The financial services industry has seen its share of employment practices liability (EPL) claims, dating back to a few high-profile gender discrimination class-action settlements (reportedly totaling in excess of $500 million) against major investment banks almost a decade ago, to a $160-million race discrimination class action settlement by another major bank in 2013 and a $18 million sexual harassment verdict against a private equity firm in 2015.
Although many financial institutions (not unlike other employers) have learned some costly lessons and have become best-in-class in managing EPL-related exposures, this risk is still a major thorn in the side of most financial institutions concerned about the reputational damage that can arise from being tossed into the spotlight because of allegations of discrimination or harassment.
In the United States there are myriad employment laws that could form the basis for an EPL claim, but the following are the main federal anti-discrimination laws:
- Title VII of the Civil Rights Acts of 1964 (Title VII) – prohibits discrimination on the basis of race, sex, color, religion, national origin and creed
- Age Discrimination in Employment Act (ADEA) – prohibits discrimination against individuals over the age of 40
- Americans with Disabilities Act (ADA) – prohibits discrimination on the basis of disability
- Equal Pay Act – prohibits discrimination on the basis of gender
- Genetics Information Nondiscrimination – prohibits discrimination on the basis of genetic disease of predisposition.
Each of the above statutes also prohibits retaliation against employees who exercise their rights and/or participate in the investigation of the alleged violation of other employees’ rights under the law.
Virtually every state and country has laws or statutes equivalent or similar to the above. In addition to these laws, employees can also bring common law torts claims against their employers as noted below.
What risks are covered under EPLI policies?
Employment practices liability insurance (EPLI) is designed to cover an entity (and its employees) for liability arising from certain employment-related wrongful acts, including:
- Wrongful termination
While employees are included as “insureds” under EPLI policies, an employer is typically required to indemnify its employees only for conduct that is within the course and scope of employment. Therefore, unlike the directors and officers liability policy, EPLI is considered the entity’s policy and should seek to indemnify the entity first before the employee (as such, “order of payment” endorsements typically found under D&O policies, have very little application to EPLI). Further, unless stated otherwise, EPLI policies typically apply worldwide.
Common definition of “employment practices liability”
- Discrimination, including but not limited to race, age, gender, disability, genetics, sexual orientation, national origin, color, military status and other protected categories under federal, state and local law
- Harassment, including “quid pro quo,” hostile work environment or otherwise workplace bullying
- Retaliation, including whistleblowing under Dodd-Frank and Sarbanes-Oxley.
- Employment related torts, including
- Wrongful dismissal, discharge or termination (either actual or constructive) of employment
- Misrepresentation(s) to an employee of any organization
- Libel, slander, humiliation, defamation
- Invasion of privacy
- False arrest or false imprisonment
- Wrongful failure to employ or promote
- Wrongful deprivation of career opportunity, wrongful demotion or negligent employee evaluation, including the giving of negative or defamatory statements in connection with an employee reference
- Wrongful discipline
- Failure to grant tenure
- Negligent, hiring, training and supervision
- Civil rights violation and failure to enforce or maintain corporate policies and procedures (may include “related to the above…” wording).
Third-party liability coverage, which protects the company against claims made by non-employees (e.g., vendors, client and other business invitees as a result of discrimination or harassment by employees) is also now typical coverage under EPLI policies. However, for financial institutions, it is not uncommon for a “redlining” (practice of denying services through selective services based on racial or ethnic characteristics) exclusion to be added by endorsement.
What constitutes a claim?
The definition of “claim” under EPLI policies is very important. EPL discrimination claims are often initiated via an EEOC charge or state equivalent (a required administrative step before a lawsuit can be filed in federal court) or an attorney demand letter.
Because of the “interrelated claim” provision and because most EPLI policies are claims-made policies (i.e., the claim is deemed “made” when it is received by an insured, rather than when it is filed), it is critical to pay attention to this definition.
Regardless of the insurer, the definition of claim is generally uniform and tends to include the following:
- A written demand for monetary damages or non-monetary relief
- Civil proceeding (i.e., lawsuit), commenced by service of a lawsuit
- Criminal proceeding (commenced by the return of an indictment or similar charging document outside the U.S.)
- Formal investigative, administrative or regulatory proceeding, such as EEOC charges and state equivalents (note that, recently, many carriers will agree to clarify that this extended to OFCCP Order to Show Cause or Notice of Violation)
- Demand for arbitration or mediation, or similar alternative dispute resolution proceeding
- Written request to toll or waive statute of limitation
How is “loss” defined?
