the Employment practices liability insurance (EPL, EPLI) is a policy that protects employers against financial loss arising from claims alleging employment-related wrongdoings.
Why do organizations purchase EPLI?
Organizations buy this insurance to protect their balance sheet from loss arising out of alleged wrongful employment practices. Organizations of all sizes purchase EPLI. If an organization has employees (including past employees or potential employees), the risk of a claim alleging employment wrongdoing exists. Defense costs often represent the majority of the loss incurred as a result of a claim, whether the alleged wrongful act is proven or not.
Another reason why organizations purchase EPLI is for risk management support. Organizations believe that the insurer knows how to assist when things go awry; this is their specialty area. Some policies include value-added risk management or loss prevention services. These value-added services are an essential part of the insurance offering.
When buying an EPLI it’s important to understand what you’re buying. Here are 5 key things to look for:
5 Things to Review on an EPLI policy
Who is covered?
What is and what is not covered?
What constitutes an EPLI claim?
What optional coverages are available?
What are the claim reporting requirements?
1. Who is covered?
As mentioned, the employer buys the policy. However, the definition of insured usually extends beyond the entity. EPLI policies typically cover the entity, executives, and employees. This means the policy would respond if allegations are brought against the entity, executives, or employees. It is important to check the definition of employee to understand if the policy covers consultants or other temporary employees.
2. What is and what is not covered?
EPLI policies are usually named perils policies. This means that the policy only covers the perils that are listed on the policy. A peril is an exposure or a risk. Since only the perils listed on the policy are covered by the policy (subject to any exclusions), it is very important to understand what would be considered an employment practice wrongful act. And for that it’s important to look at the policy definitions. The covered perils can typically be found in the definitions section of a policy under “ employment practice wrongful acts” or “employment practices violations.” The most frequently covered perils in an EPLI policy are:
- Wrongful dismissal; and
For each policy, you’ll also find exclusions. Exclusions commonly seen under EPLI policies include:
- Prior or pending claims;
- Bodily Injury or property damage;
- Contractual liability;
- Conduct (criminal or intentional acts);
- Duties under the law (like severance pay);
- Nuclear/Radioactivity; and
- Perils for which coverage may be purchased under other insurance policies.
3. What is an EPLI claim and who can bring one?
An EPLI policy covers financial loss experienced by the insured employer as a result of a claim that is made against it arising from a real or alleged named peril. The definition of loss on the policy is important and typically includes defense, settlements, and damages.
The standard EPLI policy is designed to cover allegations brought not just by current employees but also by past and future employees. It’s important to checking the definition of employee given in the policy as it can broaden or narrow the scope of coverage.
4. What optional coverages are available?
Some EPLI policies offer several optional insuring agreements as needed, for instance, Third Party EPL.
Third-Party EPLI expands the coverage scope of a policy to include allegations brought forward by third parties from outside the organization, such as vendors or clients. This type of coverage is typically restricted to harassment and discrimination claims.
This coverage is generally added by way of an endorsement for additional premium. Employers should keep this in mind and consider their third-party risk when looking to buy an EPLI policy. This is not a standard part of a policy so you’ll need to ask about it.
5. What are the Claim Reporting Requirements?
An important characteristic of EPLI policies is that they are offered on a Claims Made or Claims Made and Reported form.
The claim against the insured (a written demand) must occur during the policy period for coverage to exist under that policy (regardless of when the wrongful act occurred). The wrongful act may have happened during the policy period or possibly long before the policy was incepted. Some ‘claims made’ policies include what’s termed a ‘continuity’ or ‘retroactive’ date; claims arising from a wrongful act that occurred prior to this date will not be covered by the policy.
Insurance buyers must familiarize themselves with their policy’s specific claim reporting requirements. Avoid having a claim rejected simply because of late reporting by the insured – potentially a very costly error. The specifics are explained in the Terms and Conditions section of the policy. EPLI policies call for a claim to be reported ‘as soon as practicable’. For example, the policy will state: ‘as soon as practicable but no more than 60 days after the end of the policy period.’
In summary, when reviewing an EPLI policy, be sure you understand:
Who is covered: the definition of employee – who is covered and who can bring a claim against the organization. Ensure the definition meets your needs.
What is and what is not covered: the definition of Wrongful Employment Practice – understand what perils are covered as well as the exclusions.
What constitutes a claim: the definition of loss – understand what type of financial loss is covered.
What, if any, optional insuring coverages are available such as Third Party EPLI
The specific claim reporting requirements
Learn more about Employment Practices Liability Insurance.