A few months ago I wrote an article about a number of coverage differences and policy details. To further this idea, I’m going to spend a bit more time on Employment Practices Liability Insurance. The reason is that there are more different policies from different carriers offered to dealers for this coverage than any other.

The dealer specialty carriers all offer employment practices coverage that has not changed too much in the last few years. However, if you have a stand-alone policy the coverage offered can vary rather dramatically. We will address a few of these topics but rest assured there are even more “devils in the details.”

Occurrence vs. Claims Made

This is the first question you should ask. Is the policy an Occurrence Policy or a Claims Made Policy? If you have a stand-alone policy it is almost certainly a claims-made policy. Many, but not all of the dealer specialty companies offer occurrence policies. It is rare to see any insurance company offered occurrence employment practices coverage. While occurrence coverage is preferred, it is not necessary for you to have a high quality policy.

An occurrence policy works just like most of the rest of your liability coverage. The policy in force at the time of the alleged act is responsible for the claim. It doesn’t matter when the claim is filed, what does matter is when the occurrence that caused the claim happened. Claims-made policies on the other hand pay if the claim was made during the policy period and the claim occurred after the retro-date. The retro date is usually the date you began your first claims-made policy. Here’s the rub. If you move from a claims-made policy to an occurrence policy there can be a gap in coverage if a claim is made after the claims-made expiration but the occurrence was during the claims-made policy period. You can buy a tail or extended reporting form to cover this gap but it will cost you around one year’s premium or more. So this is something to keep in mind when you consider moving from an occurrence policy. If a year or two later you want to move back to the carrier with an occurrence form you can expect to pay a significant premium for the tail coverage.

Exclusions

Over the last few years some of theses policies have become more and more complex. As new issues and claim scenarios arise, insurers decide whether they want to continue to cover those claims and alter their policies accordingly. You would expect when this situation arises, they would just add an exclusion in the exclusion section, so it would be easy to find. Often this is the case. But more and more often we are seeing exclusions buried in the definition of coverage. In my opinion this is deceitful, but they don’t ask me. In any case it is still an exclusion. Just as important as a literal exclusion is an implied exclusion within a limited definition. Occasionally we run across a policy that has a very limited definition of employee. As a result their may be no coverage for prospective employees or past employees. This may eliminate coverage for accusations of discrimination or harassment during the interview and hiring process. It is important that both past and prospective employees are covered.

Defense Limits

Defense limits, what the insurer will pay to attorneys for your defense, call either fall outside the policy limits or within them. If you have a $500,000 policy with defense outside the limits, this means that you have $500,000 to pay the claim and legal fees are paid in addition to that. Using the same policy, defense inside the limits means that you have $500,000 to cover both your settlement or judgment and legal fees combined. Therefore, if you are looking at a policy where defense is within the limits, you should consider whether or not you need higher limits than for a policy where legal fees are in addition to your limits.

Third-Party Liability

While the policy is called “employment practices,” it can be much broader than that. Many states say that you owe all the same duties to a customer that you owe an employee. That’s where the term third party comes in. Some policies offer third party coverage and others excluded it. While even more policies offer some coverage that may be limited by additional exclusions and lower insured limits. We have seen claims where a customer has accused a dealership employee of harassment. But the uglier problem is lawsuits alleging a violation of laws applicable to financing including discrimination. Often this exclusion is buried in an obscure part of the policy. In the same vein are exclusions that relate to class-action or group suits. Needless to say the preferred policy offers full third party coverage without financing and discrimination exclusions.

Punitive Damages

Are punitive damages covered or excluded? Of course you want them covered. Some sates however do not allow insurers to pay punitive damages, but others do. A few states allow punitive damages to be paid by insurers for some allegations but not others. You should check with your legal counsel if your insurer is excluding punitive damages but tells you not to worry because the state won’t let the insurer pay them anyway. On a few occasions we have seen policies that cover punitive damages for most claims but do exclude the coverage for third party claims. The exclusion, by the way was buried in the definitions and not listed as an exclusion.

As you can see there are any number of exclusions, limitations and policy language that can limit your coverage. There is no “standard form” of Employment Practices Liability Insurance. So take the time and ask all the right questions. You might even ask the agent to specifically point out the coverages and exclusions to you.