Employment Practices Liability Insurance – Protection from Litigious Employees

The area of employees’ rights has been a bubbling caldron since the passage of Title VII of the Civil Rights Act of 1964. This federal law prohibits intentional employment discrimination by employers who are engaged in interstate commerce. It also prohibits practices that have the effect of discriminating against individuals.

As new workplace laws have been enacted, the possibility of employers finding themselves on the business end of a lawsuit has increased, especially when it comes to issues regarding discrimination.  It isn’t just about ensuring that all employees have the same rights and opportunities to job access, job security, working conditions and advancement, it also means creating a workplace in compliance with federal guidelines for the employment of disabled and mature workers. According to statistics compiled by the Equal Employment Opportunity Commission, from 1992 to 2004, the total number of individual charges of discrimination increased from 72,302 to 79,432 per year. These figures included filings for all types of discrimination.

Of course, it stands to reason that the more personnel policies employers have in place, the fewer the lawsuits filed against them, especially if these policies are outlined in a handbook provided to new employees. Even with the most careful interpretation of the law, however, there can still be instances when an employee can allege discrimination. That’s when an employer will be thankful and reassured they have Employment Practices Liability Insurance (EPLI).

How important is this type of coverage? The answer to that question lies in an examination of the workplace itself. The changing ethnic and racial composition of the workforce mirrors the changing demographics of America itself. Despite the fact that the U.S. workforce on average has a higher educational level than anytime in its history, some problems evolving in the workplace have discrimination at their root. Cultural differences have become an area ripe for discrimination lawsuits. Add to that sexual harassment, age discrimination and bias against the abilities of handicapped workers and employers can find themselves swimming in a sea of legal proceedings.

The focus on workplace litigation has steadily increased as workers have been awarded large damages in lawsuits against companies; human rights organizations have become more vigilant in reporting the actions of multinational companies; and the greater availability of information has provided more awareness of discriminatory activities that might have gone unnoticed in the past. Even the press closely examines the practices of large corporations in this post-Enron society. With all of these preventative measures in place, an employer needs the protection of Employment Practices Liability Insurance for those times when the best laid plans for a non-discriminatory workplace go awry.

Show No Disparity When Dealing with an Aging Workforce

When employers think diversity, most think in terms of sociological factors such race or religion. But there is another type of diversity that’s becoming increasingly more prevalent in today’s workforce and that is age diversity. As Baby Boomers continue to work well past normal retirement age, the phenomenon will become more widespread.

Having the wisdom and experience of a graying workforce population comes with a price. Under the ADEA, it is unlawful to discriminate against a person because of age with regard to any term, condition, or privilege of employment, including, but not limited to, hiring, firing, promotion, layoff, compensation, benefits, job assignments, and training.

This aging law was given a new lease on life with a recent Supreme Court decision. In the landmark case of Smith et al. v. City of Jackson, Mississippi, No. 03-1160, a divided Court, by 5-to-3, held that the ADEA authorizes disparate impact claims. The doctrine of disparate impact means that even where an employer is not motivated by discriminatory intent, Title VII prohibits an employer from using a seemingly neutral employment practice that has an unjustified adverse impact on members of a protected class. Of course, employees 40 and older are a protected class. The real Pandora’s Box that was opened by this decision actually lies in the nature of the disparate impact suit itself because unlike disparate treatment claims, disparate impact claims don’t require proof of discriminatory intent. Their emphasis is on whether or not a company’s policies and practices adversely affect a protected group. The claimants must have substantive proof that the disparate impact exists; they cannot just allege that there is the possibility that there may be a disparate impact resulting from the policy or practice. The downside here is that even though there may have been no discriminatory intent on the employer’s part, the fact that the disparate impact exists makes that employer legally liable.

What should employers be doing as a result of this heightened employment practices liability? The first response should be to review benefits, compensation and employment policies and practices to determine if there is any disparate impact on older workers. You will also need to perform a statistical analysis to prove the inaccuracies in the data of any potential claimant. A current statistical analysis will also evaluate whether there is the potential for disparate impact on older workers from a particular workplace policy or procedure in the future.

The next step you need to take is to talk to your agent about Employment Practices Liability Insurance (EPLI). Most comprehensive general liability policies exclude employment-related claims. Although a directors and officer’s policy may offer some form of protection, it won’t cover the business entity itself. Other forms of insurance, such as fiduciary liability coverage, usually want cover these types of claims either.

