Background. Our research reveals that employment disputes are one of the most common sources of church litigation. However, many churches are not insured against this risk, often because of an assumption that the church’s comprehensive general liability (CGL) policy covers such claims. But this often is an incorrect assumption since the typical CGL policy excludes “employment practices.”
How can church leaders respond to this potentially uninsured risk? The best response is twofold:
- Implement an effective risk management program that addresses the most common types of employer liability.
- Purchase employment practices liability insurance (EPLI). Often, EPLI insurance can be purchased as a special endorsement to a CGL policy.
Tip. A church’s choice of insurance coverages should be the result of a careful evaluation. Many churches use an insurance committee, or finance committee, to review options and make recommendations to the church board or congregation. One issue that needs to be addressed in such a process is whether the church’s existing insurance policy or policies provide coverage for employment practices. If not, this is a potentially serious gap in coverage that should be addressed.
Evaluating EPLI coverage. Here are some questions to consider in evaluating EPLI policies:
1. Do we have EPLI coverage? Check with your church insurance company to determine if your church has employment practices coverage. If so, be sure you are familiar with the policy limits, any “retention” (an amount paid by the insured), and exclusions.
Tip. As with any insurance policy, an EPLI policy should be reviewed periodically, ideally by an insurance or finance committee that includes persons having a financial background.
2. Who is covered? If you have EPLI coverage, or are considering the purchase of an EPLI policy, check to see who is covered under the policy. Generally, the employer and its officers, directors, and employees are covered. But, some policies exclude part-time employees and self-employed workers. Ask your church insurance agent about covering these persons if they are excluded.
3. Are the policy limits adequate? If you have EPLI coverage, or are considering the purchase of an EPLI policy, check the amount of coverage to be sure it is adequate. Also, note that under many EPLI policies the costs of providing a legal defense for the employer come out of the policy limits.
Example. A church is sued by a former employee for wrongful dismissal. The church has an EPLI policy with coverage of up to $100,000. If defense costs come out of the coverage limit, and the insurer incurs defense costs of $40,000, this reduces the coverage limit to $60,000.
4. What are the policy’s exclusions. If you have EPLI coverage, or are considering the purchase of an EPLI policy, carefully examine the exclusions under the policy. Common exclusions include claims made under the Fair Labor Standards Act (for overtime pay, or the minimum wage), claims resulting from layoffs, claims under the Consolidated Omnibus Budget Reconciliation Act (COBRA), and claims under the Employee Retirement Income Security Act (ERISA).
Some EPLI policies exclude punitive damages, while others do not. However, note that several states prohibit insurance policies from insuring against punitive damages.
5. Is there a deductible, or retention amount, under our EPLI policy? Determine the amount of the deductible, or any “self-insured retention,” under the policy. A self-insured retention is the amount the employer is required to pay in defense costs or settlement amounts before coverage under the policy is triggered.
Example. A church dismisses a custodian who later sues the church for unlawful age discrimination in violation of a state law. The church has an EPLI policy with a $20,000 retention. The insurance company hires an attorney to defend the church. After four months the case is dropped. The church’s attorney submits an invoice in the amount of $15,000 for legal fees. The church is obligated to pay this entire amount.
Example. Same facts as the previous example, except that the case is not dropped, and eventually is settled out of court for $50,000. The church is obligated to pay $20,000, and the insurer pays the remaining $30,000 plus the attorney’s fees.
6. Is a legal defense “inside” or “outside” the policy? Some EPLI policies state that “defense is inside the limits.” This means that the policy’s dollar limit applies both to any settlement or judgment and attorneys fees incurred in defending the employer. On the other hand, some policies state that “defense is outside the limits.” This means that the policy’s dollar limit applies only to a settlement or judgment, and not to attorneys fees. In other words, the insurer is obligated to pay the employer’s defense costs independent of any amount it pays toward a settlement or judgment.
It is very important to know whether your policy places attorneys fees inside or outside the policy. Consider the following example.
Example. In a recent case an employer settled a wrongful termination case with a former employee for $5,000. However, the legal fees incurred in defending the church amounted to $60,000! Clearly, it is important to know whether legal fees are inside or outside of the policy. If the employer had an EPLI policy with a $20,000 retention, with legal fees “inside the policy,” then the employer would have been obligated to pay up to the full retention amount with the insurer picking up the rest.
