Employee Claims and EPLI Insurance

Posted on: September 13, 2013

Authored by: Steve Holden, Holden Law Group

Employee claims are an everyday reality for employers in California. Human resource managers in larger organizations are acutely familiar with them. If you own or manage a smaller organization you may have not experienced an employee claim. Count yourself lucky and know that the chances are very good that your good luck will change in the not too distant future.

Many employers purchase Employment Practices Liability Insurance (EPLI) as a risk management tool to address the rising probability of employee claims. EPLI policies are designed to manage the fact that most general business insurance policies exclude employment-related claims. EPLI policies typically cover standard employment claims such as discrimination, harassment and wrongful termination. Many do not, however, cover commonly asserted claims such as wage and hour violations or statutory penalties.

Making good decisions about whether an EPLI policy is necessary and a good fit for your organization requires the assistance of two experts: A knowledgeable and trusted insurance broker and an experienced employment defense attorney. The insurance broker will guide you through the various policy options available and provide a wealth of risk management information. The defense attorney will advise on the real-world impact a particular policy will have when an employment claim arises.

Once you have an EPLI policy, it is critical to ensure that a potentially covered claim is properly and quickly processed both internally and externally. The internal processing involves the communication about and the handling of the claim within your organization. Finance and operations executives tend to be involved in the purchase of and are knowledgeable about the terms of the EPLI policy, whereas human resource personnel tend to be the first to know that an employment claim has been filed. When cross-communication between these two very key company functions is not effective, the result can be an untimely tender of the claim with costly results. External processing involves communicating with counsel and the insurance carrier.

Employers who are serious about risk management should prepare for employment claims before they are even asserted. This will help ensure that the EPLI defense is smoothly instituted and effective. Employers with EPLI policies should follow these preparatory steps.

  • Select Defense Counsel in Advance. If you already use trusted employment law counsel, your carrier may allow you to pre-designate your chosen law firm at the time the policy is purchased or renewed. Some policies allow the insured to select its own counsel without such pre-designation. Asking the right questions of your broker and specifying at the outset the employment lawyer you want is the best way to ensure that you get the defense counsel of your choice.

 

  • Train Staff on Claims Recognition. Train key personnel to recognize a “claim” as it is defined under the EPLI policy. What constitutes a “claim” is detailed in the policy and generally defined very broadly. It may even include pre-lawsuit claims, such as when a discrimination complaint is filed at a governmental agency like the California Department of Fair Employment and Housing. Even a “demand” letter from a threatening employee or lawyer may constitute a claim. Keep in mind that as policies change from year to year, the definition of a “claim” may also change. Key personnel should know what to do when a potential claim is spotted, including the who, what and when of communicating with the insurance broker or carrier.

 

  • Develop Protocol for Receipt and Processing of Claims. Avoid cross-communication mishaps related to EPLI claims and potential claims. Make sure key personnel know their respective roles and when other personnel should get involved. It is a good idea to have a specific person designated to whom all “claims” are promptly forwarded. This way, regardless of how the “claim” is initially received it will immediately be sent to the right person for handling. The protocol should also include things such as identifying the name of the employee who received the claim and the accurate date, time and how the claim was received. This is needed to ensure prompt tender to the carrier and to ensure that subsequent legal steps to defend against the claim are available to defense counsel.

 

  • Be Thoughtful and Precise in “Tendering” Claims to the Carrier. Once a claim arises, carefully consider the requirements in the policy for tendering the claim. This may involve discussions with legal counsel regarding the pros and cons of tendering a particular claim at all and will definitely include advice on how and what to communicate with the carrier. Careful consideration cannot result in much delay. EPLI policies typically require very prompt communication of claims and potential claims. Follow carefully the means and timing of “tendering,” i.e., providing written notice to the carrier, as stated in the policy. A copy of the lawsuit, administrative charge or “demand” letter should accompany the tender. Do not forget to follow-up to ensure that the carrier has received the claim and accepted it.

As a general rule, attorneys’ fees and costs incurred to defend a tendered claim may not “count” against the insured’s retention (deductible) until the date of tender. If you incur attorneys’ fees and costs before the claim is tendered to the carrier, your company will likely have to pay those fees plus the full amount of the retention. Worse yet, if a claim is not tendered in the manner and time frame required by the policy, the claim may be denied.

The great majority of employers in California should at least seriously consider the addition of an EPLI policy, but not just any policy will do. Without the expert guidance of a knowledgeable broker and employment counsel, you might be shelling out premium dollars that do not effectively achieve your risk management objectives. Once you have a policy, the development of effective protocols for handling claims is essential. Those protocols will ensure that claims are not denied and that they are positioned to be effectively defended.

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