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| August 2010, Volume 44 |
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369.1OVERVIEW OF THE ISO EMPLOYMENT-RELATED
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Damage Award |
$1,000,000 |
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Attorney fees |
$270,000 |
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Expert witness expenses |
$67,000 |
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Court costs |
$83,000 |
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Defense expenses |
$218,000 |
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Total |
$1,638,000 |
With the limitation of Acme’s policy, the company’s coverage was sadly inadequate. In this case, Acme would still suffer a serious financial loss (more than $600,000) even though it felt it had protected itself by purchasing insurance.
Example: The insured carries a $1,000,000 limit of insurance on its Employment-Related Practices Liability policy. The policy includes a $50,000 deductible. A claim is filed for $1,000,000 in damages as a result of an age-discrimination suit. The claimant is awarded $1,000,000 and the legal expenses amounted to $500,000. The policy will only cover $1,000,000. The insured must bear the other $500,000 rather than only the $50,000 it expected via the policy deductible.
B. Exclusions
The form contains several, critical exclusions:
1. Criminal, Fraudulent Or Malicious Acts
There is no coverage for criminal, fraudulent or malicious acts or omissions by any insured under the policy. The employer is still covered, however, though its supervisor may have committed a criminal act.
2. Contractual Liability
The ERPL will not cover liability which would not have existed had the insured not agreed to assume another party’s liability under a contract.
Example: Patsy Meeting Consultants, Inc. is insured under an ERPL from Toughluk Casualty. Patsy hired a team of project management specialists to train their staff on handling major convention planning. The training lasted several weeks. Besides the training fees, lodging, travel and meal expenses, Patsy’s contract with the consultants included extending the coverage of their business-related insurance policies (including the ERPL). A few months after the training, Patsy receives notification of a sexual harassment lawsuit. A junior consultant is suing her supervisor, claiming that he forced intimate relations on her throughout the time they were training Patsy’s staff. Patsy forwards the papers to Toughluk along with an explanation of their agreement. Toughluk sends back their response…tough luck, the ERPL doesn’t respond to their contractual obligation. Since the contract is valid, Patsy will have to handle the consultant’s suit on its own.
3. Workers Compensation And Similar Laws. This policy does not intend to cover anything that would be covered in policies written specifically to meet Workers Compensation statutes.
4. Violation Of Laws Applicable To Employers
This particular exclusion is a major component in understanding what is and is not covered by this policy. We will study it in a little more depth.
The policy expects the named insured and those under the named insured’s control to act as a responsible corporate citizen and therefore excludes violation of the named insured duties and responsibilities as required by statutes, rules and regulations issued by the federal, state or local authorities. The named insured is expected to keep up with these statutes and adhere to them. However, if the exclusion ended here there would be no reason for this policy. It goes further and says that if violation takes place in certain areas there IS coverage. The covered items are:
a. Title VII of the Civil Rights Act of 1964 and amendments thereto
b. The Americans with Disabilities Act, the Age Discrimination in Employment Act
c. The Equal Pay Act
d. The Pregnancy Discrimination Act of 1978
e. The Immigration Reform Control Act of 1986
f. The Family and Medical Leave Act of 1993
g. Similar rules or regulations to the above that are put in place by the state and local authorities but only
5. Strikes And Lockouts. Injuries to an employee on strike or lock out, or who has been temporarily replaced due to a labor dispute, are not covered.
6. Prior Or Pending Litigation
7. Prior Notice
Items 6. and 7. were added in ISO’s 2007 program revision.
Section
II—Who Is An Insured
Under the current edition of the ERPL policy, the following are Insureds:
· If the employer is a sole proprietorship, the owner and spouse are Insureds.
· If it is a partnership or joint venture, the entity and its partners or members are Insureds.
· If it is a Limited Liability Company, the entity, its members and managers are Insureds.
· If it is an organization that is not listed above, then the entity plus "executive officers" and directors are Insureds.
Employees and former employees (but only with respect to offenses committed while in the insured’s employ) are Insureds unless otherwise excluded. In the earlier form only managerial or supervisory employees were included. But be aware that there is an endorsement available to restrict coverage to only supervisory employees.
A newly acquired or formed entity is covered. The insurer must be notified as soon as practicable, but no later than 90 days. Coverage does not extend to offenses committed before the entity was acquired.
There is no coverage, however, for any newly formed or acquired partnership, joint venture, or Limited Liability Company.
Note: No past or current entity is covered unless it is listed as Named Insured in the declarations. It is very important, therefore, to be sure that any separate legal entities are included.
Example: Mega Realtors has experienced tremendous growth, establishing branch offices throughout the state. It also buys the land where each office has been constructed. On the advice of its legal department, it decides to form an affiliate, Mega Landholdings. The affiliate becomes the legal owner of the land and offices and Mega Realtors leases the space from it. Mega’s legal eagle, after an annual review of their insurance policies, advises that Mega Landholdings be added as an insured on their ERPL policy.
Section
III—Limit Of Insurance
As noted above, both defense expenses and damages will exhaust the policy limit. The limit is an "aggregate limit" and is the maximum the insurer will pay regardless of the number of insureds, the number of claims, or the number of claimants during the policy period.
Section
IV—Deductible
Prior ISO forms used a co-payment to motivate the insured to control claims. Many insureds were uncomfortable because the co-payment amount is unknown until after the total amount of the claim is known. In response to competition, ISO substituted the use of a deductible in the standard form. However, endorsements are available to provide for a combination of deductible and co-payment or for a co-payment alone. The ERPL policy, as well as some optional endorsements, includes several examples to illustrate how deductibles and co-payments are applied. When both a deductible and a co-payment percentage are used, the deductible is first subtracted from a settlement or defense expense.
Section
V—Conditions
Most of the conditions found in this policy are very similar to those found in other standard claims-made commercial liability policies. We will concentrate only on items that may be somewhat new or different.
B. Consent To Settle
In order to protect its reputation or for other reasons, the insured can prevent the insurer from offering a settlement. However, failure to agree may penalize the employer. If the insurer recommends settlement and the insured declines, the most the insurer is obligated to pay is the amount it would have paid if the insured had agreed to settlement.
J. If You Are
Permitted To Select Defense Counsel
The insurer may permit the insured to select the defense counsel. This happens either by mutual consent or by order of a court or administrative body. When it does happen, the insurer still retains the right to attempt to settle with the claimant, with the insured’s consent and to appeal any settlement at its cost.
Section
VI – Extended Reporting Period
As noted, this is a claims-made form. Before terminating (canceling or choosing not to renew) a policy, the insured should provide for continued coverage from another qualified and reliable source. The insurer must offer to provide an additional period to discover and report claims if the insurer cancels or refuses to renew a policy. The extended period is three years from the termination of the policy. However, the insured must request the extension within 30 days and must pay an additional premium that is likely to be up to 200% of the existing annual premium. If the insured chooses to cease purchasing coverage from the particular insurer, it should negotiate a "retroactive date" with its new insurer that will pick up claims arising from incidents that occurred during the expiring period but for which claims have not yet been made. Be very careful when changing insurers.
Section
VII—Definitions
The following are terms that are unusual compared with a typical liability form and bear special consideration when evaluating ERPL coverage. For detailed information, please refer to PF&M Section 369.4-2, Employment-Related Practices Liability Coverage Form Analysis.
- Defense Expenses
- Discrimination
- Employee
- Wrongful Act
- Suit