The directors’ & officers’ liability insurance (D&O) policy covers wrongful employment practice claims. This post attempts to provide a better understanding of what kind of claims can be made under the category of wrongful employment practices.
Key Takeaways
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Broad Spectrum of Eligible Claimants: Employment Practice Liability Insurance (EPLI) extensions under D&O policies protect executives against lawsuits brought by past, present, and prospective job applicants.
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Inclusion of Non-Physical Harm Claims: Policies cover non-physical workplace injuries, including employment-related defamation, invasion of privacy, humiliation, and emotional distress caused by managerial decisions.
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Coverage for Inaction and Omission: Liability triggers are not limited to active misbehavior; failure to promote, failure to grant tenure, or failure to follow internal employee handbooks can also spark insured claims.
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Independent Investigation & Defense Funding: Insurers fund independent workplace investigations and hire specialized employment defense attorneys to clear directors of false discrimination charges during restructuring layoffs.
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Third-Party Entity Protection Gap: Standard D&O policies shield individual leaders against workplace lawsuits; an explicit EPLI endorsement is required to extend coverage directly to the corporate entity.
What are wrongful employment practice claims?
Past or present employees of a company can make wrongful employment claims. The majority of these claims arise due to actual or alleged misleading statements, acts of omission, negligence, or breach of duty on the part of directors or officers of the company. These malpractices pertain to employment. Such lawsuits can also come from prospective employees going through a recruitment process.
Termination of employment in D&O insurance
For example, the director or officer of a company may dismiss, discharge, or terminate an employee on a wrongful or unlawful basis. This could be an actual or even a perceived issue and could result in a wrongful employment practice claim.
Breach of contract
A claim could also arise if there is a breach of an employment contract. The breach might be due to oral or written communication. The contract can either be an employment contract or a quasi-employment contract.
Read More: What is covered under directors’ and officers’ Liability Insurance Policy?
Discrimination or harassment
An employee might bring a claim if they face any one of the following:
- sexual harassment
- harassment at the workplace
- discrimination on the basis of race or national origin; sex; sexual orientation; religion; maternity; pregnancy; age; or disability
- unlawful discrimination, either intentional or unintentional.
Non-compliance in D&O insurance
Non-compliance or non-adherence to working hours can also be a reason for wrongful employment practice claims. Employees might make wrongful discipline claims if the organization does not adhere to office/employment policies in case of disciplinary action.
Promotion or demotion
Employees might make claims if a director or officer wrongfully promotes or demotes an employee. Even if a director’s or officer’s action deprives an employee of a career opportunity, employees can claim wrongful employment practices.
Failure to act
A wrongful employment claim might result from a director or officer’s failure to do something. For instance, failure to grant tenure or failure to adhere to the policies and procedures of the workplace or employment.
Whistle-blowers
Any action that is construed as revenge against whistle-blowers or any other person could also be characterized as a wrongful employment practice.
Other actions in D&O insurance
In addition to these, wrongful employment practice claims under the D&O liability policy can arise due to:
- negligence in the evaluation of the employee
- invasion of privacy, which is employment-related
- libel, slander, humiliation, and defamation, related to employment
- failure to provide accurate job references
- Causing mental anguish or emotional distress
Read More: Who are covered under Directors & Officers (D&O) Liability Insurance Policy?
How a D&O insurance policy helps ?
In all the cases described here, where wrongful employment practice claims can arise, D&O liability insurance will pay for costs. This covers the legal costs of your defense and also any final settlements. You must inform the insurer when litigation is anticipated, and they will then approve the claim. Sometimes, an insurer will want to be deeply involved in the legal defense. But usually, they will let you decide how to argue your case.
Summary Table: Employment Practice Liabilities Under D&O Policies
Case study: Cover for wrongful employment practice claim
An IT firm was going through tough times as business was down, leaving the only remaining choice was cost-cutting. Thus, the directors made the tough decision to reduce the number of employees. Accordingly, they sacked 10 employees.
A female employee filed a suit against the directors of the IT firm. She claimed that a particular director had always discriminated against her on the grounds of her gender and her faith. She claimed this was the reason for her dismissal.
The directors of the IT firm approached their insurance company since they had bought a D&O liability insurance policy. The insurer identified lawyers, whom they paid for, who were familiar with such cases. They also paid an external firm to conduct an investigation. The insurer’s objective was to strengthen the company’s defense and minimize its eventual claim cost.
The investigation revealed that cost-cutting was the real reason for the dismissal of the female employee. Her gender and religion had nothing to do with the termination of her employment. Hence, the investigation cleared the director of any wrongdoing. The company then reached a settlement with the former female employee. The insurance paid for this as well.
Frequently Asked Questions (FAQs)
1. What are wrongful employment practice claims under a D&O liability policy?
A) Wrongful employment practice claims refer to legal actions filed by current, former, or prospective employees against company directors or officers. These claims allege employment-related misdeeds, including wrongful termination, workplace harassment, discrimination, breach of contract, or retaliatory actions.
2. Are job applicants covered under Employment Practices Liability Insurance (EPLI)?
A) Yes. EPLI protection extends beyond active staff to cover prospective employees who allege unlawful discrimination based on age, gender, race, religion, or disability during the recruitment, interviewing, or hiring process.
3. Does D&O insurance cover wrongful termination claims resulting from company-wide layoffs?
A) Yes. If an employee terminated during a corporate downsizing files a lawsuit alleging wrongful dismissal, gender bias, or targeted discrimination, a D&O policy with EPLI coverage funds the legal defense fees, independent workplace investigations, and out-of-court settlements.
4. How does EPLI protect executives against whistleblower retaliation suits?
A) If an employee alleges that senior management demoted, disciplined, or harassed them in retaliation for reporting regulatory violations or unethical practices, EPLI coverage steps in to pay attorney fees, court costs, and potential financial awards levied against the directors.
5. What is the difference between standard D&O insurance and an EPLI extension for workplace claims?
A) A standard D&O insurance policy protects individual directors and officers when employees sue them personally for managerial missteps. Adding an Employment Practices Liability Insurance (EPLI) extension ensures that the company entity itself is covered when an employee files a lawsuit directly against the organization.
About The Author
Rajesh
MBA Finance
With a wealth of expertise in the insurance realm, Rajesh is a distinguished writer specializing in articles focusing on directors and officers insurance for SecureNow. Boasting 9 years of experience in the industry, he profoundly understands the complexities surrounding directors and officers liability coverage. Their articles delve into the intricacies of D&O insurance, providing readers with invaluable insights into risk mitigation strategies and policy considerations. Renowned for their comprehensive knowledge and attention to detail, Rajesh is dedicated to delivering informative and engaging content that empowers individuals and businesses to navigate the complexities of insurance with confidence.
