EPLI: What Is It? Do You Need It?

Employment lawsuits account for a staggering 30% of all civil litigation in the United States today.  In this lackluster economy, people who lose their jobs or suffer other adverse employment actions have real incentives to file lawsuits against former, current, or even prospective employers (as do their contingency-fee lawyers).  This is especially true in California, with its generally “employee-friendly” labor laws.  In this climate, it is not surprising that demand has grown for an insurance product known as Employment Practices Liability Insurance, or “EPLI” for short.

What Is EPLI?

EPLI is a type of insurance offered to employers to cover claims resulting from an employer’s “wrongful act” and/or violation of an employee’s legal rights.  Typically, EPLI covers claims concerning employment actions or practices, including wrongful termination, sexual harassment, discrimination, breach of employment contract, wrongful infliction of emotional distress, and a variety of other employment-related claims.  The insurance can be a rider to a company’s standard CGL policy, or a separate “stand-alone” policy.
While there may be an overlap in coverage with other insurance products (such as CGL insurance and D&O insurance), both CGL and D&O insurance policies typically exclude employment claims from coverage (unless specific endorsements are purchased).  Even a stand-alone EPLI policy typically contains exclusions for certain claims — such as wage and hour claims.  It is therefore vital for any employer purchasing EPLI to thoroughly review the policy — or even have its legal counsel thoroughly review the policy — to ensure that the policy will meet the employer’s needs.

How Does EPLI Work?

A standard EPLI policy generally covers the employer named on the policy as well as its employees, subject to certain specified exclusions.  EPLI policies generally obligate the insurance carrier to pay damages resulting from the “wrongful act” or acts to which the policy applies, but EPL insurance does not cover equitable relief such as job reinstatement or an injunction against future wrongful employment practices.  The type of damages covered by a EPLI policy (such as compensatory damages, consequential damages, or punitive damages) will generally depend on applicable state law.  Many EPLI policies also obligate the insurance carrier to pay for “loss,” which includes defense costs and other damages, such as front pay and backpay; however, the concept of “loss” usually does not include stock benefits, fringe benefits or deferred compensation.  As with most insurance, EPLI policies typically include a deductible that must be satisfied on a claim before the insurance carrier will pay out.

Generally, EPLI policies are written on a “claims-made” basis, which means that the policy only applies if a claim is made against the insured during the policy period.  “Claims” under a claims-made policy usually include a lawsuit, a demand, or other kinds of proceedings initiated by an employee alleging an injury (such as arbitration or administrative proceedings).  A claim is considered “made” when notice is received by the insured employer.Some EPLI policies are written on a “claims made and reported basis,” meaning that the insured is also required to report the claim to the insurer within the policy period (or any grace period provided under the policy).  Under those policies, a claim is eligible for coverage when notice of the claim is received by the insured employer, and the employer reports the claim in writing to the insurer.  Failure to  timely report an employee’s claim to the insurer can be fatal to the employer’s demand for coverage under the policy.

Because EPLI policies are generally written on a “claims-made” basis, employers need to be aware and give timely notice of potentially covered claims, even if no litigation is anticipated.  It is not uncommon for an employer to believe that an employee grievance has been resolved in a satisfactory manner, only to have the grievance resurface later in an administrative filing or lawsuit, commenced after the expiration of the EPLI policy period.  In such cases, the employer is at risk of a denial of coverage due to late notice.  When in doubt about a troubled employee’s future plans, it is prudent for the employer to notify the insurer of the potential claim.

What is covered and what is not covered under EPLI can be tricky.  For example, some EPLI policies are silent on claims concerning wrongful termination of an implied contract, or wrongful disciplinary actions or demotions, while others are not.  If a company has a “tenure” policy, then it should also make sure that the EPLI policy covers “failure to grant tenure” claims.  Employers should also be aware of the common exclusions on EPLI policies, such as punitive damages and multiple damage awards exclusions, intentional acts exclusion, statutory benefits exclusions including ERISA, COBRA, OSHA, and Workers Compensation claims, ADA exclusion, contractual liability exclusion, and criminal, fraudulent, and malicious acts exclusion.

Some EPLI policies allow the insured to elect its own counsel in the event of a lawsuit, instead of having to use counsel selected by the insurer.  While there is an advantage to being able to elect one’s preferred legal counsel, EPLI policies are typically written on a “self-consuming” or “burning limits” basis, so that the insurance available to settle or pay damages on a claim will be reduced by defense costs, including legal fees, expert witness fees, and the like.  Naturally, these types of policies require close scrutiny of defense counsel’s litigation activities as the lawsuit progresses.  Finally, employers must be mindful that some EPLI policies allow the insurer to settle a claim without the policyholder’s consent, while others require the employer’s agreement.

The Insurer’s Duty Under an EPLI Policy

As with most insurance, the carrier has two primary duties under an EPLI policy:  the duty to defend and the duty to indemnify.  The duty to defend is the duty to retain and pay counsel to defend the insured against any suit seeking damages on a potentially-covered claim.  A “suit” is construed broadly to include not only civil proceedings, but alternative dispute resolution proceedings (including mediations and arbitrations), as well as administrative proceedings (including EEOC investigations and hearings).

From the employer’s perspective, one of the possible drawbacks of EPLI is in the area of indemnification — or, simply put, paying the amount of any jury verdict.  Under California Insurance Code section 533, an insurer is not liable for loss “caused by the wilful act of the insured.”  But aren’t most employment actions “willfully” undertaken by the employer?  After all, employers do not accidentally fire their employees; there are investigations, meetings, memoranda to the file, and decisions made up and down the chain of command, before the intentional termination of employment.  How can such intentional conduct be covered by insurance?  As it turns out, the courts have looked at this issue on a case-by-case basis, and whether coverage will be allowed depends on the specific claim involved and the nature of the underlying factual allegations.