Some policies may broadly define “loss” as “damages”. If not, the definition, at a minimum, should include the following:
- Defense costs
- Front pay
- Back pay
- Compensatory damages
- Liquidated damages under the Age Discrimination in Employment Act and the Equal Pay Act
- Multiplied damages, punitive damages and exemplary damages
- “Most favorable jurisdiction” provision is typically added with respect to the insurability of punitive damages (i.e., insurer will look to the law of another jurisdiction that favors insurability of punitive damages)
- Punitive damages wrap policies can be purchased through Bermuda markets
- Plaintiff’s attorneys fees
Some policies may automatically include coverage for costs of sensitivity training, but this is usually included in policies issued through Bermuda markets. Otherwise it must be specifically requested and negotiated and a coinsurance may apply.
The definition of “loss” can also be further expanded via endorsements on a case-by-case basis.
What risks are not covered?
In addition to typical liability coverage exclusions, such as pending and prior litigation and prior knowledge, EPLI policies generally exclude coverage for the following types of claims:
- Bodily injury/property damages (carveback for emotional distress, mental anguish and humiliation)
- Breach of employment contract (but exclusion typically does not apply to: defense costs, mental anguish and humiliation and liability that would exist in the absence of the contract)
- Statutory violations such as WARN Act, National Labor Relations Act, Occupational Safety and Health Administration (OSHA), Workers’ Compensation, etc. (but the exclusion does not apply to retaliation claims)
- Benefits (Employee Retirement Income Security Act, unemployment, disability, social security, etc.)
- Fair Labor Standards Act (FLSA) and similar state laws (the exclusion does not apply to retaliation and a limited number of insurers may offer small sub-limits for smaller companies)
- Fines and penalties (except for defense costs)
- Modifications/alterations pursuant to Americans with Disabilities Act (except for defense costs)
There is currently approximately $800 million capacity in the EPLI marketplace. The amount available to deploy on a primary basis for financial institutions is between $15 million and $25 million.
For large accounts, Bermuda markets are the primary lead insurers, because of the flexibility in choice of counsel, broader coverage and built-in punitive damages cover (eliminating the need for a punitive damages wrap policy).
In addition, there are one or two established domestic markets that write large financial institutions. Excess capacity is plentiful domestically and offshore. Small to mid-size accounts are generally served by domestic markets.
While loss payments made in the early 2000s had a significant impact on the number of markets available for large financial institutions (causing at least one of the Bermuda insurers to retreat from the industry for some time), most of those markets are once again fully committed to providing solutions to financial institutions, albeit with stricter underwriting guidelines and due diligence.
The most important rating factor for EPLI underwriters is the number of employees – the greater the number of employees, the greater the premium. Claims history is also a significant factor, as is the location of the employees.
For example, California, Texas and Michigan are considered litigious and “employee-friendly” jurisdictions, given broader state employment laws and/or high frequency of litigation and significant verdicts in those jurisdictions. New York, Massachusetts and New Jersey are quickly joining those states because of recent amendments to their anti-discrimination statutes.
Common factors that affect pricing
- Recent claim/loss history above current self-insured retention (SIR)
- Mergers & acquisition
- Lack of or insufficient diversity
- Salary/compensation structure – stock options, deferred compensation and bonuses are more common forms of compensation in the financial services industry and can be significant component of a claim
- Lack of or failure to regularly update human resources policies and procedures
The amount of limits appropriate for a particular financial institution depends on a variety of considerations, including but not limited to
- the particular sub-sector
- number of employees
- the company’s risk retention appetite
- frequency of claims
- severity of prior claims (if any)
- industry trend
- peer purchasing behavior
- and, of course applicable premium
A self-insured retention always applies, and that, too, is based in part on the above factors. For example, a large investment bank with more than 25,000 employees may purchase anywhere from $50 million – $100 million in limits, while a retail bank with similar employee count may only purchase $25 million in coverage.
Ultimately, it is important to consider all of these factors with an experienced insurance broker, using benchmarking and other analytics, in determining what is appropriate for the particular organization.
Current trends impacting financial institutions
The following risks/trends are some of the issues that continue to make EPLI a necessity for financial institutions:
In addition to the renewed focus on this issue by the Equal Employment Opportunity Commission (EEOC) and the Office of Federal Contract and Compliance Programs (OFCCP), New York, California and Massachusetts recently enacted laws addressing pay equity discrimination on the basis of gender race and ethnicity. It is expected these laws will increase employment discrimination litigation, particularly in industries that lack sufficient diversity, which is believed to also correlate with pay inequity.
Wage and hour
Allegations of failure to pay overtime or misclassification as exempt, rather than non-exempt employee or independent contractor, rather than employee, are expected to rise in light of the recent increase in the minimum salary threshold under the Fair Labor Standards Act. Claims such as misclassification of junior investment advisors, loan underwriters, and bank assistant managers are not uncommon. It should be noted that, unless specifically endorsed, these claims are not covered under EPLI policies, but rather under separate policy known as Wage and Hour Insurance.
As financial institutions continue to expand their services and offerings outside the US, they are also subject to expanding employment laws outside the U.S., particularly in the United Kingdom, France and Germany where pay equity and other forms of anti-discrimination laws also are gaining spotlight.