Employment Practices Liability Insurance, often referred to as EPLI, can be a great resource for some employers in California. However, just like any other major purchasing decision, employers must be very careful when purchasing this insurance, as often times they can be surprised about what the insurance does not cover and the loss of control over the defense of lawsuits. This Friday’s Five covers five issues employers must be aware when considering EPLI insurance:
1. Usually wage and hour claims, and class actions are excluded from EPLI coverage.
It is normal practice for insurance companies to exclude coverage of wage and hour issues and class action claims. This is normally the large liability ticket issue that an employer is attempting to protect against when purchasing an EPLI policy, but then are surprised to learn that these types of claims are not covered once sued for a wage and hour claim or named in a class action lawsuit.
2. Similarly, liability for California’s Private Attorney General Act representative actions is usually not covered.
Just as class actions usually are not covered, insurance companies usually carve out coverage for wage and hour claims under California’s Private Attorney General Act (PAGA) representative actions. These representative actions can carry substantial liability for employers. For more information about PAGA claims, see a prior post here.
3. Intentional acts cannot be insured under CA law.
California law prohibits an insurance company from covering willful acts as set forth in Insurance Code section 533. The policy rational behind this law is to discourage intentional acts that cause harm or property loss to others. If it is an intentional act, California law prohibits insurance from covering the act. Therefore, if an employment lawsuit alleges willful acts took place as part of the allegations, it is also likely not going to be covered by insurance. This prohibition on covering intentional acts can be used by insurance companies to exclude coverage for employment claims of sexual harassment, discrimination, and retaliation.
4. Loss of control of defense counsel.
Most insurance policies will dictate which law firm must be used to defend the case. This is another surprise to many employers who have used a law firm for many years in setting up employment policies, handbooks, and procedures, only to find out that some other law firm that may not have experience in the employer’s industry, and does not have the trusted relationship built over a number of years, suddenly defending its interests in litigation. Unlike items 1 through 3 above, employers can negotiate this term with the insurance company, but this negotiation is better done when purchasing the policy or renewing the policy. Employers are advised to not wait until a lawsuit is filed and the insurance company assigns its preferred law firm to your case to start the discussion of which law firm should be defending the case. Employers should negotiate this term up front so that they have the option to select its preferred law firm to defend any litigation.
5. Loss of control over settlement of lawsuit.
Once the insurance company agrees to cover the liability of a lawsuit, it can dictate whether to settle a case and for how much. Insurance companies can look at a covered claim differently than an employer who is defending the lawsuit. For example, companies facing litigation are concerned that settling for too high of an amount may bring on additional copy-cat lawsuits. Insurance companies view settling the case with different concerns, such as risk for that one case, and their concerns may not be in line with the employer’s. Once an insurance company is covering a risk, the employer loses control on the potential resolution of the case. Employers need to understand this dynamic in assessing whether an EPLI policy is a good fit for their business.
Many employers have been able to effectively manage risks using EPLI policies, but there are many issues that must be understood prior to purchasing these types of policies. EPLI policy costs are rising, and employers should work with their broker and current employment attorney in assessing whether an EPLI policy meets their needs, and go into the purchase well-informed in order to make the best cost-benefit analysis.