EMPLOYMENT-RELATED PRACTICES LIABILITY COVERAGE FORM ANALYSIS

(August 2019)

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Employers of all sizes are exposed to legal actions filed by current or former employees that allege discrimination, harassment, wrongful termination, and other charges. The insurance industry has long provided coverage for this exposure on a non-standard basis, with participating companies relying on proprietary policies. The Insurance Services Office Employment-related Practices Liability (ERPL) program offers a form that may achieve status as a standard policy. A coverage standard provides wording to act as a baseline for comparing policies.

Without a standard form, employers would have difficulty with the following:

Determining (at least until a claim occurs) the quality of a particular company’s ERPL coverage
Judging if the pricing offered for such coverage is reasonable
Establishing a coverage benchmark for gathering credible statistics - an insurer cannot determine whether the price it develops is credible without confirmation via actuarial data
Adopting policy wording that has been approved and is in compliance with state regulations

This article is an analysis of the 11 09 edition of EP 00 01–Employment-related Practices Liability Coverage Form. Any changes from the prior edition appear in boldface.

COVERAGE FORM INTRODUCTION

Typical of ISO coverage forms, the opening paragraphs provide important information, disclaimers, and definitions that will be used throughout the entire policy.

The first paragraph is a disclaimer. It explains that there are provisions within the policy that restrict coverage, so it is important for the insured to read the entire policy carefully. Review of the entire policy is essential to determine what rights the insured has under the policy as well as to recognize the applicable duties and obligations. Sections of the policy are related, so that they must all be reviewed to understand the scope of coverage.

Several terms are defined in the introductory paragraphs of the ERPL policy.

You and Your means the named insured in the Declarations as well as any organization that qualifies as a named insured under Section II- Who is An insured item D.

We, Us or Our all refer to whoever is providing the ERPL coverage.

Insured refers to those parties (persons and organizations) described under Section II–Who Is an Insured.

The introduction also states that any other words or phrases that are in quotation marks have special meaning and are defined in Section VII–Definitions. These special terms often affect coverage, so any attempt to interpret coverage should include strict use of those terms.

SECTION I–EMPLOYMENT-RELATED PRACTICES LIABILITY COVERAGE

A. Insuring Agreement

1. Basic Agreement

In the basic contractual agreement between the named insured and insurer, the insurer accepts the obligation to pay damages when caused by wrongful acts that qualify for coverage under the ERPL policy.

Example: Acme Manufacturing Corp. is covered by an ERPL policy issued by Inept Insurors. Inept receives notice of a claim against Acme. Perturbed Properties is suing Acme because an Acme employee accidentally caused a fire that destroyed a building that Perturbed leased to Acme. An Inept claims manager sends a letter to Acme's risk manager denying the claim. He reminds Acme that their ERPL policy does not cover a suit involving fire losses.

Related Court Cases:

Termination of Employee Was Not a Covered Occurrence

Policy Excludes Injuries Caused by Harassment

The insurer has the right and duty to defend the insured in any suit seeking damages if the injury is one covered by the policy. If it is not such an injury, the insurer has no duty to provide defense. Because the injury a claimant is alleging is not always apparent, the insurer says it might, at its discretion, investigate and attempt to settle a claim for any incident.

Under ISO's ERPL form, the named insured has input in whether a settlement can be made. The named insured must give written consent prior to the insurer settling a claim. Without that written consent, the insurer is obligated to provide a defense. However, language found later in the policy shifts some risk of loss back to the named insured. More information on the consequences of not providing consent is provided later in this article.

Defense expenses are included within the limit of insurance. The implications are discussed in Section III- Limit of Insurance.

Coverage ceases once the combination of defense expenses paid plus the payment of judgments or settlements equals the available limit of insurance.

2. Wrongful Acts (Claims Eligibility)

The ERPL form has three specific place and time conditions that must be met in order for a wrongful act to be considered a claim. The conditions revolve around the fact that it is a Claims Made form with a limited geographical territory. In order to be covered all of the following must apply:

a. The injury must occur because of an offense that has taken place in the coverage territory as defined in the policy.

b. The offense cannot have occurred before the Retroactive Date that is shown in the Declarations. If an employee alleged abuse predates that date, this policy will not cover.

Note: It is vital that either a date or the word NONE be entered in the Retroactive section of the Declarations. Leaving the space blank means a potential lawsuit to determine intent. The best protection for the named insured is the word “NONE” or a date that goes back as many years as possible. The insurance company will be more interested in a date closest to the inception date of the policy.

c. All claims for injury must be first made against an insured during the policy period or during the Extended Reporting Period (explained in Section VI) if purchased.

Example: A policy is effective 10/1/19. The Retroactive Date is shown as 2/1/17. If an offense takes place on 3/1/17, after the Retroactive Date, and the claim is reported on 3/1/20, it may be covered by the policy. However, if the policy shows a Retroactive Date of 10/1/19, an offense that occurs 3/1/17, prior to the policy inception, would not be covered by the policy. If the policy is allowed to lapse on 10/1/20 and there is no Extended Discovery period, any claim first reported after the 10/1/20 expiration will be denied.

