Directors and Officers Liability Insurance

What is EPLI and how does it work?
Legal expenses can burn a deep hole in an organization’s pockets. With the surge in the number of lawsuits filed by employees (current, previous and potential) against companies, additional coverage is necessary to prevent cash outflows. Employment Practices Liability Insurance or EPLI provides coverage to companies against such employment-related claims. This includes claims made for:

  • Wrongful or forced termination
  • Discrimination
  • Harassment (sexual or otherwise)
  • Breach of any aspect of an employment contract
  • Infliction of mental trauma or distress
  • Willful denial of career opportunity or growth
  • Negligent performance evaluation
  • Any other employment-related malpractices

There are no second thoughts about the need for an organization to comply with all applicable rules and regulations, and to undertake every step to create a good and safe working environment. However, it is important to be prepared for all eventualities. Even unfounded or false allegations need to be defended and this defense can cost a fortune (in terms of time, resources and goodwill). EPLI is a good and effective way to mitigate at least the financial risks involved in such allegations. And more importantly, this is much-needed support for officers of the company when they are falsely accused.
Rise of EPLI in India
The number of employment-related lawsuits has been on the rise in the recent past. Large organizations such as TCS, IBM, Infosys, to name a few, have been dragged to the courts by their employees over a wide range of issues – eg. employment discrimination, violation of labor laws, wrongful job cuts, etc. Last year witnessed the rise of the #MeToo movement in India.  Though it started with Bollywood, it quickly spread to the corporate sector as well. When an allegation of misconduct is made against a member of the organization, the organization also gets dragged into the matter. All this has made it necessary for organizations to take additional coverage and protection.
A decade back, the concept of EPLI was restricted to very few companies in India. It was usually taken up by organizations that had a vast global presence (especially exposure in the United States). However, in the recent past, more and more companies are including EPLI as a part of their D & O (Directors and Officers) insurance policy. The premium amount for coverage against such employee-related claims is minimal compared to the outflows it can cause. The legal costs and compensation amounts are exorbitant. Hence, companies prefer to err on the side of caution.
Previously this phenomenon was limited to only large corporations or multinationals. However, these days many mid-sized companies are also opting for EPLI cover. 
Many D&O insurance policies have an EPLI component included by default which covers the top or senior management. If one wants to have a wider coverage and broaden the scope to include more management levels, it is better to opt for a stand-alone or exclusive Employee Practices Liability Insurance policy. 
How does an EPLI Policy work?
Employment Practices Liability Insurance is an extended arm of the overall Directors & Officers Insurance Policy. It covers various expenses such as investigation or defense costs as well as the compensation payable (if any) to the concerned employee. The scope of a D&O policy is wider as it covers costs due to claims or suits filed by third parties such as shareholders, vendors, customers, and even employees.
So, how does an EPLI Policy work? We will explain that with the help of an example. 
Assume that an ex-employee files a lawsuit against a company. The charges are discrimination on the grounds of race and unjust termination. In this case, the company directors will need to defend themselves (and the organization) in courts of law. This is when the Employment Practices Liability Insurance Policy will kick in. It will take care of all the legal costs and expenses incurred in fighting the case. 
Does an EPLI policy cover for the director’s (or another officer) wrongdoings?
No. The EPLI policy is always from the perspective of the organization. The coverage or protection is not applicable in case criminality is proven. If as a result of the investigations, the accused is found guilty of the allegations and is convicted by the court, then the insurance provider recovers the legal costs paid from the concerned person (i.e. convict). 
In case it is established that the allegations made against the company (or its officers) were false, then the insurance company will bear all the legal costs involved. In no way is an EPLI policy a way to cover up the malpractices or indiscretion displayed by members of the organization.
Usually the proposal form for D&O policies (including EPLI) is signed by the CEO or CFO of the organization. This helps in cascading the importance of a good and ethical working environment down the levels. It also ensures that they implement proper guidelines and mechanisms to deter any discrimination or malpractices in the company. 
Final Thoughts
Risk mitigation plays an important role in the growth of an organization. Insurance policies are no longer restricted to just the life or health of individuals but are also applicable to organizations. Though not mandatory, a D&O liability insurance policy is an integral element of corporate governance. And given the current scenario and the substantial rise in the D&O claims in India, it is better to go one step ahead and strengthen the D&O policy with an Employment Practices Liability Insurance as well. You can protect yourself with a good policy offering better benefits at a lower cost at Remember, ignorance is not always bliss!

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