EPLI Part 2: Unique Coverage Issues

EPLI coverage forms present some unique coverage issues that ordinarily are not present under typical, general liability policies. These issues include those that arise under the claims made nature of many EPLI policies, the special trigger issues that are presented with many employment claims, the effect of eroding limits policies, provisions that permit the insured to retain its own defense counsel and that require consent of the insured to settle claims. We discuss each of these below and attempt to point out some of the common issues that arise, along with some suggestions for how the insurer should address these issues.

Claims Made Forms

Most EPLI coverage is written on claims made forms. These types of EPLI policies provide coverage for claims reported during the policy period. Most claims made polices also provide at least some coverage for acts that occur prior to the policy period, but that are reporting during the period, which is known as “prior acts” coverage. Normally such coverage is only available if and to the extent there was a claims made policy in effect immediately before the current claims made policy. Prior acts coverage is often limited by a “retroactive date”, which bars any claims that arise before such date, such that coverage is provided from the retroactive date to the current policy period.

Trigger Issues

Coverage is triggered based on specific policy language, which ordinarily specifies those events that trigger coverage. Examples may include the receipt of a demand letter, filing of an administrative charge, filing a lawsuit. Under many polices an oral demand does not trigger coverage, although careful review of the policy language should be undertaken to determine if such a demand may trigger coverage and corresponding reporting obligations to the carrier in order to secure coverage and a defense. An insured’s failure to promptly report a claim made, in accordance with all the terms and conditions of the applicable policy, may jeopardize coverage. Insurers should carefully investigate when the insured first had notice of a claim, not only for purposes of evaluating coverage for a specific claim but also in determining if the insured may have made misrepresentations in its application for insurance by not reporting a claim or charge of discrimination, which although not yet in litigation (or even not having made a demand for settlement) has nevertheless been asserted and potentially triggered coverage, or is a basis for showing that the insured made misrepresentations on the application for insurance, potentially rendering the policy void ab initio.

This issue is governed by how the policy defines a “claim”. For example, the Missouri courts have addressed what is a “claim” under a claims made policy providing employment liability coverage. Grissom v. First Nat. Ins. Agency, 371 S.W.3d 869 (Mo. Ct. App. 2012). The policy defined a “claim” to include “administrative proceedings” in which “either damages are alleged or fact-finding will take place” (emphasis added). The trial court nevertheless concluded that the insured’s receipt of a notice of administrative proceedings before the Missouri Commission on Human Rights (MCHR) or the U.S. Equal Employment Opportunity Commission (EEOC) did not constitute a “claim”, because neither the MCHR or EEOC had entered findings or awarded damages. The insurer argued this holding was incompatible with the plain language of the policy that defined a “claim”. The Court of Appeals, reviewing the plain and unambiguous language of the policy agreed with the employer, and held that the policy’s definition expressly included proceedings in which an administrative agency has not yet awarded damages or conducted any fact-finding. As a result, the insured was denied coverage for its claim as a result of not timely reporting the claim.

The lesson that insurers should take from Grissom, and other cases holding similarly, is to carefully investigate when the “claim” was first made and received by the insured, or the insured otherwise had knowledge of it in terms of evaluating whether it was timely reported. At a minimum, upon receipt of notice of an administrative claim being lodged with the MCHR, EEOC or similar agency, the insured should promptly report it to the carrier. Depending on the exact language of the policy, and nature of the allegations, there could be a duty to report sooner if the insured otherwise has knowledge of it in terms of an internal complaint, etc.

Eroding Limits Policies and the Potential for Insurance “Bad Faith” and Extra-Contractual Liability

Common EPLI policy forms include the costs of defense, including attorney’ fees, and other expenses as covered “losses”, which diminish the limits of insurance. EPLI policies also often carry larger deductibles, or sometimes true self-insured retentions – deductibles of $25,000-$35,000 are not unusual – which an insured must satisfy itself before the carrier is obligated to pay defense costs, or has any indemnity obligation for settlements or judgments. EPLI policies also typically do not provide coverage for wages, salaries, benefits or expenses of the insured, punitive or other exemplary damages, fines, penalties, taxes, amounts due under an employment contract, stock options, other deferred compensation and injunctive relief (i.e. reinstatement, ADA accommodations, compliance with EEOC consent decrees, etc.)