3. Recognition of a claim

A claim is considered to have been made when the notice of the claim is received by either an insured and reported to the insurer in writing or when a claim is made directly to the insurer in writing, whichever happens first. It is critical to pass along any claim to the insurer immediately and to do so in writing. A phone call to your agent will not suffice.

Note: There is a brief grace period. A claim reported to the insurer up to 30 days after the end of the policy period will be considered to have been reported during the policy period if no other coverage is in effect at that time.

4. Reporting of a wrongful act (11 09 change)

Early notification of possible claims is very important. Therefore, named insureds are required to file written reports of wrongful acts that could be reasonably expected to create a claim. In the future, if an actual claim develops from the situation (even after the policy period expires), it is treated as if a claim was reported as of the date of written notification. The word incident was replaced with wrongful act in the 11 09 edition.

5. Aggregation of related claims

All claims that result from acts to the same person will be considered to be made when the first of the claims is made, no matter how many claims are made or how many different persons make claims.

harass

Example: An employee suffers emotional distress from sexual harassment at work and files a claim for that distress in November. In early December, the employee starts to have physical manifestations resulting from the emotional distress and incurs medical bills. In late December, the employee finally must leave work because of the situation and suffers loss of wages. All of the claims are considered to have been made in November when the first claim was made. When the employee dies and the estate claims the death was due to the emotional distress of the sexual harassment, that claim is also part of the November 1st claim.

The policy specifically states that the insurer has no obligation to pay any other sums, fines, damages, or awards that may be assessed against the insured. Specifically excluded are civil or criminal fines. A few additional services or acts owed by the insurer are listed elsewhere as Supplementary Payments.

B. Exclusions

A number of acts and situations are not covered by this insurance policy. However, the insurer will provide defense (in most cases) until such time as it has been determined through appropriate legal processes, that the act is excluded.

Appropriate legal processes have not been defined in the policy; however, that terminology with regard to insurance claims generally refers to actions associated with a court of law. In other words, if an insured that is alleged to have committed an act triggering an exclusion is convicted of the act in court, the insurer’s obligation to provide a defense terminates.

1. Criminal, Fraudulent or Malicious Acts

Liability an insured has for his or her criminal, fraudulent, or malicious acts or omissions is not covered.

Note: Policy coverage is barred only for an insured who has committed a criminal act. Defense coverage is provided until a determination is made as to whether the insured’s act was criminal, fraudulent, or malicious.

2. Contractual Liability

Liability or injury the insured has assumed in an agreement or contract is not covered unless the insured would have had that liability even without the contract or agreement. This means that liability assumed under an employment contract is not covered. Further, ISO’s ERPL program does not offer an endorsement to add this coverage.

3. Workers Compensation and Similar Laws

There is no coverage for any liability or obligation described under workers compensation, unemployment, and other similar laws.

4. Violations of Laws Applicable to Employers

This particular exclusion is a major component in understanding what is and is not covered by this policy. We will study it in a little more depth.

The policy expects the named insured and those under the named insured’s control to act as a responsible corporate citizen and therefore excludes violation of the named insured’s duties and responsibilities as required by statutes, rules and regulations issued by the federal, state or local authorities. The named insured is expected to keep up with these statutes and adhere to them. If the exclusion ended here, there would be no reason for this policy. However, it goes further and says that violations of certain acts ARE covered. The covered acts are:

· Title VII of the Civil Rights Act of 1964

· The Americans with Disabilities Act

· The Age Discrimination in Employment Act

· The Equal Pay Act

· The Pregnancy Discrimination Act of 1978

· The Immigration Reform Control Act of 1986

· The Family and Medical Leave Act of 1993

· The Genetic Information Nondiscrimination Act of 2008 (11 09 addition)

· Similar rules or regulations to the above that are put in place by the state and local authorities but only if they operate in a similar fashion to the federal statutes.

· Any amendments to the above (11 09 addition)

Consider one statute in particular: Title VII of the Civil Rights Act of 1964 deals with Equal Employment Opportunity. Subsection 703 deals with Discrimination Because of Race, Color, Religion, Sex, or National Origin. The statute makes it unlawful to discriminate against a person during hiring or employment based upon the above factors. Were the Act not specifically included there would be no coverage for the single largest source of ERPL claims.

There are two very important restrictions on coverage granted. Wrongful acts claimed under the Americans with Disabilities Act are not covered if they are related to physical requirements that may be needed to accommodate a person. The second restriction is that there is no coverage for a claim alleging retaliatory treatment on the part of any insured because a person brought action under any of the coverage statutes.

The Employee Retirement Income Security Act (ERISA) is not included in this list. Claims arising from pension plans, health plans, and other related benefit problems are not covered. Non-fiduciary coverage is available under CG 04 35–Employee Benefits Liability Coverage while fiduciary coverage is available under CR 00 01–Commercial Crime Coverage Form.