What an EPLI policy does is provide coverage for the cost of defending against and/or settling various types of claims, including discrimination, sexual harassment and wrongful termination. The majority of EPLI policies require the insurer to defend an employer against covered claims. The insurance company usually has the right to select the defense counsel. EPLI insurers typically have pre-approved, panel counsel hired to defend their clients. The cost of defense lessens the amount for settlement, so having an EPLI policy will actually encourage out of court settlements.

Most Companies View Employment Liability Claims Through Rose Colored Glasses

“It will never happen to me” is a multi-purpose rationale people use to avoid doing what they know they should, especially when it is difficult or requires extra effort. Interestingly this rationale also applies to small and medium-sized businesses wanting to avoid the issue of employment practices liability (EPL).

Research proves there is no reason for employers to adopt such a rosy outlook. According to November 2005 figures from Jury Verdict Research, the average compensatory jury award for employment practices liability lawsuits has risen by an annual average of almost 5 percent. The average amount for these awards in 1998 was $164,200, which rose to $218,133 in 2004. A significant factor in this trend has been the U.S. Equal Employment Opportunity Commission’s aggressive approach in prosecuting offenders. The agency obtained an unprecedented $168.1 million in awards in 2004.

Jury Verdict Research went on to note that since 1998 the most frequently targeted businesses are retail and service companies. Although these lawsuits outnumbered those brought against manufacturing and industrial companies by more than three to one, the average awards against manufacturing and industrial companies were far higher. Awards in manufacturing and industrial company suits averaged $250,000, as compared with $137,853 for retail and service companies.

With statistics such as these, why would any business risk liability when it comes to employment practices? Specialty insurer Beazley commissioned research to find the answer to that question. What they discovered was that many small and mid-sized businesses have developed a sense of prosecutorial immunity from the media’s bias toward reporting only awards against Fortune 500 corporations. This reinforces the impression that EPL claims are only a problem for large companies that maintain public visibility.

What should a small company do to protect itself from EPL claims? Start by reducing your exposure with a comprehensive employment practices program. Your program should not only spell out company policy, but must be specific in terms of the consequences for violating that policy. The next step you need to undertake is to protect your company’s financial assets. You can transfer this risk by purchasing Employment Practices Liability Insurance. While sound employment practices and well-trained managers can help reduce the risk of EPL suits, if an employee feels they have been unfairly treated, they can take legal action at the drop of a hat. For this reason you should consider the financial protection an EPLI policy provides.

Median Employment Lawsuit Damages Continue to Rise

According to the 2005 edition of Employment Practice Liability:  Jury Awards Trends and Statistics, damages awarded for employment-related lawsuits were approximately 20 percent higher in 2004 than the year before.  While actual damages rose, the percentage of plaintiffs winning their cases dropped slightly.

For 2004 the median jury award for employment-related lawsuits was $218,133, compared to $182,131 for 2003.  The probability of a plaintiff winning their case continued to decline at 63 percent and has decreased seven points since hitting 70 percent in 2002.

Most awards were in the $100,000-to-$249,000 range (22 percent) and $250,000-to-$499,000 range (17 percent), according to the report.

A breakout of the various types of employment-related cases along with median awards follows:

Employment-Related Lawsuits



 Median Award


 $          270,000

Discrimination (Overall)

 $          187,583


 $          262,405


 $          211,272


 $          186,250


 $          138,880


 $          101,563

Retaliation (Overall)

 $          140,000

Wrongful Termination

 $          125,880


Source:  Employment Practice Liability:  Jury Awards Trends and Statistics, 2005, Jury Verdict Research, Horsham, Pa.

EEOC Casting a Bigger Net to Catch Systemic Discrimination

Commissioner Stuart Ishimaru of the U.S. Equal Employment Opportunity Commission issued a stern warning to American businesses when he spoke at the Employment Practices and Fiduciary Liability Symposium sponsored by the Professional Liability Underwriting Society. He cautioned that the EEOC is shifting its focus from small individual cases to larger systemic issues, even some that will cut across entire industries. He added that the change in emphasis was the result of limited resources that were stretched too thin to fight all potential employment discrimination cases.

