Coverage for workplace-related claims (such as wrongful dismissal and human rights complaints) has become increasingly common in the Canadian insurance landscape. While certain employment practices liability insurance policies (“EPLs”) do provide coverage exclusively in relation to such claims, oftentimes coverage is instead found in directors’ and officers’ liability policies/management liability policies (“MLPs”) or otherwise in legal expense policies (“LEPs”).[1]
Although the essence of EPLs, MLPs, and LEPs may be the same (coverage in relation to employment-related wrongs), there is no standard form, and such policies do contain notable distinctions. Given the prevalence of employment-related coverage in MLPs and LEPs specifically, and the unique considerations associated with each kind of policy, a comparison of both can be illustrative.[2] These similarities and differences may be particularly relevant where an entity possesses coverage under both policies.[3] To that end, we note the following common features of MLPs and LEPs:
a) Type of Policy: MLPs tend to be “claims made” or “claims made and reported” policies, meaning that coverage is triggered by claims made during the period of insurance. By contrast, LEPs may be written on an “occurrence” basis. This distinction will be relevant depending on the timeframe of the claim in determining coverage.
b) Coverages: Both MLPs and LEPs will contain some description of coverage for employment disputes. The definitions under each policy may include claims following the dismissal of an employee, or for breaches of human rights or other employment-related legislation. The scope of this coverage will vary from policy to policy. For example, in Canada there can be a distinction between individuals being considered employees or independent contractors. Whether a claim made by an individual alleging an independent contractor relationship is covered by either an MLP or an LEP will be dependent on the policy’s wording. Likewise, whether claims made by unionized employees are covered will be dependent on the policy’s scope of coverage. Employment-related claims generally can encompass a number of civil and administrative matters which may or may not fall within the scope of either an MLP or an LEP.
c) Scope of Loss: LEPs generally do not cover damages of any kind, but do cover defence costs and potentially other specific expenses. By contrast, in addition to defence costs, MLPs may also cover punitive, exemplary, or aggravated damages. Neither LEPs nor MLPs cover amounts owed pursuant to an employment agreement, including damages to compensate for the failure to provide reasonable notice. This is notable, as wrongful dismissal claims will almost always seek some amount to compensate for reasonable notice. In instances where aggravated damages are claimed (as is frequently the case with wrongful dismissals), an MLP will provide coverage of such amounts whereas an LEP will not.
d) Analysis of the Merits: a requirement for coverage under an LEP is a determination of whether the claim possesses “reasonable prospects of success.” Although the definition of such may vary from policy to policy, generally this means that, in order for coverage to be triggered, the insurer must agree that the claim is more likely to succeed than not (i.e. on a balance of probabilities). Coverage under an MLP does not generally require an evaluation of the merits of the claim and whether there is liability on the part of the insured. Depending on the nature of the claim, this analysis can be relatively straightforward or may prove to be contentious.
Practically, businesses may have one or both of MLP and LEP coverage, depending on the nature of their operations. Given the distinction between both types of policies there may be some overlapping coverage and, where an insured possesses both, a question of policy primacy may emerge. From a practical perspective, the requirement for reasonable prospects of success as well as the more limited scope of loss under an LEP generally makes it more difficult for the insured to demonstrate coverage is triggered. As such, LEP policies may set out a lower deductible (or no deductible) when compared to an MLP.
Ultimately, while there are a number of distinctions between these types of policies, parties to an insuring agreement related to employment practices should consider the relative merits of both types of policies. At the core of risk management for workplace-related claims will be the structure of the workplace and the sophistication of its human resources operations. Given the various differences between employment-related coverages, the nature of the underlying policy (i.e. MLP or LEP) can affect claims handling costs. This is particularly the case where significant aggravated or punitive damages are claimed, or where an insured’s prospects of success are controversial.
[1] Not all MLPs or LEPs contain this coverage. This analysis focuses on those policies which do include these types of claims.
[2] It is beyond the scope of this article to consider the breadth of EPL policies, which may likewise possess certain similarities to and differences from MLPs and LEPs.
[3] This comparison is based on common features of such policies, however the interpretation of a particular policy is always governed by the wording of the policy document itself.