ISO Commercial General Liability Coverage Forms Available Endorsements and Their Uses

Satisfying ERISA Bond Requirements with Employee Theft Coverage

5. Strikes and Lockouts

There is no coverage for injuries that occur to employees during strikes, lockouts, or labor disputes. Loss ineligibility also applies to any employee that is temporarily or permanently replaced as a result of such labor versus employer actions.

6. Prior or Pending Litigation

There is no coverage for suits or claims that were either pending or that existed before the date appearing in the policy’s Pending or Prior Litigation Date. This exclusion also applies to claims for damages that are related to such prior incidents. This could be viewed as a second retroactive date. It is very important to enter a date or the word NONE just as with the Retroactive Date.

7. Prior Notice

If a claim had been reported or a notice had been given under a prior insurance policy, there is no coverage under this insurance policy for any wrongful act that is related to that reported claim or notice. There is a requirement that the prior insurance policy must provide coverage similar to that which is part of this insurance policy.

Example: Jennifer reported a sexual harassment incident to ABC insurance company on 2/4/2018. This ERPL policy is effective on 4/1/18.

Scenario 1: The policy under which Jennifer reported the incident was a similar ERPL policy with a term of 4/1/17 to 4/1/18. When a claim is filed, the 4/1/17 to 4/1/18 policy should respond and the current ERPL will not respond.

Scenario 2: The policy under which Jennifer reported the incident was a CGL policy with a term of 4/1/17-4/1/18. The CGL provides no ERPL coverage so when a claim is filed, the current ERPL might respond.

C. SUPPLEMENTARY PAYMENTS

There are two supplementary payments available in the ERPL coverage form. They do not count against, but are in addition to, the limits of insurance. They are not subject to the deductible. These are paid only if the insurance company chooses to investigate or settle a claim or to defend a suit.

1. Prejudgment interest that is awarded to a claimant.

The insurance company pays prejudgment interest but for only such interest on the part of the judgment the insurance company is responsible to pay. This payment comes with a significant exception. If the insurer offers to pay its limit of insurance in order to settle a claim but the insured withholds consent, the insurance company stops being responsible for any pre-interest judgment that accumulates after the date on which the offer to settle was presented to the insured.

2. Postjudgment interest

The interest on the full amount of any judgment that begins to accrue on the judgment entry date is the responsibility of the insurance company until it pays, offers to pay, or deposits payment with the courts its portion of the judgment that is within its limits. If any amount of the loss remains after the insurance company pays, offers to pay or deposits it limits, the insured or its other insurance coverage is responsible for accrued interest on the remaining judgement amount.

Example: Justice for All’s ERPL limit is $500,000. The jury awards the plaintiff $1,000,000. Justice’s insurance carrier immediately deposits its limit with the court. Justice for All has no excess coverage so is responsible to pay post-judgment interest on the excess $500,000 until it pays.

SECTION II–WHO IS AN INSURED

A. The individuals or entities named in the declarations are insureds. Others with direct relationships to the named insured may also be insureds depending upon the type of entity. These relationships are spelled out as follows:

· If the entity is an individual, the individual and that individual’s spouse are both insureds.

· If the entity is a partnership or joint venture, the entity and all partners or members are insureds.

· If the entity is a limited liability company, the LLC and all members and managers are insureds.

· For any other type of organization, the entity and all executive officers and directors are insureds.

B. All employees of the named insured are also insureds unless excluded elsewhere

Example: Heckler, Inc. was sued by a former employee who claimed that several employees’ racially motivated acts created a hostile environment, forcing him to quit. Heckler, Inc.’s ERPL Policy was amended by form EP 01 12, Restricted Coverage for Employees. The form extended insured status to only employees at or above the supervisor/manager level. There is no coverage for the individual named employees because they were non-management, but there is coverage for Heckler, Inc. for any wrongful acts, such as negligent supervision, related to those actions.

C. Former employees are insureds but only with respect to offenses committed during the term of their employment.

Example: Acme Consulting is sued by a former account representative. The suit alleges actions involving the former employee’s supervisor who now works for another firm. Because the actions triggering the suit took place while the former supervisor was on Acme’s payroll, the former supervisor is still considered an insured under Acme’s policy. However, if that former supervisor was sued by someone in connection with his current position (and current employer), the Acme policy would not apply.

D. Any organization the named insured acquires or forms, other than a partnership, joint venture, or limited liability company, is a named insured on this policy for 90 days provided the named insured has the majority interest in the organization. However, if that new organization has other similar coverage in place, this section does not apply and there is no coverage. Any coverage afforded is forward looking and does not apply to wrongful acts committed prior to the date of acquisition or formation. The 90 days is the maximum time limit for which this coverage applies. If the policy expires before that, this coverage also ends and would not apply to the renewal policy. The new acquisition would need to be added as a named insured for coverage to continue.

Example: Great Escapes, Inc. acquires Safe Returns, Inc. on 12/15/19. Great Escapes, Inc.’s policy expires on 1/1/20. When the policy term expires, all coverage for Safe Returns, Inc. expires unless Safe Returns, Inc. has been added to the 1/1/20 policy as a named insured.

