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Discrimination Insurance Q & A

1. What is Employment Practices Liability Insurance (EPLI)?

Employment Practices Liability Insurance is a recent invention of the insurance industry, created to protect employers from unexpected losses stemming from discrimination claims. EPLI has become increasingly important for employers as the legal system continues to recognize more forms of discrimination and allows for significant compensation to the victims of such discrimination.

2. What kinds of employment claims might fall under such coverage?

Among the claims that may be covered are: constructive discharge, whistle-blower, retaliation, discrimination (based on gender, race, sexual orientation, etc.), sexual harassment, contract, and statutory (state and federal law) claims.

3. Why purchase EPLI when my business already pays for general liability insurance?

Because it usually doesn't cover workplace discrimination claims. Beginning in the 1990's, juries began awarding large amounts to victims of workplace discrimination. Businesses looked to the courts to decide if their general liability policies covered those claims. The results were varied and unpredictable. This "judge-made" "employment discrimination insurance" could not survive when neither the employer nor the insurer knew what was covered.

4. Should my company simply take its chances?

The answer will be different for every employer. Although recent statistics from the Equal Employment Opportunity Commission show that meritless discrimination claims are on the rise (70.6% of race-based claims, 63% of sex-based claims, and 59.4% of religion-based claims were found to be meritless), payouts for sex-based discrimination claims have doubled to $145.7 million over 15 years. Also, Americans with Disabilities Act (ADA) claims in 2011 resulted in almost $40 million more in payouts than in 2010. Ultimately, every employer will have to decide whether or not to purchase an EPLI policy based on its perception of risk of discrimination claims within its work environment and based on its ability to independently pay for a potential award against it should that risk become a reality.

5. I have very few employees, so do I still need EPLI?

EPLI can be appropriate for a company of any size. Like any other insurance policy, the specific coverage areas, and therefore the premiums of an individual policy, will differ depending on what your company feels it needs to protect against. For example, a small restaurant may want to protect itself from gender-discrimination suits, but may not feel it necessary to have a whistle-blower policy. In short, EPLI can be appropriate for businesses of every scale and are tailored to the risks of the employer.

6. If EPLI is so new, can I really trust it to address my need to be protected from discrimination judgments?

While EPLI is indeed new and relatively few EPLI contracts have come before the court for review, it has become clear that the language of the policy is all-important and requires review. For example, companies that do not rely on traditional employees, but instead use independent contractors or consultants, need to be certain that their policies contain language including such workers under the policy's coverage.

7. What should I be concerned about after purchasing an EPLI policy?

It is essential that your company follow the conditions of the contract. For example, most EPLI's will require an executive officer of the company to provide notice to the insurer of an impending suit within a specified time period. Courts have made it clear that failure to provide notice will absolve the insurer of any liability for coverage it would have otherwise have had. It is also essential that a company disclose to the insurance carrier any potential claims it might have during both the application process (prior claims of racial discrimination, etc.) and while the policy is in effect. Courts have ruled that an insurer can rescind an EPLI contract, effectively leaving the company "on its own" for all discrimination claims against it, when an employer has misrepresented itself in its application by failing to disclose critical information, or by failing to timely give notice of possible claims by "disgruntled" workers, whether terminated or still on the job.

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