Should your company insure against discrimination, wrongful termination suits?

Many companies have recently been presented with a new type of insurance option -- one that may protect them from employment related litigation. Although California law prohibits employers from insuring against liability for a claim of wrongful termination "in violation of public policy," employers can insure against some forms of employment related liability, such as wrongful termination, sexual harassment and some forms of discrimination.

Review Of A Sample Policy

Under the terms of the policy, lawsuits for wrongful termination, sexual harassment and the most common forms of discrimination are covered. The insurer pays the employer's liability and defense costs up to policy limits, excluding punitive damages, civil or criminal fines, and non-monetary damages (e.g., reinstatement of an employee). Although wrongful termination claims are generally covered, claims based on an express contract are not.

The policy would also cover an employee for actions within the course and scope of employment that result in liability under the covered theories unless a judge decides that the employee acted with intent to harm. The insurer will pay for an employee's defense until such a judicial determination is made.

The employer is required to provide a detailed report to the insurer as soon as it becomes aware of a situation that is likely to result in a covered claim. The insurer has the absolute right to select defense counsel and to settle the case up to policy limits at any time in its sole discretion. The insurer could even settle a potential claim before litigation, again in its absolute discretion.

The policy containes a very interesting feature. Insureds are encouraged to participate in an Employer Practices Audit Program, designed and implemented by the insurer in conjunction with an international law firm. The insurer will pay 50% of the audit up to $2,500. The program includes an examination of all personnel policies and practices of a policyholder including employee handbooks, job applications, collective bargaining agreements, affirmative action programs and individual employment contracts. The program is designed to assist policyholders in identifying and correcting potential employment problems, and could lead to reduced renewal premiums.

The cost for this insurance: approximately $25,000 a year per $1 million of coverage.

Analysis Of The Policy

"Because state law does not allow companies to insure against punitive damages, these policies will not protect companies from many of the million dollar verdicts often handed down by California juries. However, attorneys' fees, which are covered under such a policy, can quickly accrue into significant amounts and thus an employer may wish to insure against this often costly expenditure.

Second, employers may have a problem with the provision that gives the insurer complete discretion in deciding whether or not to settle a case. Employers generally consider factors other than pure short term economics in deciding whether to litigate or settle lawsuits, but insurance companies only focus on the immediate bottom line, and therefore may act differently than would employers. Insurance representatives will point out that it is rare that an employer and insurer disagree on the settlement issue; they claim that an insurer would be as motivated as an employer to make reasonable settlement decisions since it will be faced with the payment of future claims should an employer be perceived as an "easy" target for employment related lawsuits.

Third, it is hard for some employers to stomach an insurance company selecting, in its sole discretion, the attorney who is going to defend the company against potentially disastrous claims. It is argued that insurance companies may tend to hire a less expensive lawyer, which could mean lower quality service. Again, however, insurers claim that they are equally motivated to choose high quality, but reasonably priced, counsel. Further, the insurance company will sometimes allow an employer to choose counsel as long as the lawyer is pre-approved (approved at the initiation of the policy) by the insurance company.

Bruce Friedman, a partner at the Los Angeles law firm of Mitchell, Silberberg & Knupp who specializes in insurance coverage, calls this type of insurance "necessary." Friedman recommends, however, that employers negotiate for the ability to settle litigation and to select their own counsel, or look for another policy that provides such options.

There is at least one part of the coverage that is certainly attractive -- the Employer Practices Audit Program. Regardless of whether a company decides to buy this type of insurance, employers would be well advised to invest in hiring an experienced human resource consultant or employment lawyer to conduct an audit similar to the one described in the policy. The cost of defending even one lawsuit can be many times the cost of these periodic audits.

Joseph L. Beachboard is an employment attorney and the president and publisher of "The California Labor Letter," an employer information service based in Manhattan Beach, California. Readers of the Los Angeles Business Journal may receive a complimentary copy of the December issue by calling [phone].