If a partnership, LLC or joint venture is not listed as a named insured no person or organization is an insured under this policy for any offense related to conduct of that partnership, LLC, or joint venture.

A number of endorsements are available to limit or extend the coverage under the Who is An Insured Section. One optional form restricts insured status of employees to only supervisory employees. Others extend coverage to employees serving as outside directors, volunteers, and independent contractors.

SECTION III–LIMIT OF INSURANCE

A. No matter how many insureds are listed in the declarations, how many claims are made, or suits brought, or how many entities are bringing suits or making claims, the most that will be paid by this policy is the limit of insurance.

B. The limit of insurance is the total amount available for the sum of the damages and defense expenses combined, for all claims that are first made against the insured in the covered policy period.

Discussion on Defense Expenses being outside the limit

There are some very important limitations regarding the defense cost protection provided by the ERPL. Unlike the unlimited coverage found under the standard Commercial General Liability policy, ERPL defense costs, settlements and damages are all charged against the limit of insurance shown in the declarations. The insured must consider this when choosing a limit. It is not unusual for defense costs to be substantial, leaving inadequate funds to cover damages.

Example: Acme Publishing has an ERPL policy with a $1,000,000 limit. A former employee sues and wins an award in the same amount, $1,000,000. Acme’s total expenses were as follows:
Damage Award	$1,000,000
Attorney fees	$270,000
Expert witness expenses	$67,000
Court costs	$83,000
Defense expenses	$218,000
Total	$1,638,000
With the defense expenses being included in the limit of insurance, the company’s coverage was sadly inadequate. In this case, Acme would still suffer a serious financial loss (more than $600,000) even though it felt it had protected itself by purchasing insurance.

Purchasing a sufficient limit of insurance is critical. The insured must understand the legal climate surrounding ERPL issues, and the fact that anyone may be exposed to an ERPL claim. The agent/broker and insured would do well to investigate the legal expenses involved in a typical ERPL suit and consider the potential for more than one claimant. Defense costs may equal or exceed the actual damages named in the claim, especially if a group of employees decides to file claims.

Example: Pleasing Pies, LLC carries a $1,000,000 limit of insurance on their Employment-related Practices Liability policy. Five women feel they were passed over for promotion in favor of a man and each files a claim for $250,000 in damages. The governmental body decides there was a gender discrimination offense and awards each $150,000. The defense expenses totaled $700,000. The policy covers the $750,000 in damages and $700,000 in defense expenses but the limit of insurance is capped at $1,000,000. Pleasing Pies, LLC is responsible for the $500,000 that is not handled by their policy limit.

The limit of insurance is not a per occurrence or per claim limit. It is an annual aggregate limit. This means that once the policy limit has been used up, the insurer no longer has any obligation to defend any insured against any claim or suit.

Example: Pleasing Pies, LLC, which carried a $1,000,000 limit of insurance, used up the entire limit (and then some) in the first claim. When a second claim is filed in the same policy year for an age discrimination suit, the insurer has no duty to provide defense or any amount for damages.

This aggregate limit of insurance applies separately to each annual policy period. If there is a policy period of less than one-year (less than 12 months) the limit applies separately to the period of time also, unless that short-term (less than 12 month) period is an extension to the policy by endorsement. In that case, the limit applies once for the annual policy period including the extension period.

Example: An insured had an ERPL policy that ran from May to May each year. In order to assist with his cash flow, he asked his insurance company to change his expiration date to August.

Scenario 1: The insurer amends the policy term, extending the expiration from May to August. The policy limit will apply once for the entire 15-month period.

Scenario 2: The insurer provides a short-term renewal (for the three-month period between May and August). In this case, the full policy limits are available for the May to May period and a second set of limits is available for the May to August short-term period.

SECTION IV–DEDUCTIBLE

The ISO ERPL form requires the use of a deductible. The deductible applies to BOTH defense expenses and any eventual indemnity. The policy includes two examples to illustrate how a deductible is applied to losses that involve both defense expenses and indemnity.

The use of a deductible allows an insurer to mitigate their loss exposure, by guaranteeing that the named insured will share in the total cost of each loss and that its capacity to respond to losses is not diminished by the occurrence of minor losses.

The deductible applies to all claims arising from the same injury or a series of incidents arising from a common cause. The form includes two examples that illustrate the application of the deductible.

Under this section, the form states that the insurer has the right to settle a claim as it chooses, paying the deductible (or a part of the deductible) and then requiring reimbursement from the named insured. This part of the provision allows the insurer to maintain control of how it responds to a given claim. However, this is still subject to the policy’s Consent to Settle condition.

SECTION V–CONDITIONS

A. Bankruptcy

If the insured or the insured’s estate becomes bankrupt or insolvent, the insurer is not relieved of any obligations or responsibilities as outlined and committed to in this policy.

