Employment Practices Liability Insurance and Ex Post Moral Hazard
39 Pages Posted: 30 Mar 2020 Last revised: 28 Apr 2020
Date Written: March 5, 2020
Employment Practices Liability Insurance (EPLI) is a form of insurance that protects employers from claims of discrimination, harassment, retaliation, and wrongful termination. EPLI contracts as currently written often do not exclude intentional actions or payment of punitive damages, creating potentially severe moral hazard problems. We propose potential alterations that would hold employers accountable for prohibited employment acts when upper management is involved, while still allowing the EPLI market to reduce risk to employers and help compensate victims.
Specifically, the extent of employers’ fault, as evidenced through upper-management involvement, should correlate with their direct payment of damages. Three potential insurance-related options could achieve this goal. These include, in cases where upper-management is involved, (1) giving the insurer the right to pursue subrogation against the employer, (2) mandating that the employer pay a minimum coinsurance rate, and (3) granting the EEOC power to pursue uninsurable fines in the most egregious cases.
Keywords: Insurance, Employment Discrimination, Moral Hazard, Human Resources, Sexual Harassment, Employment Law, MeToo, Management
JEL Classification: G22, J71, J78, K0, K15, K31, K38, M5
Suggested Citation: Suggested Citation