Employment Practices Liability Insurance: What It is & Why It Matters

November 20, 2016

Roger Murdoch is probably thankful he has insurance.

Earlier this year, Gretchen Carlson, a former high-profile news anchor on Fox News, sued Roger Ailes and Fox for damages relating to decades of sexual harassment she experienced during her Fox News tenure. Her suit quickly settled for an astonishing $20 million. In the aftermath, many women employed at Fox came forward (and continue to come forward) with stories about a pervasive business culture of both quid pro quo and hostile-work-environment types of harassment within the Fox News corporation.

How does a business protect itself should one of its employees – or one of its officers or directors – sexually harass a subordinate? Taking steps to proactively prevent harassment from ever happening is always the right thing to do. But when prophylactic measures fail, insuring a business for errors or omissions in its employment practices is the next prudent step.

Employment Practices Liability Insurance (sometimes called “EPLI”) covers an employer against a worker’s claims that the employer violated one or more employment rights. The scope of coverage varies by policy and insurer, but most EPLI policies provide employers with a defense and indemnity against claims of sexual harassment, discrimination, wrongful termination and other types of employment-related rights violations.

EPLI works similarly to other types of liability insurance by providing protection against claims or occurrences within the coverage period through the payment of the attorney’s fees incurred in defense against the claims, settlement costs or judgments up to the policy’s limits and beyond any retention or deductible. When an employment-related claim – such as a sexual harassment lawsuit – arises, a business covered under a typical EPLI policy would tender the claim to the insurer. The insurer would then appoint defense counsel to defend the insured business (and would bear the costs of that defense). Counsel would work with the insured business and work to settle the claim. In most instances the insurer would also pay the cost of settlement. If the case does not settle and goes to a verdict with a damages awarded against the insured business, the insurer would pay that judgment as well. (There are, of course, exceptions to these general rules based on a variety of circumstances such as policy terms, applicable law, and the facts of the claim.)

EPLI coverage was relatively unheard of before 1991. But, following Clarence Thomas’s confirmation hearings and Anita Hill’s allegation of Thomas’s sexual harassment of her when she worked for him, underwriting for such policies took off. As of 2014, the EPLI market averaged $2 billion annually. As employment laws evolve and grow in complexity – wage and hour laws, employment-versus-independent-contractor definitions, internship liabilities – that market is expected to increase.

A few important things to note about EPLI coverage. First, don’t rely on your commercial general liability (“CGL”) or businessowners protective policy (“BOP”) to provide coverage for employment-related claims. General liabilities policies like these are typically occurrence-based (meaning they cover only liabilities arising from an accident) and cover only damages for bodily injury or property damage. Employment-related claims nearly always fall outside of these definitions. Additionally, CGL and BOP policies contain an express exclusion of coverage for employment-related claims.

Instead, acquiring EPLI coverage means talking to your insurance broker about obtaining a separate EPLI policy or an endorsement to your current CGL or BOP policy to include such coverage. You will pay additional premiums for that coverage, and the terms of coverage (including deductibles, retentions, defense limits, and policy limits) will be separate from the terms of your base or other policy.

Second, it is critical to carefully and thoroughly complete EPLI policy applications. Most EPLI applications will ask you to disclose any claims and potential claims about which you have knowledge. The failure to disclose material information can void your coverage. Your insurance broker can work with you to complete the application and address what coverage might be available for known-but-as-yet-unfiled claims.