B. Consent to Settle

In cases where the insurer recommends a settlement to which the claimant has agreed but the named insured refuses, the insurer will pay no more than that rejected settlement offer in the eventual payment of the claim. When a judgment is granted or a settlement negotiated, the insurer pays the amount of the rejected settlement offer and the named insured must pay the difference. The named insured must also pay its deductible based on the rejected settlement amount.

Example: Negotiating Insurance Company and Jane Doe, a claimant in a sexual harassment case, agree to a settlement of $300,000. Not Me, the named insured, will not consent to settle and demands a court fight. Before the trial concludes, Not Me realizes that he is going to lose and requests that Negotiating negotiate a settlement. Negotiating does so but now Jane Doe’s legal fees have mounted, and the $300,000 is no longer acceptable. She settles for $500,000. In this case, Negotiating is obligated to pay only $300,000 (minus the deductible) of the $500,000 because that was the amount of the original settlement to which the insured would not consent. This means Not Me must pay $200,000 plus its $10,000 deductible while Negotiating pays $290,000.

C. Duties in the Event of a Claim or Wrongful Act That May Result in Injury (11 09 change)

1. If an insured receives a claim, the named insured has the responsibility to:

a. Immediately make a record of the date the claim was received and the specifics.

b. Notify the insurer as soon as practicable. The notice must be in writing.

2. Any involved insured and the named insured must also do the following:

a. Immediately send the insurer copies of any demands, notices, summons, or legal papers that have been received that are in any way a part of any claim.

b. Give the insurer any permission necessary to obtain relevant records and other information.

c. Cooperate with the insurer in the investigation and/or settlement of the claim and if the claim turns into a suit, cooperate in the defense.

d. At the request of the insurer, assist the insurer in enforcing any rights against any entity that may be liable to the insured for any injury or damage involved (subrogation).

3. The insured cannot voluntarily make any payment, commitment, agreement, or incur expense of any kind without the insurer’s written consent. However, if the insured wants to bear the cost, they can do so.

Example: General Makers Corp. is covered by an ERPL policy from Frugal Fire and Casualty. Its executives become aware of a discrimination offense against one of its division managers. They offer that manager $100,000 if she agrees not to pursue a claim or legal action and the manager accepts the payment. Because General Makers did not contact its insurer about the complaint, the $100,000 is not covered by their policy. In order to qualify for coverage, General Makers should have contacted Frugal for written approval. However, if a lawsuit is later filed, this payment will not impact the insurance coverage available to General Makers Corp provided General Makers Corp. had notified Frugal Fire of the claim in writing.

4. Any time that the named insured is aware of a wrongful act that may result in a possible offense or injury, even though a claim has not yet been filed, a report must be made to the insurer. It must be a written notification and it must be provided as soon as practicable. Further, practicable is not defined, so what it means depends upon the circumstance surrounding the particular incident.

Example: Rusty Inspection United reports an incident to its ERPL insurer, two months after it took place:
Scenario 1: It occurred in Rusty’s main office, in front of many employees
Scenario 2: It occurred between a two-person inspection team that was on a remote, out-of-state assignment.
While the time it took to make a report in the first scenario appears to be a major delay, the second situation could very well be considered timely notice.

The policy also requires that any notification concerning a possible, wrongful act include a description of the event, dates when it occurred, names of all involved parties, an explanation as to why the named insured believes the wrongful act may develop into a claim, information on the level of possible damages that may be sought and how the insured became aware of the incident. (11 09 changes)

D. Legal Action Against Us

The insurance company cannot be joined in a lawsuit in which an entity is demanding damages from an insured.

The insurance company cannot be sued under this policy until the terms and conditions of the policy have been met.

The insurer can be sued to recover a settlement that has already been agreed upon or for a final judgment awarded in a trial against the insured. However, the insurer providing ERPL coverage is not liable for damages that are not covered under the insurance policy nor can the insurer be held responsible to pay amounts that exceed the policy’s applicable limit of insurance. The insurance company cannot be held liable for the portion of any settlement that is the named insured’s deductible responsibility.

Example: ABC Printing is sued by an employee who was terminated after he refused to participate in a relocation plan. The employee wins an award of $1,789,000. ABC Printing’s insurer pays the employee $920,000, which is what was available after they deducted $80,000 in defense expenses costs from the $1,000,000 policy limit. The employee threatens to sue for the remaining part of the judgment, but the insurer responds that suit will have to be filed directly against ABC since it (the insurer) is not obligated to pay the amount that exceeds its limit (in this case, $869,000).

An agreed settlement occurs when a settlement has been finalized and a release of liability is signed by the insured, the claimant (or claimant’s legal representative) and the insurer.

E. Other Insurance

Whenever another source of insurance is available to pay the covered loss, it affects an insurer’s obligation to respond. The obligation is as follows:

1. Primary Insurance

The insurance provided in this coverage part is primary. This insurer will not ask another insurer to respond unless that other insurer’s policy (or policies) is also designed specifically to cover an ERPL loss on a primary basis. When both are primary, the damages for the loss will be shared.

