Key Point 8-30. Most church general liability insurance policies exclude employment practices. This means that many churches face a potentially significant uninsured risk. Employment practices liability insurance is available to cover most employment-related claims.
Employment disputes are one of the most common sources of litigation involving churches. However, many churches are not insured against this risk, often because of an assumption that the church's comprehensive general liability (CGL) policy covers these claims. In many cases, this is not the case 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. This text contains many suggestions that will assist church leaders in implementing a risk management program.
- Purchase employment practices liability insurance (EPLI). Often, EPLI insurance can be purchased as a special endorsement to a CGL policy.
Tip. Church leaders should ask their church insurance agent if the church has insurance for employment practices. If not, ask how this coverage can be obtained.
Here are some points to consider in evaluating the need for EPLI coverage:
- Check with the church insurance agent or company to determine if your church presently has employment practices coverage. If so, find out the amounts of coverage and determine if the coverage is adequate. As with any insurance policy, the EPLI policy should be reviewed periodically.
- 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 the church's insurance agent about covering these persons if they are excluded.
- 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 most 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.
- 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.
- 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.
- 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 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 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."
- 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 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.
- 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).
- 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 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 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.
- 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.
Tip. Churches should appoint an insurance committee composed of persons having some knowledge of insurance. This committee can evaluate insurance options and coverages, and make recommendations to the church board.