EMPLOYMENT PRACTICES INSURANCE
Several highly publicized recent settlements and judgments against large, well-respected U.S. companies have demonstrated the importance of and have increased the attention being given to risk management for employment-related claims. For example, since October 1996:

• Texaco settled a race discrimination class action lawsuit by African-American employees for $176.1 million;
• Lockheed Martin Corp. settled an age discrimination class action lawsuit brought by the EEOC on behalf of former employees for $13 million;
• Chevron Corp. settled a sex discrimination class action lawsuit for $7.42 million;
• Southern California Edison settled a class action race discrimination lawsuit for $11.25 million;
• Federal National Mortgage Assn. was held liable for gender discrimination and retaliation and was required to pay a former female manager $6.9 million;
• Mitsubishi is currently defending a sexual harassment lawsuit by the EEOC on behalf of more than 500 potential victims.

In addition to emphasizing the need for effective loss prevention practices, these recent cases also highlight the potential value from purchasing employment practices liability insurance ("EPLI"). Although this insurance has been available in various forms since 1992, it has not been purchased by many large corporations. However, the escalating frequency and severity of employment claims, combined with the current availability of favorable terms and pricing, justify virtually any large company carefully considering this type of insurance.

The October, 1993 ACE Report summarized the conceptual justification for this type of policy (i.e., consolidating the rather limited EPLI coverage afforded by the CGL and D&O policies into a single policy affording relatively broad coverage for the company and its directors, officers and employees) and analyzed the insurability of employment-related claims. The following summarizes many of the material differences between various EPLI policies now available and identifies many of the coverage issues which should be considered when evaluating the quality of a proposed EPLI policy.

Most of the insurers that write D&O insurance now also offer to underwrite an EPLI policy. When evaluating the various EPLI policies in the market, it is misleading to compare and contrast only the policy forms offered by each insurer since, like D&O insurance, many carriers routinely amend the EPLI policy with endorsements. Therefore, until a policy is fully negotiated, it is generally impossible to label the EPLI coverage available from a particular insurer as being superior or inferior to its competitors.

Like D&O insurance, EPLI policies are all claims-made with defense costs within the limit of liability. Most policies are similarly structured to the insurer's D&O policy form. Therefore, many of the differences between competing D&O policy forms also apply to competing EPLI policy forms (e.g. severability, bi-lateral discovery period, non-cancelable, automatic coverage for new subsidiaries, etc.). The following briefly discusses those policy form differences which are unique to EPLI policies.

A. INSUREDS
All EPLI policies cover claims against the insured company (typically including its subsidiaries) and its directors, officers and employees. Policies vary, though, in describing covered employees. The broadest definition includes full-time, part-time, temporary and seasonal employees. Some policies do not cover part-time, temporary or seasonal employees, probably because such employees are not likely to receive the same training and education regarding appropriate employment-related behavior as full-time employees. A few policies also include as insureds stockholders of the company and spouses of insureds.

B. CLAIM
EPLI policies differ in several respects regarding the definition of "Claim". All policies include a civil judicial proceeding and virtually all include arbitration and administrative proceedings (for example, before the EEOC). Some policies also include a written demand for monetary damages and a distinct minority include written demands for non-monetary relief, written threats of legal action or requests to toll the statute of limitation.

In addition, policies vary as to who may bring a covered Claim. Some policies cover only a Claim brought by an employee, where other policies afford broader coverage by also including Claims "on behalf of" employees, thus covering Claims brought by the EEOC as plaintiff on behalf of employees. Also, like the definition of "Insureds", policies differ as to the type of employee whose Claim would trigger coverage, with the broadest provision covering claims by or on behalf of any past, present or prospective full-time, part-time, temporary or seasonal employee.

