What You Need in an Employment Practices Liability Insurance Policy

Twelve considerations when purchasing or reviewing this type of insurance policy.

Employment disputes are one of the most common sources of church litigation. However, many churches are not insured against this risk. If you are looking at getting employment practices liability insurance (EPLI), these 12 considerations will help you evalute it.

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 the church’s insurance agent about covering these persons if they are excluded.

Check the amount of coverage to be sure it is adequate

Also, note that under most employment practices liability insurance (EPLI) policies the costs of providing a legal defense for the employer come out of the policy limits. To illustrate, assume that a church has an EPLI policy with coverage of up to $300,000. If defense costs come out of the coverage limit, and the insurer incurs defense costs of $75,000, this reduces the coverage limit to $225,000.

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.

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. To illustrate, if a church’s EPLI policy has a $20,000 retention, the church must pay the first $20,000 in attorneys’ fees and any settlement amount. Only after the church pays this amount will the insurer be obligated to pay additional amounts under the policy, up to the coverage limit.

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 and self-employed workers, and former employees.

Most EPLI policies are “claims made” policies

A claims made policy covers injuries for which a claim is made during the policy period if the insured has continuously been insured 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 church carried insurance with another insurer. This is often referred to as “prior acts coverage.”

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.

Most EPLI applications require the church to identify any facts or incidents that may result in an employment-related claim

This includes 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.

The need for EPLI insurance increases with the number of church employees

More employees means additional exposure to employment-related claims.

Most EPLI policies cover a wide variety of employment-related claims

This includes 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 Equal Employment Opportunity Commission (EEOC) or state human rights agencies are covered.

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.

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 arbitration awards.

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Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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