For example, in a sexual harassment case, where the court found that there was a consistent course of intentional sexual harassment that was ratified and condoned by the employer, the court let the insurance company off the hook on its EPLI obligations, based on Insurance Code section 533.  (Coit Drapery Cleaners, Inc. v. Sequoia Ins. Co. (1993) 14 Cal. App. 4th 1595.)  But it has also been held that EPLI coverage may exist for sexual harassment claims when they do not necessarily implicate intentional or willful misconduct on the part of the employer.  (See Markel American Ins. Co. v. G.L. Anderson Ins. Services, Inc. (2010) 715 F. Supp. 2d 1068.)

Some courts have held that disparate treatment in violation of employment discrimination statutes may constitute “wilful acts” barring insurance coverage.  In B & E Convalescent Center v. Sate Compensation Ins. Fund (1992) 8 Cal. App. 4th78, the Court of Appeal denied insurance coverage for an employer because the employee’s termination was undertaken with the intent to interfere with protected labor union rights and/or to discriminate on the basis of gender, age, or ethnic origin.  The court held that such conduct is “inherently harmful” and “necessarily involves willful and intentional misconduct.”  In contrast, disparate impact claims (which allege that facially-neutral employment practices have the effect of harming a protected group) are subject to coverage, despite Insurance Code section 533.  Likewise, the Insurance Code does not bar indemnification based on wrongful conduct of lower-level employees that the employer did not authorize or ratify.

Employers should understand that the issue of whether an act will be construed as a “wilful act” under California law, thereby barring indemnification, requires a thorough, fact-specific analysis.  As a result, the answer will not always be clear-cut.

How Much Does it Cost?

Several factors drive the cost of EPLI coverage, including the company’s size, the number of employees, the company’s core business or industry, the company’s claims history, hiring and firing practices, turnover rate, and the nature of the company’s written policies and procedures.  Generally, the larger a company, the more employees in its employ, the higher its turnover rate, and the fewer written policies and procedures that are in place, the higher the coverage cost will be.  According to one insurer, annual premiums on an EPLI policy have recently ranged from $2,000 to $4,000 for companies with 5 to 20 employees; for larger companies, the annual premiums start as high as $15,000.

To Buy or Not to Buy

One prominent plaintiff’s employment attorney who spoke at a recent seminar made three noteworthy points about EPLI: (1) any employer with more than 10 employees should have EPLI; (2) one of the first things plaintiffs’ lawyers look at, in deciding whether to take an employment case, is whether the defendant-employer has EPLI; and (3) some lawyers will only file a lawsuit if the employer is insured with EPLI.Of course, the opinions listed above are those of just one lawyer, but they do raise an interesting question:  if some plaintiff’s-side lawyers will sue only those employers who have EPLI, does obtaining the insurance increase the employer’s chances of being sued?  On reflection, the same can be said of personal-injury cases:  there are probably many contingency-fee lawyers who will lose interest in a good PI case, upon learning that a target defendant is uninsured.  The fact that 50% of today’s EPLI claims are made against small businesses is a testament to the fact that many small businesses consider this type of insurance to be a valuable component of their insurance portfolios.


Whether or not an employer decides to purchase EPLI, the first line of defense against employment claims is still the existence of adequate personnel policies and procedures.  For employers who already have employee handbooks and guidelines in place, it is good practice to have human resources and/or legal counsel conduct periodic reviews to tighten up the language, and to update the policies and provisions to comply with ever-changing employment laws and regulations.

As for employers who do decide to purchase EPLI, it is essential for them to review (or have legal counsel review) the policy language in detail, so as to fully appreciate the terms of the policy and coverage issues that may arise in the event of a claim. And finally, in the face of a potential claim or lawsuit, prudent entrepreneurs should always evaluate all insurance policies for coverage, and tender that claim! Contact Eva Wong, Esq. by clicking here.

Hourly Rates for Attorneys — The Latest Surveyby Paul S. Marks, Esq.

There has been a lot of press over the past few years about alternative billing arrangements for legal services, such as flat fees, contingency fees, sliding scale arrangments, equity transactions, and the like.  Some observers say that these alternatives are sounding the death knell for the billable hour;however, the fact remains that, in corporate law and business litigation, attorney fee agreements based on hourly rates remain the norm.  So what are average hourly rates looking like these days?Based on the most recent information available, some legal consumers may conclude that hourly rates are defying the laws of gravity.

Here is a chart based on information compiled by Valeo Partners, a consulting firm located in Washington, D.C., showing the results of its recent survey of 550 law firms nationwide; this chart depicts average rates in three major legal markets in California, compared to national trends:

Those who use the services of the law firm that publishes this newsletter will be familiar with hourly rates that begin under $300 per hour, and top out below $500 per hour.  By that standard, the rates in the Valeo Survey seem quite high.
To be fair, a detailed compendium of hourly rates called the Laffey Matrix, prepared each year by the United States Attorney’s Office for the District of Columbia, shows much lower rates.  However, the Laffey Matrix is intended to be used for attorneys’ fee awards in federal court cases, and does not purport to show what private lawyers charge their private clients.  The Valeo Survey seems to demonstrate that hourly rates for lawyers and law firms are on the rise again.