 Introduction
No
Coverage by Default
EPLI
Coverage
Limits
and Pricing
Underwriting
Issues
Looking
Ahead
Introduction
Nonprofits, like businesses, are subject to claims by disgruntled employees,
former employees and rejected applicants alleging discrimination,
harassment, wrongful termination or other violations of their employment
rights. Many organizations are stunned when hit with one of these claims,
and then stunned again when they discover their general liability insurance
policy does not cover the claim. This article offers suggestions for
avoiding that second surprise.
No Coverage by Default
The decisions an organization makes regarding hiring, firing and
supervising its employees, referred to as "employment practices," are
considered intentional decisions. Standard general liability policies do not
cover intentional acts. Some Directors and Officers (D&O) insurance policies
for nonprofits do cover employment-related claims. The extent of the
coverage should be verified, though. Those policies may cover only claims
against board members. For more complete protection, a policy should be
endorsed to cover claims against anyone with personnel responsibilities, as
well as the organization itself. As the number and cost of
employment-related claims rise, some insurers are amending their General
Liability, Umbrella, and Directors and Officers policies to specifically
exclude claims arising out of employment practices regardless of whether
they allege an intentional act.
Going without coverage is more hazardous than ever because
employment-related claims are increasing. Recent changes in federal law,
like the Civil Rights Act of 1991 and the Americans with Disabilities Act,
make discrimination claims easier to prove and more costly. As a result,
more claims are expected.
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EPLI Coverage
The insurance industry has responded to this increased exposure and
employers' requests for coverage by introducing a new product called
Employment Practices Liability Insurance (EPLI). Because this is a fairly
new type of policy, the scope of coverage varies widely among the policies
offered. Employment practices liability is generally defined as the results
of actual or alleged wrongful termination, sexual harassment or
discrimination against an employee or applicant. Policy wording will
determine the extent of coverage offered by the carrier. Exclusions can
eliminate some very important coverages. Organizations interested in
purchasing coverage should carefully review the terms and conditions,
pricing and underwriting requirements offered by the insurance carriers.
Coverage is provided for the organization (the named insured), its
directors, officers, employees and former employees either in the standard
policy wording or by endorsement. The policy will pay for defense costs,
judgments, costs to investigate, and administrative proceedings. The policy
may cover back pay, loss of benefits, appeals, and bonds, either as standard
coverage or through endorsement.
Exclusions on an insurance policy are used to clarify what the carrier
intends to cover or not to cover. Employment related coverages that are
usually purchased through other types of insurance policies are common
exclusions on all EPLI policies. These include claims that would normally be
covered by workers' compensation, ERISA, unemployment compensation, COBRA,
and disability coverage. In addition, EPLI policy exclusions may exclude
class action suits, actions arising from strikes, lockouts, staff
reductions, closings and reorganizations.
EPLI coverage is a claims-made coverage, meaning the policy covers claims
made during the policy period. This provision may exclude acts occurring
prior to the policy period and will certainly exclude coverage for claims
made subsequently against the employer. A retroactive date might be added to
the policy, extending the time before the policy inception date, so that
losses occurred before the inception date can be included in coverage.
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Limits and Pricing
Most insurance carriers target a certain segment of the market and offer
limits that will appeal to the target market. Limits range from $1 million
to a maximum of $10 million. Deductibles can be as low as $1500 or as high
as $250,000, again depending on policy limits, market demands, and the
carrier's requirements. Co-payments are common on most policies. If a
co-payment is included, the organization must pay a portion, usually 10% of
every claim over and above the deductible.
Any time the insurance industry introduces a new product to the market,
it takes some time to determine appropriate pricing levels. The premium must
be adequate to cover losses and expenses while, at the same time, priced at
a level most organizations can afford. The carriers offering EPLI appear to
be making coverage affordable and available even for smaller employers.
Minimum premiums can range from $2,000 to $50,000 depending on the carrier's
limits and extent ofcoverage offered.
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Underwriting Issues
Insurers take a careful look at an organization's operations before they
agree to provide insurance coverage. An application accepted by one carrier
may be rejected by another based upon its view of the organization's
operations. Key issues vary from carrier to carrier. Application forms are
fairly standard among the carriers offering coverage. Most are four pages
and ask for historical, financial and organizational information about the
applicant, loss history, and human resources operations. The carrier will
ask for copies of annual reports, budgets, employee handbooks, applications
for employment, organizational charts and other information related to human
resources issues.
All EPLI carriers will look very carefully at the organization's
management and human resources policies and procedures. They will review
employment applications, employee handbooks, and employee education and
training. Most insurance companies are also interested in the financial
condition of the organization and its claims history. Some carriers insist
the organization must have an employment-at-will statement and a sexual
harassment policy.
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Looking Ahead
Many insurance professionals feel EPLI coverage will eventually become a
standard coverage that most large organizations will maintain as part of
their overall insurance program. Much will depend on the stability of the
market for this type of coverage, attractive pricing and broad coverage that
will insure the majority of employment practices losses.
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Katharine (Kas) Vargo is an insurance consultant in Louisville, Kentucky.
She is the former risk manager of the Presbyterian Church (USA).
This article is reprinted from the newsletter "Community Risk Management &
Insurance."
To subscribe to this free publication, contact:
The Nonprofit Risk Management Center,
1001 Connecticut Avenue, NW, Suite900,
Washington DC, 20036
202-785-3891;
FAX 202-833-5747. |