C. WRONGFUL ACT
EPLI policies generally adopt a named-peril approach by listing the types of employment-related wrongful acts which are covered. Many EPLI policies originally covered only discrimination, wrongful termination and sexual harassment. Today, virtually all policies cover a much broader list of wrongful acts. Depending on the policy, the list may include wrongful termination, breach of an employment or quasi-employment contract, employment-related misrepresentation, violation of employment discrimination laws (including sexual or other illegal workplace harassment), wrongful failure to employ or promote, wrongful discipline, wrongful deprivation of a career opportunity, failure to grant tenure, failure to adopt adequate workplace or employment policies and procedures, illegal retaliatory treatment, negligent evaluation, invasion of privacy, employment-related defamation, or employment-related wrongful infliction of emotional distress.

D. LOSS
Like D&O policies, EPLI policies typically cover any amount for which the insured is legally obligated to pay on account of a covered claim, including defense and investigation costs, settlements and judgments. Taxes, fines and penalties are typically excluded from the definition of loss. Punitive, exemplary and multiple damages (including liquidated damages), although historically excluded, are now expressly covered under several EPLI policies if otherwise insurable. Such coverage may be subject to a sublimit.

E. DEFENSE
Most EPLI policies afford duty-to-defend coverage, requiring the insurer to defend the claim (including selecting defense counsel). A few policies afford only indemnity, not duty-to-defend coverage, while a few other policy forms offer either type of defense coverage depending upon which type of coverage is designated in the Declarations. If the insureds have a strong preference regarding the selection of defense counsel, the preferred counsel should be specifically named by endorsement to a duty-to-defend policy.

F. EXCLUSIONS
The number and content of the exclusions in EPLI policies vary greatly. Like exclusions in D&O policies, the scope of the EPLI exclusions depend, among other things, on whether the preamble language is broad (e.g. "arising out of or relating to") or narrow (e.g. "for"). All of the potential exclusions generally fit within one of the following three categories:

1. Other Insurance Exclusions. Several exclusions are included in order to avoid the EPLI coverage overlapping with coverage otherwise available through other types of insurance policies or through prior policies. Examples of these types of exclusions include:

• Matters which were noticed under a prior policy;
• Pending or prior litigation and, under some policies, pending or prior administrative proceedings or demands;
• Bodily injury (other than mental anguish or emotional distress) or property damage;
• Violations of the Occupational Safety and Health Act ("OSHA");
• Claims relating to workers' compensation, unemployment insurance, social security or disability benefits;
• Violations of ERISA;
• Pollution.

2. Conduct Exclusions. Some exclusions are included in order to eliminate coverage for particularly egregious wrongdoing or to prevent the insureds from obtaining a windfall. Examples include:

• Illegal profit, remuneration or advantage;
• Fraud or purposeful violation of law or wrongful acts committed with actual knowledge of their wrongful nature or with intent to cause damage.

Like D&O policies, these exclusions vary among policies as to whether a judgment is required in order to invoke the exclusion. A few policies today have eliminated one or both of these exclusions since the likelihood of the exclusion applying (particularly if a judgment is required) is relatively remote and in light of the confusion created particularly by the "purposeful violation of law" exclusion in the context of employment claims.

In most discrimination claims, the plaintiff must prove intentional discrimination, which generally means an intent to commit the act regardless of whether the defendant knew the act was illegal. The "purposeful violation" and similar exclusions are not intended to apply to all discrimination claims simply because intent is an element of the cause of action. Rather, they are intended to apply only where the insured intended to violate the law or harm the plaintiff.

3. Ordinary Business Expense Exclusions. Numerous other exclusions are included in order to avoid the policy responding to an ordinary business expense. Examples include:

The cost of reasonable accommodation for the disabled (some policies limit this exclusion only to accommodating facilities for the disabled);

• Breach of contract;
• Violations of the Fair Standards Labor Act (which requires certain minimum wages, regulates employment of minors, etc.), although the Equal Pay Act portion of the statute is excepted from the exclusion;
• Violations of the National Labor Relations Act (which generally regulates union-related activities);
• Violations of the WARN Act, which generally requires advance notice prior to facility closings;
• Violations of COBRA, which allows employees to continue benefits after employment termination;
• Large layoffs, plant closures, strikes, and in some policies, financial insolvency, each of which create risks which some underwriters view as either unacceptably catastrophic or at least to some extent within the control of the insureds;
• Cost of non-monetary relief for the claimant;
• Cost of continued employment of the claimant;
• Cost of non-wage benefits due the claimant, although some policies except from the exclusion wrongfully denied family or medical leave benefits and/or wrongful termination claims.

