Using Insurance to Pay Judgments in Employment Lawsuits: A Guide for Employers

Employment lawsuits can result in substantial financial judgments, especially with rising claims for discrimination, harassment, and wrongful termination. Companies increasingly rely on insurance policies to protect against these liabilities. This article explores how insurance, especially Employment Practices Liability Insurance (EPLI), is used to cover judgments in employment lawsuits, the limitations of such coverage, and key considerations for employers in managing these policies.

Types of Insurance for Employment Lawsuits

Employment Practices Liability Insurance (EPLI) is the primary coverage used to handle judgments and settlements in employment-related cases. EPLI policies cover a wide range of employment claims, including wrongful termination, sexual harassment, and discrimination. Notably, EPLI often covers both the costs of defending against claims and the actual settlement or judgment amount, although policy terms vary widely (Advocate Magazine, Kainen, LLC).

General liability insurance, by contrast, is typically limited to third-party claims such as slip-and-fall injuries or reputational damage through slander or libel. While useful for other claims, general liability insurance does not cover employment disputes, making EPLI essential for employers facing workplace claims (World Insurance).

How EPLI Works in Employment Lawsuits

EPLI policies generally provide two main protections for employers: defense costs and indemnity coverage (for settlements and judgments). When a lawsuit is filed, the insurance company may assume control of the defense, hiring its preferred attorneys. However, policyholders may feel limited by this as insurance companies often select lower-cost legal counsel to manage costs. Employers can negotiate in advance to retain a choice of counsel or other litigation controls when setting up or renewing their EPLI policy (Advocate Magazine, Kainen, LLC).

EPLI coverage is often structured as a “burning limits” policy, meaning that the defense costs reduce the policy’s total available limit. Consequently, higher legal expenses can lower the remaining funds available for indemnity, requiring careful consideration during litigation (Mondaq).

Steps to Access Insurance for Employment Judgments

1. Understanding the Policy: Companies should review EPLI policies to ensure they cover a broad spectrum of employment-related claims. Policies may exclude certain claims, such as those arising from intentional violations, or limit coverage for federal claims like those under the Fair Labor Standards Act (FLSA), making it essential for companies to understand exclusions that could limit payouts.
2. Meeting Self-Insured Retention (SIR): Many EPLI policies include an SIR amount, which is essentially a deductible that the company must pay before insurance kicks in. Only after this threshold is met will the insurer begin covering additional defense or indemnity costs.
3. Policy-Limits Demand: If a lawsuit’s value approaches or exceeds the policy’s limits, plaintiffs may issue a policy-limits demand. This is a strategic move where the plaintiff requests a settlement for the maximum amount covered. Insurers who refuse such demands may risk being sued for “bad faith” if the final judgment exceeds the policy limits, potentially requiring them to cover the excess judgment.
4. Coordination with Insurers: Once a lawsuit begins, employers should work closely with their insurers to negotiate settlements early. This is because protracted litigation costs can deplete the policy limits available for any judgment. Additionally, insurers have a duty to act in good faith to protect the insured by attempting to settle within policy limits if possible (Advocate Magazine).

Limitations and Challenges with Insurance Coverage

Despite the protections offered by EPLI, several challenges exist:

• Control Over Litigation: Because insurance companies often take control of litigation decisions, companies might feel restricted, especially if the insurer’s litigation strategy doesn’t align with the employer’s long-term goals.
• Policy Exclusions: EPLI policies frequently exclude wage and hour claims under the FLSA, meaning that judgments for unpaid wages or misclassification issues may not be covered unless specifically included in the policy. This exclusion is notable given the rise in wage and hour lawsuits.
• Potential for Bad-Faith Claims: When insurers fail to settle within policy limits despite a clear risk of a higher judgment, they may be liable for the entire judgment amount. This scenario arises if the insurer’s refusal to settle within the limits is considered unreasonable or made in “bad faith.”
• Exhausting Coverage Through Defense Costs: Defense costs can quickly exhaust EPLI limits, particularly if the case involves extensive discovery or a prolonged trial. Companies should strategize with insurers to prioritize early settlement discussions to prevent defense costs from consuming the policy’s total limits.

Strategic Use of EPLI and Other Policies

For companies, having EPLI coverage provides financial protection and offers leverage in legal negotiations. Key strategies include:

1. Negotiating Coverage Terms: Companies can negotiate terms, such as the right to select preferred legal counsel, or require that defense costs do not reduce indemnity limits. Understanding how defense costs impact policy limits is crucial for minimizing unexpected liabilities.
2. Settlement Prioritization: Given that defense costs reduce the total coverage, companies are often best served by settling early when possible. This not only preserves policy limits but can also mitigate reputational damage from protracted public lawsuits.
3. Policy Review and Renewal: Employers should review EPLI policies annually to ensure the coverage reflects current employment practices and legal risks. As new regulations emerge and workplace challenges evolve, regular updates to policies can prevent future coverage gaps.

Conclusion

Insurance plays a crucial role in managing the financial risks associated with employment lawsuits. EPLI policies are tailored to cover legal costs and judgments arising from workplace claims, offering significant protection for employers. However, the limitations, exclusions, and complex terms in these policies require companies to carefully negotiate and regularly review their coverage. By doing so, employers can maximize their insurance benefits, safeguard against unexpected liabilities, and navigate the complexities of employment litigation with greater confidence.

Employers should consider consulting with experienced employment counsel and insurance advisors to ensure their policies are comprehensive, tailored to their specific risks, and structured to offer optimal protection in today’s complex employment landscape.

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