Commissioner Ishimaru also noted that the agency needed to choose its targets more carefully, especially in litigation. In order for the EEOC to change attitudes and deter bad behavior in employment practices, targets must be bigger than they’ve been in the past. To that end, the agency has adopted recommendations from an internal task force report that focuses on strengthening its nationwide approach to investigating and litigating systemic cases.

The task force was established in 2005 to examine the EEOC’s systemic program and recommend new strategies for handling this type of employment discrimination. The task force worked for nearly a year, conducting interviews, holding focus groups, and polling EEOC staff. One of the outcomes of their work was a specific definition of systemic cases as a “pattern or practice, policy and/or class cases where the alleged discrimination has a broad impact on an industry, profession, company, or geographic location.”

Another outcome was a plan to revitalize the agency’s systemic program by having district offices analyze data to spot problems within their regions’ industries.Most employers are required to file an EEO-1 report that breaks down race, gender and ethnic composition of employees. These EEO-1 statistics will be used to uncover problem employers and industries. In addition, members of the EEOC Commission and employees involved in outreach will be encouraged to educate employers and other members of the public about systemic discrimination, including trends and issues the agency has identified and cases the agency has handled.

Commissioner Ishimaru also hinted at the possibility of the EEOC using testers either directly or indirectly in enforcement. Testers are job applicants with similar resumes but different races or ethnic backgrounds that apply for the same jobs.

In addition to those changes described above, the Commission also approved some other significant operational changes:

  • Systemic investigations and litigation will be conducted in the field, and the systemic investigation and litigation units in headquarters will no longer exist.
  • Each district in the field must develop a plan that will ensure the Commission is identifying and investigating systemic discrimination in a coordinated and effective manner throughout the agency.
  • The Office of General Counsel should staff systemic cases using a national law firm model, meaning that cases will be staffed with employees who have the expertise suited to each particular case.

The most significant change in this overall shift in focus is the decentralization of the agency. Field offices are expected to handle all systemic investigations and litigation. They will be partnering to share expertise, in order to maximize resources. Headquarters will now assume a secondary role as a provider of assistance and support for the field offices’ systemic program.

Third Party Coverage Is a Key Coverage of Employment Practices Liability Insurance

The purpose of third-party coverage in an Employment Practices Liability (EPLI) policy is to protect an organization and its employees from accusations of wrongful acts committed against customers, clients, vendors, and suppliers. Some EPLI policies also cover wrongful acts committed by third parties against the insured’s employees.

Harassment and all forms of discrimination are covered under wrongful acts. Discrimination claims include discriminatory practices against a person based on their race, religion, age, sex, national origin, disability, pregnancy or sexual orientation. Harassment involves unwanted sexual advances or requests for sexual favors. Both verbal and physical conduct, as well as other forms of harassment that create a hostile or offensive work environment, are covered. Some policies also cover accusations of mental anguish, emotional distress, humiliation and assault.

If your organization has a lot of interaction with the public, it is especially vulnerable to third-party claims like those described above. In some cases, EPLI carriers may not provide third-party coverage to firms with a high potential for claims. What they might offer instead is limited coverage, such as covering accusations of discrimination, but not harassment claims.

To protect your organization from third-party claims, you need to go beyond just purchasing coverage. You must implement policies and procedures that address discrimination and harassment issues, both from the standpoint of an employee’s actions and the actions of third parties. EPLI insurers are increasingly requiring employers to implement these practices before they will issue a policy.

Having policies in place will offer little help to stop third-party claims if employees aren’t adequately trained. New employee orientation programs should include a presentation outlining the organization’s harassment/discrimination policies. The training must also include how to report and handle a third-party claim. However, hearing the information once is not enough to insure compliance. Employees must be periodically retrained through departmental meetings. To maintain the effectiveness of departmental training sessions, be sure that supervisors are provided with copies of all policy updates and procedural changes.

One important caveat to keep in mind is that most EPLI policies don’t provide third-party coverage for accusations involving the violation of the Americans with Disabilities Act. Nevertheless, you should review your EPLI policy’s definition of a claim to determine the policy’s interpretation. Many policies define a claim as a “demand for monetary damages.” This definition can present a problem in an ADA claim, because many of these claims are asking for reasonable accommodations, not monetary awards. That’s why it is important to ensure that your policy’s definition of a claim includes claims for non-monetary damages. A policy with this expanded definition will cover defense costs and indemnity connected with an ADA claim, but will not provide the funds to bring your organization into compliance with the provisions of the law.