Will Your Employment Practices Liability Insurance Policy Be There When You Need It?
 
May 1, 1999
 
Stephen J. Weiss- Washington

(Part Two of a Three-Part Series)

In the March 1999, issue of the Employment Law Letter we published part one of a three-part series on Employment Practices Liability Insurance. We covered the definition of a "claim," the definition of "wrongful employment act," and a discussion of punitive and exemplary damages. In part two, several other critical issues pertaining to protecting the employer with EPLI policies are presented.

Prior-Acts Coverage

EPLI policies are "claims-made policies." This means they only cover a claim made against an insured during the policy period. If a claim is made against an insured during the policy period, the next key coverage inquiry is whether the wrongful conduct of the insured that triggered the claim occurred before or during the policy period. Some EPLI forms disclaim coverage for wrongful acts that occurred before the inception of the policy. Other forms expressly cover prior acts. Clearly, prior-acts coverage is preferred.

Prior-acts coverage, however, is not a key to the insurance company's treasury. Prior wrongful acts that had progressed into litigation or an EEOC proceeding at the inception of the policy would be excluded under the typical "prior and pending litigation" exclusion. In addition, the EPLI application asks if the prospective insured is aware of any facts or circumstances which may result in a claim. Misstatements in and omissions from applications are a crime in some states and can result in a denial of coverage.

Mergers and Acquisitions

Mergers, acquisitions and consolidations are frequent occurrences today. These events can result in work force reductions that tend to generate employment lawsuits based on age discrimination, race discrimination, wrongful termination and breach of contract. It thus becomes all the more important for an acquiring corporation with EPLI coverage to extend that coverage to a newly acquired entity and its directors, officers and employees.

Before proceeding further, a bit of background may be helpful. EPLI policies customarily cover the corporation named as the insured in the policy as well as all subsidiaries in existence at the inception of the policy period, and their directors, officers and employees. A coverage question arises when a subsidiary is created or acquired during the policy period.

The treatment of a new subsidiary varies greatly from policy to policy. The best provision for you is one that affords automatic coverage, without any additional premium, for any new subsidiary below a specified size. Most EPLI policies include this kind of a provision. They differ, however, in the way they measure size. Some provide automatic coverage if a newly acquired or created subsidiary's assets do not exceed 10% to 25% of the total consolidated assets of the parent corporation and its subsidiaries as of the inception date of the policy. Other insurance companies provide such coverage if the number of employees of the new subsidiary does not exceed 10% to 20% of the total number of employees of the parent corporation and its other subsidiaries.

Legal Defense Provisions

Most EPLI is in the form of a "duty-to-defend" policy. In the words of one such policy, "The Insurance Company has the right and duty to defend any Claim to which this insurance applies made or brought against any Insured." Another group of EPLI policies offers a flexible approach to defense. Under these policies, the insurance company does not assume a duty to defend but gives the insured company, at its sole option, the right to "tender the defense" of a claim to the insurance company -- that is, to require the insurance company to provide a defense, not just pay defense costs. If your company has a strong preference for controlling the litigation itself, including selection of counsel, you should not purchase a duty-to-defend policy.

Conclusion

The policy deficiencies discussed in this article do not represent the universe of policy deficiencies that are candidates for improvement. Part One of this series is available in the March 1999 issue of the Employment Law Letter.

For more information please call Stephen J. Weiss at 1-888-688-8500.