7. Who can bring claims under your EPLI policy? If you have EPLI coverage, or are considering the purchase of an EPLI policy, pay special attention to those persons who can bring claims that will be covered under the policy. Some policies limit coverage to claims made by current full-time employees. Others broaden the coverage to include claims made by part-time employees, self-employed workers, and former employees.
8. Is our EPLI policy a “claims made” policy? Many forms of liability insurance come in two varieties: (1) occurrence policies, and (2) claims made policies. It is critical for church leaders to understand the difference. Occurrence policies only cover injuries that occur during the policy period, regardless of when a claim is made. A “claims made” policy covers injuries for which a claim is made during the policy period if the insured has continuously been insured with claims made policies with the same insurer since the injury occurred. Some insurers who offer claims made policies may agree to cover claims made during the current policy period for injuries occurring in the past when the insured carried insurance with another insurer. This is often referred to as “prior acts coverage.”
Many EPLI policies are claims made policies, and it is important for church leaders to understand the legal significance of this type of coverage.
Key point. One of the drawbacks to a claims made policy is that a failure to promptly notify the insurer of a potential claim may result in a loss of coverage. Read your policy’s notification provisions carefully, and be sure you comply with them. Some policies require notification of potential as well as actual claims.
Example. A church dismissed a female employee in 2005 for living with a man to whom she was not married in violation of the church’s moral teachings. The dismissed employee sues the church in 2007 for gender discrimination, claiming that the church has been more lenient with male employees who have been guilty of the same conduct. The church had a claims made EPLI policy in force in 2005, but failed to renew it when it expired in 2006. Even though the dismissal giving rise to the lawsuit occurred while the EPLI policy was in force, there will be no coverage for this claim under the policy because no claim was presented when the policy was in force. If the EPLI policy had been an occurrence policy, it would have covered this claim since the dismissal giving rise to the lawsuit occurred during the policy period.
9. What are the policy’s notification requirements? EPLI policies will define how and when a claim must be made under the policy. It is essential for church leaders to be familiar with these provisions, since a failure to comply with the policy’s claims or notice requirements may lead to a loss of coverage.
10. Have we made full disclosure? Most EPLI applications require the church to identify any facts or incidents that may result in an employment-related claim including wrongful dismissal, sexual harassment, or various forms of discrimination. It is important for the church to provide accurate and complete information in response to such questions. This should not be done by one person. A better practice would be for the board and staff to collectively provide input.
11. What about directors and officers insurance? Some churches have purchased directors and officers insurance. Such policies may provide limited coverage for employment-related claims. Usually, these policies carry a large retention (deductible).
12. How many employees do we have? The need for EPLI insurance increases with the number of church employees. More employees means additional exposure to employment-related claims.
13. Does our policy cover claims filed with the EEOC or a state civil rights agency? Most EPLI policies cover a wide variety of employment-related claims including some or all of the following: sexual harassment, discrimination, wrongful dismissal, breach of employment contract, wrongful discipline, emotional distress, negligent selection and supervision, invasion of privacy, and defamation. Be sure to note whether an EPLI policy covers claims of discrimination filed with the EEOC or a state human rights agency.
14. Does our policy contain a “hammer clause”? Many EPLI policies contain a “hammer clause.” Such a clause gives the insurer the authority to recommend the settlement of a pending claim for a specified amount. If the employer disagrees, and the case proceeds, the insurer’s liability under the policy cannot be more than the settlement amount it recommended. It is important for church leaders to be aware of the existence of such a provision in an existing EPLI policy, or an EPLI policy that is being considered.
15. Does our policy cover arbitration awards? Be sure to note whether an EPLI policy covers arbitration awards. Many churches have inserted arbitration clauses in employee handbooks or employment applications that require employment-related disputes to be resolved through binding arbitration. Churches that have adopted arbitration policies to resolve employment-related disputes should ensure that their EPLI policy will cover arbitrators’ awards.
This article first appeared in Church Treasurer Alert, August 2007.