Although an eroding limits policy is designed to limit total exposure of the insurer, and often has the effect of driving settlement sooner rather than later (thereby reducing defense costs) it is especially important to be sure and determine if this type of policy is implicated early in the case. It is also critically important that the carrier stress to defense counsel to provide it with an accurate, realistic budget, and evaluation of the claims made, so that the insurer can best determine if there is potentially an excess judgment situation. Eroding limits can be problematic in those cases involving a single claimant who alleges especially horrific allegations of sexual violence or the like, or who has an especially strong damages claim. Eroding limits can also be problematic in those cases involving multiple claimants, even if the individual claims taken by themselves may be of dubious value and be defensible, if from an aggregate perspective the limits of insurance may be substantially exhausted not only by the potential indemnity exposure, but also by defense costs, including attorney’s fees. This issue requires the carrier to insist on obtaining a very careful, thorough evaluation of the underlying claims from its defense counsel (in addition to an accurate budget) so that the carrier can make a proper evaluation regarding how to proceed in the best interest of its insured. Otherwise, and while insurance “bad-faith” and extra-contractual liability is not often thought of in the employment context, the insurer can find itself in a position where the insured may, in those jurisdictions where it is possible, enter into a “rollover agreement” or other similar agreement with claimant’s counsel to limit recovery to insurance assets and assign any “bad-faith” claims it has against the carrier to the claimant, thereby exposing the insurer potentially to bad-faith damages and other extra-contractual liability in appropriate cases.

Selection of Defense Counsel

Most carries prefer to select defense counsel from panel counsel they are familiar with and confident are competent to defend complex employment liability matters. However, some EPLI polices permit the employer to select its own defense counsel. This obviously provides the employer with a great deal of control over the defense, and the ability to work with counsel familiar with its personnel and operations. Difficulties can arise with insured-retained counsel in maintaining a positive working relationship with the EPLI carrier, including prompt case evaluation and reporting, which is important in obtaining settlement authority and preparing and trying appropriate cases. It is important that the carrier contact defense counsel at the earliest opportunity in order for the claims handler to be introduced and begin forming a cooperative relationship with counsel to obtain the best possible outcome for the insured.

These issues can present a unique challenge to insurers not with policies that do not permit a choice of counsel. However, the insurer should require retained counsel to be guided by its guidelines and to follow its procedures for reporting, billing, etc. in order to retain as much control as possible. In some rare cases, if the exposure is great enough, the carrier may want to consider retaining monitoring counsel to advise it of developments and make recommendations to it for discussions with defense counsel in order to properly evaluate the case.

The Consent to Settle

Another critical difference found in many EPLI policies, but not in most other commercial insurance policies, is the “consent to settle” provision, which requires the insurer to obtain the insured’s consent prior to settlement of claims. However, most policies contain language that requires that an insured may not “unreasonably” withhold its consent to settle.

Although not a regular occurrence, sometimes the insurer and the employer may disagree regarding whether a claim should be settled. Usually the carrier only wants to settle those claims that can be settled for less than its defense costs, or some other amount it views as reasonable according to its evaluation of the claim. Sometimes, however, the employer may not want to settle a claim because of the potential for setting a “precedent” for future claims. Many polices have a “hammer clause”, which allows the carrier to limit its claim payment to no more than the amount it could have settled the claim for, plus defense costs. Other provisions may permit the insurer and insured employer to “share” the additional defense costs going forward if the insured will not consent to a reasonable settlement recommendation by the carrier.

