Co-authored by Lillian Romero Gomez/ Jessica Gomez, Esq.
Two important insurance coverages that every organization needs to consider are Directors & Officers (D&O) and Employment Practice Liability Insurance (EPLI). There is no such thing as a “standard” D&O and EPLI policy form. Every insurance company writes their own coverage terms and conditions. It is important to note that most California D&O policies are written on a claims made coverage form. Organizations also need to pay special attention to the details of their policies regarding Prior Acts Coverage and the policy Retro date.
Understanding the D&O and EPLI insurance coverage forms and exclusions are key to an effective Risk Management Plan. EPLI and D&O Insurance policies can be purchased separately or can be combined under one policy. Some companies will also include Fiduciary Liability in combination with the other coverages.
Below are important issues to consider when reviewing your D&O/ EPLI policy:
1.Is the cost of Defense paid outside policy Limits? The average cost of defending an employment claim that goes to trial is $150,000. A jury could potentially award one million dollars. If your policy liability limit is one million your organization may be required to pay the expense of your attorney. A policy that has defense outside the limit will pay for both the one million dollar award and the cost of the attorney defending your case plus expenses. When possible, purchase a policy with defense costs outside the policy limits.
2.Duty to defend? Policies containing this explicit wording obligate the insurance company to assume control of the claim defense process, including selecting counsel and paying legal bills.
3.Deductibles (retention): Make sure that the deductible is reasonable and can be paid by your organization. Many EPLI policies carry retention limits in excess of $25,000. Always discuss deductible amounts with your board of directors and attorney.
4.Broad definition of insured? Make sure that the policy definition of insured covers the nonprofit, organization, business entity, directors, officers and employees (including full-time, part-time, seasonal, temporary, leased and loaned), volunteers, committee members, interns, students-in-training, and spouses
5.Coverage extends to third-party Harassment: Third party harassment usually occurs when an outsider such as customers, clients, vendors, and suppliers accuse your employee of harassment.
6.Broad Employment Practice Liability coverage- Since D&O/ EPLI do not have a standard coverage form, each insurance company can select how they will provide coverage. The insurance company may have conditions that only cover specific type of claims and not cover others. Find a policy that has broad employment practice liability coverage and covers different types of claims rather than a narrow definition of what it will cover. Review this coverage form with your attorney and insurance broker.
7.Separate or Shared Liability Limits- Some companies offer shared limits which combine EPLI and D&O liability. Others provide separate liability limits for each line of coverage. In other words, your EPLI and D&O would each carry their own separate limits under one policy. Discuss with your board of directors and attorney which option makes sense for your organization.
8.NO “Hammer Clause”- This type of clause limits the insurance company’s liability should your organization refuse to accept a settlement offer. The primary intent of the clause is to give the insurance company control of settlement. If your organization does not accept the settlement offer and the claim proceeds, the insurance company may refuse to pay for any more costs that occur after the initial settlement. Review this clause with your attorney,
9. Is there a Wage and Hour Defense Limit? Wage and Hour lawsuits are financially devastating because of the potential for a class action and hefty fines. In California, no insurance company covers wage and hour liability claims under its policy limits. However, some insurance companies will provide a limited defense sublimit to defend your organization against the suit.
10.Does the carrier offer additional employment risk management consultations? While insurance should be part of your risk management it should NOT be your risk management plan. It is important to see what additional services your insurance company offers for effective risk management. Many insurance carriers will offer free legal consultation or HR support on employment related matters.
Understanding your insurance coverages and exclusions are key to an effective Risk Management Plan. Your Board of Directors and attorney should be informed of coverage limits, terms and conditions. Call us if we can be of any assistance or if you would like a quote. We are here to help.