Other side of the story

Other side of the story

In the July/August 2015 edition, we discussed the insurance and management of the first category of employment risks. Essentially, the discussion focused on risks of a physical nature, such as bodily injury, sickness, or death of employees in the course of employment. This is the second part of that discussion

It was pointed out in the previous discussion that risk management efforts relating to these risks revolve around occupational health and safety interventions. We also noted that both employers’ liability insurance and workmen’s compensation are common methods of financing compensation payable to those affected by these risks.

In most countries, workmen’s compensation is by far the main source of compensation, while in a minority of countries employers’ liability insurance dominates.

In this article, we consider the second category of employment risks and discuss some perspectives on how these risks can be insured and managed.

Employers need to understand that not all risks associated with the workplace result in bodily injury, sickness or death. Some employment risks arise from wrongful practices adopted by the employer resulting in legal liability.

Risks of this nature include: discrimination of an employee at work, sexual harassment, wrongful dismissal, breach of the employment contract by the employer (this could be on the basis of race, religion or sexual orientation), defamation, failure to promote, negligent supervision, invasion of privacy and retaliation.

These risks do not result in bodily injury or death of employees. They are collectively known as employment practice liability risks. They can be as financially damaging as risks causing injury or death, if not worse – to the extent that they affect the financial stability and reputation of a firm.

For some empirical results of employment practice liability risks on companies, it is perhaps helpful to turn to the most litigious country on the planet, the United States (US). Studies from the US indicate that, since the late 1990s, employment practice liability risks have been increasing at a much faster rate than risks causing bodily injury or death.

According to the US Equal Employment Opportunity Commission (EEOC), private sector workplace discrimination cases, filed with commission, peaked at 99 922 in 2010. Other studies have also shown that six out of ten employers in the US faced an employment practice lawsuit from 2006 to 2011.

It has also been observed that nearly 75 percent of all civil cases filed against companies in the US involve an employment practice dispute. Another interesting observation is that the frequency of employment practice liability claims tends to increase in periods of economic stagnation.

An explanation for this could be that when the economy is not in good shape employers are hard pressed to cut costs, which results in infringement of employee rights. In highly litigious countries like the US, such infringement rarely goes unchallenged.

How then can employers manage their exposure to employment practice liability risks? An obvious answer is by taking out insurance. Employment practice liability risks are generally insured under Employment Practice Liability (EPL) policies. This type of insurance is relatively new, having been introduced in the early 1990s.

EPL policies exclude coverage of all risks associated with occupational health and safety, which, as we saw in Part 1 of this article, are covered under workmen’s compensation or employers’ liability insurance. Claims constituting wrongful employment practice are invariably arbitrated and a significant number are settled through litigation.

As a consequence, coverage of defence costs is an integral component of EPL insurance. In a significant number of cases it is not unusual for the claim to be settled for an amount significantly lower than the cost of the defence. In addition, insurers take great care in defining what constitutes a wrongful employment practice for purposes of coverage.

Naturally, there is a lot of variation among insurers on how this term is defined, with some defining it more narrowly than others. Generally speaking, however, the term “wrongful employment practice” incorporates a variety of objectionable practices such as discrimination, sexual harassment and wrongful dismissal.

Apart from buying insurance, there is a lot more that employers can do by way of risk management to reduce their exposure to employment practice liability risks.

New insurance products like EPL are bound to be highly priced by insurers as they build expertise in assessing the risks covered.

Risk management should, therefore, be the primary focus area for employers. Any effective risk management intervention must be premised on a sound understanding of the risks that it seeks to mitigate. Employment practice liability risks arise from three main sources.

The first is failure by the employer to adhere to or uphold the company’s own employment policies. This can easily happen if implementation of those policies is deemed to cost money against a background of faltering business fortunes.

Another source of employment practice liability risk is the employer’s failure to comply with contractual obligations.

The last source is the employer’s failure to comply with legal obligations. Effective risk management interventions will invariably be those that target these sources of exposure. A simple four-stage risk management strategy can be adopted by employers to manage employment practice liability risks:

1. There must be a clear, comprehensive and context-specific set of workplace rules and policies.

2. The rules and policies must be well communicated – especially to people who are more likely to breach them and create vicarious liability for the employer in the process. Middle and senior managers are particularly important in this regard.

3. There must be a mechanism of ensuring that managers and supervisors comply fully with company rules and policies. One way of ensuring this would be to make this item a key performance area on which they are regularly assessed.

4. A framework must exist to monitor and evaluate compliance with rules and policies across the company. Adjustments can be made where necessary. A properly functioning risk management system, premised on a good understanding of employment practice liability risks, can even make the purchase of insurance unnecessary.

Employment practice liability risks are a product of a company’s internal architecture or relationships. Firms should constantly strive to build a good understanding between themselves and their employees based on honesty, trust and accountability.

In other words, companies should build their operations around clearly communicated values, which are shared by employees. However, as is often the case, things can go wrong. It is, therefore, important that firms have structures and measures in place to deal with situations when they arise.

Employment practice liability is a fast-growing source of exposure for firms, certainly in the US, and this trend is expected to spread to other regions as well. It would, therefore, be unwise for local firms to simply wish this type of exposure away.

Unlike in the past, when employees used to shun taking their employers to court, things are rapidly changing, as a result of increasing awareness by employees of their rights at the workplace.

Recurring litigation of this nature could seriously damage the reputation of a company. Simple risk management measures discussed in this brief can make a big difference between avoiding or settling financially crippling claims.


Legally Speaking is a regular column by Albert Mushai from the school of Economics and Business Sciences, University of the Witwatersrand. Mushai holds a master’s degree from the City University, London, and was the head of the insurance department at the National University of Science and Technology in Zimbabwe before joining the University of the Witwatersrand as a lecturer in insurance.

Published by

SHEQ Management

SHEQ MANAGEMENT is the definitive source for reliable, accurate and pertinent information to guarantee environmental health and safety in the workplace.
A proud Thabo Modumaela – SGB-Cape’s national health, safety and environmental manager – showing off the company’s accolades.
Prev Nearly 30 Noscars and still aspiring for more
Next Prevent alcohol related accidents – in and out of work
Prevent alcohol related accidents – in and out of work