend basis; it is just more cost effective and generally controlling of the defense for the insurer to provide coverage in this manner. There is some variance, however, in that a few EPL insurers will allow buyers their choice of defense provision approaches–the trick is that this decision must be made at the time coverage is purchased, and not at the time of a claim.
Policy definition of subsidiary. Not always a positive for the buyer, several EPL policies have taken to defining a covered “subsidiary” as a “corporation”, or a “corporate entity,” automatically detrimental to subsidiaries that are limited liability companies. The careful seller of EPL insurance must have a good working knowledge of the corporate structure of the insured organization, or risk a potential claim denial situation for his client, due to the “fine print.”
EPL looking forward
EPL insurance has woven itself into the fabric of corporate insurance programs throughout the U.S., and on foreign soil, as well. Employees have more rights than in previous years, and thanks to an evolving, aggressive legal system, will not hesitate to seek restitution, if there is the appearance of discrimination, harassment or a wrongful termination of employment.
However, despite a fairly constant increase in claims payments by insurers, EPL as a line of commercial insurance is generally sought by commercial insurers, both large and small. The use of increased premiums, per claim retention (or deductible) amounts, and policy language are ways in which EPL insurance underwriters can both underwrite, as well as “regulate” their underwriting approach. There’s no reason to think that there will be less underwriter interest in EPL insurance, looking forward.
Richard G. Clarke is senior vice president of J. Smith Lanier & Company, a member of the RiskProNet national agency network. He has
worked as an underwriter, consultant and broker through both hard and soft market cycles.
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