Insurance Tips for Employers

Employers don’t just need employment lawyers. They need a team of experts to help them insure and mitigate against potential loss. The most direct way to insure against loss is to obtain liability insurance. But what happens if certain claims aren’t covered? This article provides some options.

Employers typically purchase two types of insurance to cover risks associated with their employment practices: employer liability and employment practices liability insurance. Employer liability insurance covers employers for liabilities due to employees’ job-related illnesses or injuries that are not covered under the workers compensation laws—that is, when the employee alleges that (s)he was injured due to the employer’s negligence.

Employment practices insurance, on the other hand, covers harm that is not physical, but rather an injury to the rights of the employee. For example, whereas employer liability insurance covers the defense and indemnity costs of an employer if sued by an employee for physical injury on the job due to the employer’s alleged negligence, employment practices liability covers the employer for suits alleging discrimination based on sex, race, age or disability, wrongful termination, harassment and other employment-related issues such as the failure to promote. Large employers tend to purchase substantial employment practices policy limits, but they are often surprised to learn that one of the most significant employment practices liabilities is not covered: class action lawsuits alleging violations of wage-and-hour laws.

What Is an Employer to Do with Respect to These Claims?

Fortunately, most single-plaintiff wage-and-hour claims are low value claims—in the low to mid five figures. This is typically less than most insured’s deductibles. Wage-and-hour class actions, on the other hand, have much greater exposure. In these instances, an arbitration agreement with a class-action waiver can help. Both the California Supreme Court and the United States Supreme Court have upheld arbitration agreements with class-action waivers in employment agreements. While these agreements are not insurance policies per se, they help employers mitigate the common six- and seven-figure liability that class actions typically trigger.

Of course, prevention is always the best medicine to insure against employment litigation – of any type. Aside from the sheer thousands of dollars in defense costs and attorneys’ fees, employment lawsuits can lead to low morale, reduced productivity and a loss of trust between management and employees. Accordingly, employers should be proactive with their compliance efforts and try to head off litigation before it starts. To prevent employee injury litigation, employers should train employees in safety protocols and encourage the immediate reporting of employee injuries and/or hazards.

With respect to litigation related to management and employee misconduct, employers should develop an employee handbook that contains policies prohibiting unlawful conduct such as discrimination, harassment and retaliation and update it on a regular basis. To help prevent against disability claims, employers should develop detailed job descriptions which clearly outline the essential functions of the job and train their managers about interactive process protocols. Finally, employers should maintain an open-door policy; encouraging and investigating employee complaints. If employers can get in front of litigation before it happens, the need for insurance is greatly diminished.

Employers also seek to protect their intellectual property, and similarly find that their typical insurance coverage often does not provide much cover. Like wage-and-hour claims, coverage for intellectual property claims under widely purchased insurance policies is also difficult to obtain. This is often due to the frequently high amount of damages at stake, in particular for patent actions. Historically, companies sued for patent, copyright and/or trademark infringement, or misappropriation of trade secrets, sought coverage for these claims under their commercial general liability policies’ “personal and advertising injury” coverage. Insurers responded with intellectual property exclusions, barring coverage for any claims arising out of infringement of trade secrets or other intellectual property rights. However, whether this exclusion applies often depends on the theory of liability against the policyholder. Some insurance may cover false advertising or trademark-related unfair competition claims under the Lanham Act. When at least one claim alleged does not invoke intellectual property rights, some courts have held that the insurer has a defense obligation that extends to the entire action. That said, courts most often construe intellectual property exclusions to avoid coverage.

Despite limited availability of insurance protection for intellectual property-related claims, plaintiffs and defendants are not without certain options for funding the prosecution or defense of such claims. For example, on the plaintiff’s side, litigation funding by third-party funders can provide a path for covering the costs and fees in bringing an expensive intellectual property enforcement action.

Likewise, a defendant asserting a counterclaim with a monetary counter claim may be able to obtain litigation funding to help defray the costs of the lawsuit. Additionally, fixed fees and/or volume discounts (especially by bundling multiple cases for a single client) can help mitigate the costs of defending an expensive intellectual property infringement suit. While not providing insurance coverage in the traditional sense, these creative approaches can help subsidize high costs and fees in infringement actions.

When employment disputes arise, determining whether coverage exists can play an important role in litigation strategy. And, in cases where certain claims are not covered, employers should seek legal advice about other options. Lathrop GPM handles a variety of matters where traditional insurance provides coverage, as well as matters requiring creative and flexible strategies to maintain or defend their claims.

Article was co-written by Alex Roje And Erica Van Loon of Lathrop GPM.

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