2. Method of Sharing

If all other policies permit contribution by equal shares, that is the method that will be used. In this method, each insurer contributes equally to the loss until either the entire loss has been paid or the applicable amount of insurance has been used up.

Example: A claim is filed against an employer for wrongful termination. The amount of damages claimed is $2,000,000. The employer has two ERPL policies, one for $500,000 and one for $2,000,000. Both are considered primary. The claimant files suit and, after a trial, the entire $2,000,000 is awarded to the former employee plus $200,000 in defense expenses have been incurred. In equal shares, each policy pays $500,000 and at that point, the first policy’s limit is exhausted. The second insurer then pays the remaining $1,000,000 plus $200,000 in defense expenses for $1,200,000. When the initial $500,000 is added, the second insurer pays a total of $1,700,000.

When one of the policies does not allow for contribution by equal shares, then the amount payable by each insurer will be determined by the limits provided by each insurer.

Example: Using the same example with the two insurers, one at $500,000 and one at $2,000,000, the total available limits are $2,500,000. Thus, the first insurer is responsible for one-fifth of the loss or $440,000 (500,000/2,500,000 X 2,200,000) and the second insurer is liable for four-fifths of the loss or $1,760,000 (2,000,000/ 2,500,000 X 2,200,000).

No matter which method of sharing is used, the named insured is still responsible for the deductible as shown in the declarations.

F. Premium Audit

The following items apply regarding the ERPL's auditing provision.

1. Premiums for the policy are computed with the insurer’s rates and rules.

2. The initial premium charged for the policy is merely a deposit premium. The insurer will determine or compute the actual earned premium for each audit period. The earned premium (minus the deposit) will be billed to the first named insured that is responsible to pay the premium by the due date shown on the audit bill. If the deposit premium is greater than the earned premium, the excess will be returned to the first named insured.

Note: Reference to retrospective premium no longer appears. (11 09 change)

3. It is the responsibility of the first named insured to keep the necessary records for the insurer to compute premiums. The first named insured must provide the insurer with the records, and whatever other pertinent information is necessary, and must provide copies of those records and information as often as requested by the insurer.

4. The insurer can only waive the audit when the named insured agrees with that decision.

G. Representations

The named insured agrees, in accepting the policy, to the following:

1. The statements in the declarations are accurate and complete.

2. Those statements are based upon the representations made by the named insured to the insurer.

3. The insurer has relied upon the statements and representations of the named insured in issuing the policy.

In other words, this provision explains that the insurer has relied upon the statements and representations made by the named insured in underwriting, determining acceptable coverage, and pricing for this policy. The named insured verifies that the information is accurate and complete. If it later turns out that the information was not true, the insurer may have grounds to void coverage due to misrepresentation.

H. Separation of Insureds

Except for the application of the limit of insurance (which is applied only once as stated in the declarations) and for those rights and duties that are specifically assigned to the first named insured, the coverage under this policy applies in the following manner:

1. To each named insured, regardless of the number, as if that named insured were the only named insured covered by the policy

2. Separately to each insured that a claim is made against

Note: Regardless of the mechanics of applying coverage, the result is that the policy limit is still the maximum amount available to respond to losses during the policy period.

I. Transfer of Rights of Recovery Against Others to Us

Once the insurance company pays on behalf of an insured, any rights that insured has to recover those payments from another are transferred to the insurer. The insured can do nothing to jeopardize or impair those rights. At the request of the insurer, the insured is required to bring suit, transfer their rights to the insurer, or assist the insurer in enforcing them.

Let us clarify this provision. An insured can certainly act in a way that does ruin an insurer’s right to pursue reimbursement from another party. However, if an insured does harm this right, the insurer then is able to take legal action against its own insured. It is important that an insured cooperates with its insurer.

J. If You Are Permitted to Select Defense Counsel

There may be times when an insured may wish to select its own defense counsel. In order to do so, the insured must either reach an agreement with the insurer or obtain a court order. When the insured selects the defense counsel the following applies:

1. The insurer retains the right to:

a. Settle, approve or disapprove the settlement of any claim

b. Appeal any judgment, award or ruling; if this is done, it is at the expense of the insurer

2. Any insured that is involved in a claim must:

a. Continue to comply with all of the duties outlined in this policy

b. Require that the selected counsel cooperate with the insurance company. The selected counsel must provide information so that the insurance company can evaluate if coverage is available under the particular suit. The counsel must also cooperate with the counsel selected by the insurance company to aid in or to monitor the defense.

3. If coverage for a claim is questionable and the insurer has reserved its rights, the insured should be aware that the insurer might end up denying the claim. When the insurer has properly notified the insured of this fact, it is possible that the insured will be solely responsible for paying its selected counsel. The insurer must maintain all necessary and pertinent information regarding defense expenses it incurs. If part of the claim is not covered by the policy, the insurer will use its records to determine which defense expenses are covered by the insurer and which must be paid by the insured.

