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Even if you draft airtight employment policies and provide expert training, your company could still end up among the increasing number of businesses facing an employee lawsuit or administrative claim. That's why it's wise to take a fresh look at your insurance coverage.

The number of employers that purchased employment practices liability insurance (EPLI) soared in the late 1990s. From 1997 to 1999, the percentage of companies with EPLI jumped from 22 percent to 29 percent, according to a Society for Human Resource Management study. Today, an estimated 70 percent of Fortune 500 companies have EPLI.

Why the spark in interest? Employee lawsuits continue to soar, prompting insurance companies to expand their offerings.

Plus, you had only five EPLI carriers to choose from a decade ago. Today, there are about 60 or 70, according to an insurance market survey by Betterley Risk Consultants Inc. (For an October 2000 report on the EPLI market, visit www.betterley.com/products.html.)

Boundaries of coverage

At its basic level, EPLI covers the cost of defending and paying any settlements or awards in employment allegations, such as sexual harassment, wrongful termination and discrimination, that aren't included in a business's general liability coverage. Now it's also encompassing workplace torts like misrepresentation and negligent hiring.

Some EPLI carriers go beyond basic coverage and offer risk management services that can help you head off issues before they turn into claims. These services include employee training and alternative dispute resolution.

But only about 5 percent of companies that have such coverage actually use these risk management tools, says Tom Hams, director of EPLI syndication at Aon Corp., a risk management and consulting firm. The reason, Hams says, is that risk managers who buy the coverage don't coordinate with their HR staff to let them know those services are available.

Only about half the states explicitly allow insurers to cover punitive damages. But that coverage has basically become standard in EPLI policies, Hams said, thanks to "favorable venue" or "most favored jurisdiction" language in most contracts.

Translation: If the employer has operations in multiple states, the law where coverage is most favorable to insurability will apply. For example, if a claim arises in a state that prohibits coverage but the company is incorporated in a state that does allow such insurance, the company is covered.

Third-party coverage, for claims such as sexual harassment involving clients or vendors, had also become more standard, Hams said. But the pendulum may be swinging back as more insurers cut out that expanded coverage.

A few carriers also have been willing to cover disputes over items like stock options in coverage that includes benefits or written contracts.

Wage-and-hour claims not covered

If you're looking at EPLI to protect you from massive overtime claims from workers who say they were misclassified, forget it. Insurers still aren't covering wage-and-hour claims. EPLI language usually excludes coverage for claims under the federal Fair Labor Standards Act "and similar state law."

Other EPLI trends to watch for:

  • EPLI has largely become a stand-alone product. The idea of offering it under other policies has mostly disappeared. Hams did note that EPLI can be built into directors and officers policies for private companies.
  • More EPLI policies are giving companies added flexibility to add particular attorneys to the panel allowed to handle claims.
  • It's easier today to avoid a hard "hammer" clause in your contract, which limits payment after the insurer recommends a settlement amount.


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