A Blog Post On Risk and Insurance: Really, It's Not As Painful As It Sounds (And It May Even Save You A Lot Of Money)
I need to start off with a confession: my name is Bill and I’m an insurance lawyer. (“Welcome, Bill”). I’m going to be writing about insurance as it applies to employment-related disputes. Even though you may think insurance is a very dry subject, I promise to make it as interesting as I can – although there will be no dancing green lizards in any of these posts. And, if you work for (or defend) a company that can face suits by employees, you may find these posts very helpful when it comes to protecting your corporate bottom line from those suits.
Many of the other folks who write on this blog are able to tell great tales of high-profile fights between executives and their companies. Those are important stories and they are at the core of what this blog is about. My perspective on employment disputes is somewhat different: I look at whether a company’s insurance policies can provide the company with a defense against an action brought by an employee (or reimbursement for fees and costs when a company defends itself), and whether those policies will cover a judgment or settlement of the case. It can be a little esoteric at times, and I spend a lot of time thinking about the meaning of individual words in an insurance policy.
We’ll get into the individual words in the future, but let’s start with the basics. Here, I’ll briefly discuss the idea of insurance as a way to transfer away risks and identify four types of insurance policies that may apply to disputes between companies and their executives (and other types of employment disputes as well). In future posts, I’ll go into more depth on those different types of policies, and outline some practical considerations for companies thinking about their insurance.
Starting at the beginning: what is insurance? Simply put, it is a way to transfer away the consequences of a risk that something in the future may come to pass, and cause a loss (financial or otherwise). All of us face risks every day, and we all consider ways to transfer to an insurer the consequence of those risks. For example:
1. There’s a risk you’ll have an accident with your car – and assuming you have auto insurance, you’ve transferred away some of the consequences of that risk if it comes to pass;
2. There’s a risk your house, apartment, or personal property will be damaged by a fire or other catastrophe – and you have likely transferred some of the consequences of that risk to a property insurer;
3. There’s a risk you’ll be sued if your neighbor slips on your driveway – and you may have also transferred that risk (a “liability risk”) away to your property insurer. If your neighbor sues you for her fall and the consequences of that fall – the judgment or settlement of that suit – exceed the liability of your homeowners’ insurance policy, that “excess” dollar amount may be covered by an “excess” or an “umbrella” policy.
Think of insurance policies as discrete baskets into which you can put the consequences of certain risks you face: your auto policy is a “basket” for risks of a car accident, and so forth.
For our discussion of policies that can apply to employment disputes, it’s important to look at the possible “baskets” first, because auto, property, and many other types of policies generally aren’t baskets for a company’s risk that it will have an employment dispute. That risk – really a series of risks, depending on what type of employee is suing the company, and for what – goes mainly into four different policy “baskets”:
Directors’ & Officers’ Insurance (“D&O”) – this insurance protects the individual directors and officers of a company (and can reimburse the company, if it protects the individuals on its own) against the consequences of “wrongful acts.” These “wrongful acts” can include violations of the Employee Retirement Income Security Act (ERISA);
Errors & Omissions (“E&O”) – this insurance covers individual company owners, and sometimes companies or professional firms, for their “errors, misstatements, misleading statements, acts, omissions, or neglect or breach of duty;”
Employers’ Liability insurance – this insurance is most often packaged with workers’ compensation insurance and is the “basket” of risks for injuries – including emotional injuries – to employees suffered on the job;
Employment Practices Liability Insurance (“EPLI”) – this insurance is designed (at least according to insurers) expressly as the “basket” for risks arising from employment discrimination, wrongful termination and sexual harassment; and
Commercial General Liability (“CGL”) – this is the core of liability protection for most businesses, and collects many of the risks of liability for a business’s “bodily injury” of others and damage to others’ property. It doesn’t catch many of the risks for a dispute between a business and its employee, but in some limited circumstances, the CGL policy can apply.
Even a quick reading of this list shows you two things: first, no one type of policy catches all of the liability risks an employer faces from its employees; and second, some risks don’t seem to be collected in any risk “basket” at all. That’s where careful reading of the policies comes in – to figure out exactly how big the policy risk “baskets” are.
An employee facing a suit by her employer has, unfortunately, a smaller number of “baskets” in which to place the risk of that suit. Excluding automobile policies, individuals usually only have liability protection in two places: as coverage attached to a homeowners’ policy (and it only covers a small number of discrete risks) or through a “personal liability” or “personal umbrella” policy. An “umbrella” policy provides coverage over a homeowners’ policy as “excess” to that policy – meaning it pays when the homeowners’ policy has paid out its last dollar – and provides primary (or “first dollar” coverage) for an additional small set of risks. In general, though, the coverage these policies can offer to an employee facing a suit from her employer is limited.
It doesn’t mean we shouldn’t take a look at coverage for individuals in more detail, though, and we’ll do that after we take a closer look at the policies available to employers. In the next post, we’ll start our tour through these policies by looking at what risks are covered by the Employment Practices Liability Insurance and Employers’ Liability.