K. Transfer of Duties When Limit of Insurance Is Used Up

Things can get difficult if an ERPL's insurance limit is exhausted. The policy describes what happens under such a circumstance.

1. If the insurer determines that the limit of insurance is being approached and could be exhausted by claims, settlements, judgments, or defense costs, the insurer must notify the first named insured in writing of that fact. This allows the insured to prepare.

Example: An insured has a policy limit of $3,000,000. The insurer has already paid claims totaling $1,800,000 in damages and $500,000 in defense expenses. $700,000 is the remaining limit of insurance available. Another claim is received for damages in the area of $750,000. The insurer must notify the insured in writing that only $700,000 of the limit is available.

2. When the limit of insurance has been used up by actual settlement payments and defense expenses, the insurer must:

a. Notify the first named insured in writing, (as soon as practicable) that the limit has been exhausted and that the insurer’s duty to defend the insured has ended.

b. Initiate and cooperate in the transfer of control of all unresolved suits to an appropriate insured.

Note: The insurer not only must cooperate in the transfer process, but also must go even further and initiate that transfer of control.

c. As long as the insured is cooperating fully in the transfer process, the insurer is obligated to take all necessary and appropriate actions to continue defending suits until the transfer process is complete. It is up to the insurer to avoid default of any suit during the transfer of defense responsibilities.

3. The first named insured also has duties and obligations in the transfer process. When it has been properly notified it must:

a. Cooperate fully in the transfer of the control and defense of any unresolved suits.

b. Make all necessary arrangements for the defense of those suits within a time period agreed upon between the appropriate insured and the insurer. If a time period agreement cannot be reached, defense arrangements must be made as soon as practicable.

4. The insurer will not take any action on any claim that is reported to the insurer after the limit of insurance is used up. Once the limit is exhausted, it is the insured’s obligation to arrange for the defense of subsequent claims.

5. The first named insured is responsible for reimbursing the insurer for the defense expenses that may have been incurred during the transfer process described in paragraph 2 above.

6. Even in the event that the insurer fails to comply with any of the provisions of this condition, once the limit of insurance has been exhausted, the insurer’s duty to defend ends.

L. When We Do Not Renew

If the insurer decides not to renew the ERPL policy, the insurer will give the first named insured (designated in the declarations) 30-days advance written notice. If any applicable state law/regulation requires a longer period, the insurer will comply. Proof of mailing is considered sufficient proof of notice when the notice is mailed to the insured.

SECTION VI–EXTENDED REPORTING PERIOD

The named insured has the right to purchase an Extended Reporting Period (ERP) under limited circumstances. Buying an ERP is critical with claims-made policies because there may well be a lag time of a year or two between the actual injury and the filing of a claim. As discussed earlier, any claim that is not reported before the policy expiration will not be covered unless the insured has purchased an ERP.

A. Insureds, and often agents, may not anticipate the restricted nature of the limitation. An ERP is only available if the coverage relationship is severed. There are two specific instances that trigger an insured’s opportunity to purchase an ERP:

1. The policy or coverage part is canceled or not renewed for any reason

2. This insurer renews but either of the following applies:

a. The renewed policy has a Retroactive Date later than the date shown in the declarations

b. The policy is renewed on a policy that is not on a claims-made basis.

B. The Extended Reporting Period, if purchased, is for three (3) years. Often that is long enough that a Statute of Limitations will operate to prohibit an injured party from making a new claim. The ERP is an endorsement to this coverage part and there is an additional premium charge. If the insured does not purchase the endorsement, no subsequently reported claim will be covered.

C. The Extended Reporting Period begins the day the policy expires. It does not extend the policy period in any way. It does not in any way change the coverage provided. It only gives an additional period of time during which claims for injury occurring after the Retroactive Date but prior to the policy expiration can be first reported and thus covered.

D. The named insured must act quickly to declare its intent to purchase this Extended Reporting Period endorsement. The insurer must receive a written request for the endorsement no more than 30 days after the policy is terminated.

E. The Extended Reporting Period endorsement does not go into effect unless the additional premium is paid promptly as well as any other premium or deductible that remains outstanding. Of important note to the insured, once this endorsement has been attached and the premium paid, it cannot be canceled.

F. The insurer will set the premium for the Extended Reporting Period endorsement in accordance with their rating rules and manuals. Various factors are taken into consideration in setting the pricing but the most that an insurer can charge for the Extended Reporting Period endorsement is 200% of the annual premium for the policy. Because this is not a competitive situation, it is hard to imagine what motivation the insurer would have to charge less.

G. When the Extended Reporting Period endorsement is purchased, the insurer provides a Supplemental Limit of Insurance equal to the limits shown in the declarations at the end of the policy period. This means that by purchasing the ERP endorsement, the named insured is purchasing a whole new limit of insurance but only for claims that are first reported during the extended period.

SECTION VII–DEFINITIONS

The ERPL policy has words and terms that may be unique to the ERPL environment. ISO specifically defines certain terms used in the policy. As we discussed, these definitions are more than dictionary definitions but instead are used to enhance or to limit coverage.

