Employment Practices Liability Insurance/Choice of Defense Counsel and Other Issues

In 2015 we will continue to see an increase in litigation, in the areas of sexual harassment, disability discrimination, failure to reasonably accommodate employees with disabilities, violations of FMLA/CFRA, wrongful termination in violation of public policy (whistle-blowers), and wage and hour claims including class action cases. Many of the discrimination cases are frivolous at best.  In the wage and hour class action cases, opposing counsel prey on our clients for technical violations. What happens to all of these cases?  Are these cases decided by judges and juries?  No.  They are settled.  In my experience even the most frivolous discrimination case ends in a settlement between $30,000 and $60,000.  The wage and hour cases settle for substantial sums.  Why are these cases settled?  Sometimes, employers do not want to risk their fate before a jury, or it is cheaper to settle than pay defense fees.  These things are true in many cases, but not all.  We are proponents of mediation and settlement when our clients have legal exposure and when, in our opinion, the risk of a verdict against our client is likely.

The vast majority of employment cases are covered by Employment Practices Liability Insurance policies and insurance carriers would rather settle for a reasonable sum than spend money on litigation defense, even if the case has no merit.  The end result, in my opinion, is that this an approach often increases frivolous litigation.  In one case, one of our clients agreed to a $100,000 settlement even though the client did nothing wrong.  We were prepared to try the case, but the client was facing the insurance carrier’s “hammer clause” whereby the carrier could get out of the case, and leave the client to fight on its own, if the client did not consent to the settlement. Our client made the difficult business decision to settle.  Now we wait for the same attorney to look for new cases against our client. Would you have settled?  The choices are difficult.

We value our relationship with many of the Employment Practices Liability Insurance carriers.  We are panel counsel for several carriers and approved by many more. Many of the carriers understand employment litigation and are truly partners with our clients.  There are other carriers that simply have acted in bad faith on claims.  Several of our clients with claims were disappointed to discover that their policies were not renewed after having a claim that was costly in terms of settlement and defense costs.  The solution is partnering with a responsible carrier at the beginning of the case to determine the potential exposure, developing a litigation budget and a strategy for early resolution by mediation.   It is critical to determine very early in the litigation the amount of covered exposure v. uncovered exposure.  This happens frequently when there are discrimination causes of action and also alleged wage and hour violations such as overtime, rest periods, meal periods and related penalties.  When there are wage and hour violations, there may be coverage for defense but not the wages and penalties resulting from the alleged violations.  Employers must be prepared to participate in the settlement beyond their deductible for these uncovered causes of action.

Do we recommend Employment Practices Liability Insurance?  Yes.  We also believe that our clients deserve to have their long term interests represented by counsel of their choice and not the attorneys assigned by the carrier. Most employers do not understand that they give up that choice because of policies that are “duty to defend” policies, which allow the carrier to assign defense counsel from their panel list.  Therefore, we recommend that our clients have “choice of counsel” policies, or ask for a Special Endorsement to have our firm designated as counsel in the event of a claim.  In the last year, several of our long term clients found themselves with major claims and our firm could not represent them in litigation because of the terms of the policy.

I was admitted to the California Bar on November 29, 1978.  After practicing employment law for 35 years, the landscape has changed, and not for the better for employers.  New and creative approaches to resolution of employment disputes, including termination of employees, must be adopted.  Our focus must be the prevention of lawsuits and, in the event of litigation, strategies to discourage future claims.  As always, I am available to discuss these issues with you and your trusted insurance brokers.

By: Alfred J. Landegger, Esq.

Rev. 2/2015