The exclusions for large layoffs, etc., benefits due, and breach of contract are included within only some EPLI policies, whereas the remainder of these "business expense" exclusions are included in some manner in virtually all EPLI policies.

4. Retaliatory Exception to Exclusions. In addition to the exceptions noted above, many policies except from several exclusions (i.e., cover) claims for retaliatory treatment against an employee who, for example, reports a pollution incident or exercises his or her rights under various statutes otherwise listed in an exclusion.

G. RETENTION
The retention amount under an EPLI policy is generally quite large, ranging from a mid-five figure amount for small companies to up to $1 million or more for large companies which want to self-insure most of their EPLI exposures. These large retentions are generally viewed as appropriate in light of the large amount of low severity employment claims which would be extremely expensive and cumbersome to insure. The retention is generally the same for all insureds (including individual directors, officers and employees). At least one policy form applies a higher retention for class action lawsuits than for other types of employment-related claims.

The high retention creates difficult claims handling issues in at least two respects. First, insureds are required to give the insurer notice of a Claim as soon as practicable. Because most policies define "Claim" quite broadly (as described above), the insured is obligated to notify the insurer of many small employment-related disputes which in all likelihood will never exceed the retention. Such a reporting obligation can be quite burdensome for both the insureds and the insurer. If the insureds decide not to report its small disputes in light of the large retention, it may jeopardize coverage if that small dispute unexpectedly blossoms into a large loss exceeding the retention.

Second, the insurer's duty to defend typically applies independent of the retention and therefore the insurer has the right and obligation to select defense counsel even if the claim is likely to be fully resolved within the large retention. Thus, the insurer selects defense counsel, but the insureds pay the defense costs up to the retention.

Both of these issues exist under virtually all EPLI policies. Insureds should at least understand and perhaps seek to address these issues with special policy language which, for example, does not require notice and does not invoke the duty to defend unless the claim is reasonably likely to exceed a defined amount of loss. At least one EPLI policy form permits the insureds to report annually at the end of each Policy Period a bordereau of Claims which are reasonably expected to involve total loss of less than a defined dollar amount; all other Claims must be reported as soon as practicable throughout the Policy Period.

H. NOTICE
In addition to the aforementioned notice of claim issue, some policies treat notice of potential claim differently. In order to avoid the EPLI policy effectively become a pseudo occurrence policy, a few EPLI policies do not allow insureds to give to the insurer a notice of circumstances that could give rise to a claim. Most policies, though, recognize such a notice of potential claim.

I. OTHER INSURANCE
Most EPLI policies do not attempt to coordinate coverage under that policy with concurrent coverage also afforded by the same insurer under a D&O or fiduciary liability policy issued to the same insureds. Because an EPL claim frequently is covered under both the EPLI and the D&O and/or fiduciary policy, the lack of such a coordination provision creates potential confusion and disputes regarding which coverage applies first. This issue can become important since the different policies frequently have different retentions, limits of liability, exclusions, and defense provisions and since D&Os may wish to preserve the D&O limit for other potential claims. A few EPLI policies which are marketed in tandem with a D&O and fiduciary policy, provide that an employment claim triggering coverage under two or more policies is first treated as covered only under the EPLI policy and the D&O and/or fiduciary policy is triggered only if the EPLI policy is exhausted.

This issue is particularly problematic if the EPLI and D&O policies are purchased from different insurers, thus increasing the potential that each insurer will expect the other to first respond to the claim.