A. Claim is a suit or demand for damages. The demand must be from or on behalf of an employee and the damages must be due to an alleged wrongful act. The employee can be a current, former or even a prospective employee.

B. Coverage territory is the following:

1. The USA, its territories and possessions, and Puerto Rico

2. The entire world, but only when the insured's responsibility to pay damages is determined in a suit brought in the territory described in item 1. or through a settlement to which the insurance company agrees.

It is common for U.S. insurers, while providing limited worldwide coverage, to only respond to damages based upon U.S. law. It would be difficult to underwrite and determine an appropriate premium otherwise.

C. Defense expenses are payments allocated to a specific claim that the insurer investigates, settles, or defends. This is very important information because all of these expenses are part of the limit of insurance. The money used to pay these expenses will be subtracted from the amount of insurance available to pay the actual damages. The following are examples of the types of expenses that can be included but please note that others may be included. The important part is that only expenses that are specific to the particular claim can be charged. General claims and defense expenses incurred by a company cannot be included.

1. Fees and salaries of attorneys and paralegals either retained or employed by the insurer.

2. Fees of insured-selected attorneys but only when hired with the insurer’s consent or by order of a court. (See Condition J. If You Are Permitted To Select Defense Counsel)

3. Other litigation or administrative hearing expenses. An example of an expense is the cost defense counsel incurs by hiring expert witnesses.

4. Reasonable expenses incurred by the insured at the insurer’s request in order to assist it in the investigation or defense of a claim, including actual loss of earnings up to $250 a day because of time off from work. To be covered the insurer must request the assistance. Voluntary assistance expenses incurred by the insured are not covered.

5. All costs that are taxed against the insured in the suit.

Defense expenses do not include the salaries and expenses of employees of the insurer or of the insured (except those described in 1. and 4. above).

D. Discrimination in this policy is narrowly defined to mean the violation of a person’s civil rights. The violation must be based on one or more of the following factors:

· Race

· Color

· National origin

· Religion

· Gender

· Marital status

· Age

· Sexual orientation or preference

· Physical or mental condition

· Any other protected class or characteristic PROVIDED that protection is established by any federal, state or local statutes, rules or regulations

E. Employee is expanded to include leased and temporary workers but not independent contractors. There is an endorsement available to add coverage for contractors.

F. Executive officer is a person who holds any officer position. That position must have been created by the named insured’s charter governing document such as its constitution or by-laws.

G. Leased worker is a person who is leased to the named insured by a labor-leasing firm. There must be an agreement or contract between the named insured and the labor-leasing firm. The leased worker must be leased to perform duties related to the conduct of the named insured’s business. A temporary worker is not a leased worker.

H. Suit is a civil proceeding in which damages because of wrongful acts are alleged. The wrongful act must be covered by this insurance. The civil proceedings include, but are not limited to the following:

1. Arbitration but only if the insured is required to submit to it or willingly submits to with the permission of the insurance company.

2. Any alternative dispute resolution (ADR) but only if the insurance company gives permission prior to the insured submitting to the ADR.

3. A governmental agency administrative action but only if the agency has legal authority over the matter in which damages are claimed.

I. Temporary worker is a person who is substituting for a permanent employee while that employee is on leave. It is also a person hired to meet seasonal or short-term workload conditions. The person must be furnished to the named insured.

J. Wrongful Act is one or more of any of the following but only when related to employment:

· Demotion, failure to promote, giving a negative evaluation, reassignment, or discipline of a current employee if considered wrongful.

· Not hiring a person if done for a wrongful reason.

· Termination if done in a wrongful manner. A wrongful manner is when an employee is constructively or actually terminated in either of the following circumstances:

o The law or public policy is either violated or breached

o A contract or agreement that stipulates financial consideration as a result of the breach of the contract is violated. The contract or agreement can be implied, written, or oral. The contract cannot be an actual employment contract.

Related Court Cases:

Terminated Employee Does Not Qualify As "Protected"

Terminated Employee Challenges Reduction in Work Force Reasoning, Alleges Age and Sex Discrimination

· Any denial of training or deprivation of career opportunities for a wrong reason or any breach of employment contract.

· Negligent hiring or supervision, which results in another offense listed herein.

· Retaliatory action against an employee who has:

o Declined to perform an illegal act

o Declined to perform an unethical act

o Filed a complaint with a governmental agency or a suit against any insured

o Testified against any insured

o Notified an authority of illegal activity.

Related Court Cases:

Discharged Employee Not Covered Under Whistleblower's Protection Act

Terminated Employee Protected By Whistleblower's Protection Act

· Coercing an employee to perform an illegal act as a part of that employee’s work function

· Harassment.

Note: This term is not further defined which leaves it fairly wide open but to be covered the harassment must be related to employment.

· Libel, slander, invasion of privacy, defamation, or humiliation. As with harassment, these situations are not further defined but still must be related to employment activities.

· Any other type of verbal, physical, mental, or emotional abuse that comes from discrimination as defined in this policy and is work related.