Form EP 02 03: Third-Party Liability Coverage (Employment-Related Practices Liability)
1. What the form is
Form EP 02 03, Third-Party Liability Coverage, is an endorsement to an Employment-Related Practices Liability (EPLI) policy, such as Form EP 00 01. Its primary purpose is to extend coverage to include claims made against the insured by third parties—individuals who are not employees, such as customers, clients, vendors, or visitors. These claims must arise from employment-related wrongful acts, specifically discrimination or harassment, allegedly committed by the insured or its employees against these non-employees. Standard EPLI policies typically focus on claims brought by current, former, or prospective employees. This endorsement bridges a critical gap by providing protection against lawsuits from external parties.
2. Classes of business it applies to
This endorsement is particularly crucial for businesses that have frequent interaction with the public or other external parties. Real-world examples include:
- Retail Stores: A customer alleges racial discrimination by a store employee who provided inferior service compared to other patrons.
- Restaurants & Hospitality: A hotel guest claims sexual harassment by a staff member. A restaurant patron sues, alleging they were denied service based on their national origin.
- Healthcare Facilities: Patients or their family members might allege discriminatory treatment or harassment by medical or administrative staff.
- Service Industries (e.g., contractors, delivery services): A client alleges that an employee made derogatory remarks based on gender during a service call. For instance, a pool cleaning company was sued after a family alleged a technician sexually harassed their teenage daughter.
- Educational Institutions: Students or visitors could claim discrimination or harassment.
- Property Management: A prospective tenant sues a property manager for discrimination based on national origin, alleging a civil rights violation.
Essentially, any organization where employees interact with non-employees faces this exposure and should consider this coverage.
3. Special considerations
There are several important points to consider regarding this endorsement:
- Gap Filling: Commercial General Liability (CGL) policies often exclude coverage for harassment and discrimination claims, which are the primary types of claims covered by this third-party endorsement. Therefore, without this endorsement, a significant coverage gap can exist.
- Scope of Coverage: Third-party EPLI coverage is generally limited to discrimination and harassment claims. It's important to understand that it may not cover all types of third-party claims.
- Claims-Made Basis: Like the underlying EPLI policy, this coverage is typically written on a claims-made and reported basis, meaning the claim must be made against the insured and reported to the insurer during the policy period or any applicable extended reporting period.
- Defense Costs: Defending against third-party allegations of discrimination or harassment can be expensive, even if the claims are ultimately unfounded. This endorsement typically covers defense costs in addition to settlements or judgments, subject to policy limits and deductibles.
- Not Standard: Third-party EPLI coverage is not automatically included in a standard EPLI policy; it must be specifically added, often as an endorsement like EP 02 03.
A real-world example illustrating a limitation: While this endorsement covers claims of harassment by a delivery driver (a third party) towards an employee of the insured business (creating a hostile work environment for the employee), it's crucial to distinguish this from claims made *by* the delivery driver against the insured for harassment. The EP 02 03 endorsement specifically addresses claims *by* third parties *against* the insured.
4. Key information for agents and underwriters
- Risk Assessment: Businesses with high public contact, diverse clientele, or operations in highly litigious areas present a higher risk for third-party claims. Underwriters should carefully evaluate the nature of the insured's operations, employee training programs (especially for customer-facing staff), and history of such claims.
- Pricing: The premium for this endorsement will reflect the increased exposure. Factors influencing price include the industry, number of customers/clients, employee training, and prior claims experience.
- Coverage Gaps: Agents should highlight the potential coverage gap if this endorsement is not purchased, particularly since CGL policies usually exclude these types of claims. Explain that while the base EPLI policy (EP 00 01) covers employee-related claims, it doesn't extend to these non-employee situations without this specific endorsement.
- Underwriting Guidelines: Underwriters may look for evidence of strong anti-discrimination and anti-harassment policies that extend to interactions with third parties. Documented employee training on these policies can be a positive underwriting factor. The definition of "wrongful act" in the policy will be key in determining coverage.
- Interrelation with EP 00 01: This endorsement modifies the base EPLI coverage form. Definitions, limits, and conditions in EP 00 01 will generally apply unless specifically amended by EP 02 03.
- Limit Adequacy: Ensure that the policy limits are sufficient to cover potentially costly third-party claims, which can sometimes involve class-action lawsuits. Third-party coverage may have its own separate limit or may be part of the overall EPLI limit.
For example, an underwriter assessing a large retail chain would likely scrutinize their customer service protocols, how they handle customer complaints of discrimination, and any past incidents. They might also review employee handbooks and training materials related to customer interaction and equal treatment. Conversely, a small B2B software company with limited outside interaction might be considered a lower risk for this specific coverage.