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Do We Have Insurance for That? An Overview of Employment Based Insurance

A nonprofit faces many risks.  It may be sued if someone is injured on the nonprofit’s premises; it may have a substantial loss if there is a fire at one of its offices; or it may have to pay a claim if a volunteer is in an auto accident.

One of the more significant risks that a nonprofit faces involves employment claims.  Employees can file a claim against their employer for many reasons, including wrongful termination, discrimination, harassment, wage and hour violations, and injuries on the job.  It is important for a nonprofit to understand how it can protect itself in such case.

A. Preventing Employment Based Claims

As a first step, the nonprofit should take steps to ensure that it fully complies with the applicable employment laws.  For example, it should adopt a nondiscrimination policy and a policy prohibiting sexual and other forms of harassment.  The nonprofit should ensure that it is properly paying people, including making sure that it is characterizing its workers correctly – is the person really an independent contractor or should the individual be treated as an employee; is the employee exempt from overtime pay or not; is the nonprofit providing the statutorily required sick leave?  It is also important for the nonprofit to properly train its employees, and to make them aware of the nonprofit’s legal responsibilities.

B. Employment Practices Liability Insurance

However, even a nonprofit that has adopted the appropriate policies and trained its staff will face legal issues from time to time.  Therefore, the next step is for the nonprofit to consider purchasing employment practices liability insurance, or EPL insurance.

EPL insurance covers an employer’s wrongful acts arising from the employment process. The most frequent types of claims covered under EPL policies include: wrongful termination, discrimination, sexual harassment, and retaliation. In addition, an EPL policy will cover claims from a variety of other types of inappropriate workplace conduct, including (but not limited to) employment-related defamation and invasion of privacy. An employer may purchase a free-standing EPL policy, but the coverage is often included as part of a business insurance policy package or an association liability policy (commonly referred to as D & O insurance).

Nonprofit policies will typically provide coverage to the nonprofit’s officers and directors, employees and volunteers, as well as the nonprofit itself.  The policy will typically pay for the cost of an attorney, and neither the nonprofit nor the individuals should have to pay any out-of-pocket costs in connection with an employee claim.  These types of policies are what is known as a “claims made” policy – meaning that the claim is covered under the policy in effect when the claim is made.

For example, suppose an employee is sexually harassed in 2017, but files a claim against the employer in 2018.  The nonprofit employer’s 2018 policy will provide coverage for the potential claim, because that was when it was filed, even though the harassment occurred in 2017.  Under the policy, the insurer should provide the nonprofit with an attorney to defend the claim, and pay the amounts due to the employee in a settlement or judgement.

You should check with your insurance broker to ensure that your insurance provides EPL coverage, and whether the policy is a “claims made” policy.

C. Workers’ Compensation

Another common claim an employer faces is if an employee is injured on the job.  In such case, D.C. and state laws provide that the employee cannot sue the employer.  Instead the employee is required to file a worker’s compensation claim with the D.C. or state workers’ compensation board.  Under D.C. and Maryland law, an employer is required to maintain workers’ compensation coverage if it has any employees (including part-time employees).  Under Virginia law, an employer must maintain workers’ compensation coverage if it has more than two employees.

Workers’ compensation has many elements that are common to every state, but there are some provisions that are state-specific, including how to calculate premiums.  Therefore, a nonprofit that employs individuals to work in more than one jurisdiction, such as D.C. and Maryland or Virginia and D.C., should make sure that it has coverage in every state where it has employees.

D.  Non-Insured Claims

Even if your organization has insurance, it still faces potential liability for certain common employment claims.  This is because most insurance policies do not cover them.  The most common are failure to pay minimum wage and overtime.  For example, suppose you think one of your employees is exempt from overtime pay, and the employee files a wage and hour claim, stating that they are eligible for overtime.  Historically, EPL policies have not covered this type of claim and an organization was responsible for finding an attorney to represent it, and for paying any claims for unpaid wages the employee makes.

There has been a steady increase in the number of wage and hour claims being brought by former and current employees.  In order to protect employers, insurance carriers are now offering wage and hour endorsements to EPL policies.  Typically, this endorsement covers the cost of defending claims alleging that an employer failed to pay overtime or minimum wages to a nonexempt employee.  This additional coverage typically does not cover settlements or judgments (i.e., they cover only attorneys’ fees and other defense costs), and there may be a lower limit (e.g., $100,000 to $500,000) to the amount of coverage the employer has.

You should check with your broker to determine if you have this additional coverage in place, whether your organization should obtain it, and how much it would cost.   However, because the insurance will typically not cover any back wages and penalties your organization may owe for failing to meet the wage and hour laws, your organization may still face a substantial judgement which it must pay out of its assets.  Therefore, you should also consult with an attorney to ensure that you are properly paying your employees.

E. Risk Management Services

Finally, your EPL insurance carrier will often provide you with risk management services free of charge.  This is because the insurance carrier believes it is more cost-effective to avoid a claim than to pay one.  Specifically, most insurance carriers have employment law attorneys available to answer basic legal question you may have.  For example, suppose you are about to terminate an employee. You may be able to call your insurance carrier and speak to a lawyer before the termination takes place.  The employment lawyer could give you some pointers about how to avoid potential liabilities.  If you have a difficult employment situation that you are trying to resolve, it may be most effective to reach out to your insurance broker and see if there is an attorney you can speak to who will talk to you about the problem.