These provisions too, while attempting to allow the insured to control its defense to some extent can be problematic for the insurer. Many carriers will not force a recalcitrant insured to settle a claim, but may be, depending on the terms and conditions of the policy, free from any additional exposure. Some policies exist that provide the carrier the authority to control settlement similar to a traditional CGL policy, and to settle claims without insured consent. When communicating with a recalcitrant insured regarding settlement, the insurer should carefully determine the type of provision regarding settlements the applicable policy contains so that it can determine its best strategy.

Thorough and timely evaluations by the carrier and its defense counsel are key in those cases whether the consent to settle becomes an issue. If it appears the insured will likely be reluctant to settle a claim that the insurer believes should be settled, the carrier should be sure to properly and thoroughly evaluate its exposure and share that information with its insured. Later if an adverse judgment is entered the insurer will be in a better position to defend any bad-faith claim based on a failure to properly advise its insured of the risk (this is especially true when utilizing panel counsel who are argued to be more “beholden” to the carrier), and help defend any argument by the insured that “of course” it would have settled the claim if the insurer would have shared all the information about the claim and its evaluation of it in its possession.

Although perhaps occurring less often, there are also cases in which the insurer does not believe a claim should be settled and the insured wants to settle. These may be claims in which the insured, or its principal, believe that embarrassing information about it will be disclosed to the public if the claim is not settled before filed in court, even though carrier and its defense counsel have evaluated the case to be of negligible value, and should be defended. Although in these cases the consent to settle provision is rarely directly implicated (since those provisions typically only address the insured’s right to consent to a settlement recommend by the carrier, and not to force the carrier to settle a claim it does not want to settle), insurers should still exercise caution in these situations. Special care should be taken to be sure to evaluate all of the factual information and conduct a careful investigation of the facts to determine if there are any facts potentially missing from the insurer’s evaluation, which are known by the insured, or if perhaps the claim is one that represents the “tip of the iceberg”, and although not asserted yet, the insured fears that additional claims will be made. In these cases, the insurer should be sure to listen to its insured’s concerns, and to elicit any information the insured may have that relate to the claim, or any that may exist, which are similar to it. The insurer should be sure to carefully vet its evaluation of the claim to be sure it has not missed any pertinent facts, which would substantially impact its evaluation of either liability or damages. In this way, the insurer can best protect itself should it choose not to settle the claim, proceed to trial, and end up with an unexpected result. These concerns can be greater of course in those cases in which the insured has an eroding limits policy. Careful evaluation of the underlying claim and the pertinent policy language are crucial to properly addressing these situations too.

Take Aways

Each of the issues discussed above are somewhat unique in the EPLI context, when considered in the light of general liability insurance claims with which most claims handlers are most familiar. Effort should be undertaken by carriers to properly and periodically educate claims handlers to be aware of and sensitive to these issues, some or all of which may arise in the handling of an employer liability claim. Each of them can best be addressed by employing a two-fold strategy. First, ensuring that there has been timely, appropriately frequent, and thorough reporting and evaluations prepared by defense counsel so that the carrier is in the best position possible to determine its recommendation for settlement and request for requisite authority. Second, if issues regarding coverage under the policy arise, or if some of the other issues discussed above are implicated regarding eroding limits, the consent to settle, etc., the carrier should retain trusted coverage counsel to promptly evaluate those issues for it. In this way, by being best informed about the underlying claim and the implications of the policy provisions, the insurer can maintain the integrity of its policy, while acting in the best interest of its insured.

Read EPLI Part 1: Current Considerations

Phil Graham is the chair of his firm’s Insurance Law Team. He regularly represents insurers in bad-faith, extra-contractual liability and other complex insurance coverage matters. He is also a member of his firm’s Labor and Employment Team. He regularly represents and defends management and employers in employment discrimination and other employer liability matters.

Christi Swick is Counsel in her firm and serves on its Employment Law Team. She regularly counsels employers on risk management tools such as personnel policies and procedures, and training. She also defends employers in discrimination cases, contract disputes and traditional labor law actions in both state and federal court.