BUSE4024A -Lec 8 - Employment Liability Risks - EL-WC-EPL.pdf

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Dr Albert Mushai Lecture 8 EMPLOYMENT LIABILITY RISKS – EMPLOYER’S LIABILITY INSURANCE, WORKER’S COMPENSATION AND EMPLOYMEN...

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Dr Albert Mushai Lecture 8 EMPLOYMENT LIABILITY RISKS – EMPLOYER’S LIABILITY INSURANCE, WORKER’S COMPENSATION AND EMPLOYMENT PRACTICE LIABILITY EMPLOYER’S LIABILITY INSURANCE AND WORKERS’ COMPENSATION Taxonomy of Employment/Occupational Risks and their Context The workplace is a complex environment where various factors may interact to produce undesirable outcomes. The undesirable outcomes could be in the form of physical bodily injury, violation of civil rights of others as well as other events causing loss to the employer. Occupational risks in the context of liability insurance and risk management are those risks that affect employees and arise in the scope and course of employment. These risks create liability for the employer. There are two main types of occupational risks, namely: a) Risks that relate to the health and safety of employees e.g., accidental bodily injury, death, and illness; and b) Risks that relate to the violation of civil rights of employees e.g., discrimination, sexual harassment, or victimization. Although both these risk types can result in liability for the employer, their management is different when it comes to insurance. Health and safety risks fall under the domain of employer’s liability insurance (EL) and/or workers’ compensation (WC). EL and WC are not mutually exclusive mechanisms. They can co-exist. Risks relating to violation of civil rights of employees fall under the ambit of employment practice liability insurance (EPLI). In this session, we focus on health and safety risks handled through EL and WC. At common law, employers owe a range of duties to their employees. These duties seek to protect the health and safety of employees. Some of the duties of an employer at common law are: § § Duty to provide safe plant and machinery. Duty to implement a safe system of working. 1|Page § § § § Duty to educate employee on the hazards and risks inherent in their work, Duty to provide employees with protective clothing, Duty to select competent staff who do not endanger the safety of fellow employees, and Duty to ensure that ensure the health and safety of employees. Breach of any of these duties renders the employer liable in damages to the employee. Despite this impressive list of duties, the common law has a poor record when it comes to providing compensation to injured employees. Historically, employers have been protected from liability by three formidable defences of: i) volenti non fit injuria (voluntary assumption of risk), ii) common employment, and iii) contributory negligence. These defences together with the difficulty of proving fault saw many claims against employers fail to yield compensation. Today it is highly improbable that an employer can successfully defend a claim brought against him/her by pleading the volenti defence. This is because, the duty of the employer to ensure the health and safety of employees has no firm boundaries. In addition, courts are no longer persuaded by the ancient argument that by agreeing to work one assumes all the risks associated with that work. By the early 1900’s, most jurisdictions were convinced that the common law was an inappropriate mechanism for dealing with claims for compensation arising from workplace accidents. Eventually most countries replaced the common law system of fault liability with workers’ compensation that operates on a no fault (strict liability) basis. Purpose and Scope of Employer’s Liability Insurance EL indemnifies an insured employer for all sums he shall become legally liable to pay as damages following bodily injury, death or illness of an employee happening in the course and scope of employment. The fact that EL pays where the employer is legally liable implies that it is a faultbased mechanism. Only those injuries, deaths, or illnesses attributable to the fault of the employer fall under EL insurance. Therefore, if an employee sustains injury due to his own negligence the employer cannot be legally liable for the injury. As we will become clear later, WC creates no such distinction. Coverage for EL can be on claims made or occurrence basis. In Block 1 we discussed the problems associated with providing liability insurance on occurrence basis. Nowhere has this basis of coverage produced more problems than in EL especially in connection with liability for long latency occupational diseases. 2|Page The occurrence liability policy played a significant part in the Lloyd’s of London near disaster of the early 1990s. Since the 1930’s, Lloyd’s wrote liability risks in the US using the occurrence wording. When asbestos litigation started in the US in the 1970s, Lloyd’s found paying claims in the 1980s from policies it had issued in the 1940s. US judges were unsympathetic in their interpretation of the policies. Courts adopted a very liberal interpretation of the word ‘occurrence’ resulting in losses that Lloyd’s never intended to cover being included in the meaning of occurrence (Raphael, 1995). Like any other insurance product, EL is optional in many countries except for a few where it is compulsory. Notable among the countries where EL is compulsory is the UK. The Employer’s Liability (Compulsory Insurance) Act 1969 makes it compulsory for all employers (with few exceptions) carrying on business in the UK to have EL insurance. It is even less common to find countries that rely solely on EL as the main source of compensation for employees injured in the course of employment. Among them are Bangladesh, Nigeria, and Thailand. In the UK, EL exists alongside WC. Most countries rely exclusively on WC or a combination of WC and EL. For a claim to be covered under EL, 4 key pre-conditions must be met – (1) there must be legal liability of the employer, (2) the injury must arise from an accident, (3) the injury must arise in the course and scope of employment, and (4) the claimant must be an employee. Purpose and Scope of Workers’ Compensation Inability of the common law to yield compensation for injured workers forced many countries to explore other options. A solution that would become almost universal first emerged in Germany in the form of workers’ compensation. WC first emerged in Germany under Chancellor Otto von Bismarck in 1884. Workers’ compensation is a social insurance system that places the responsibility of compensating injured workers on employers under the supervision of the state. From Germany, WC quickly spread to Austria, Norway and eventually the rest of Europe. England passed its first WC legislation in 1897 after first attempting to reform the common law through the Employer’s Liability Act of 1880. This proved unsuccessful forcing England to follow the German approach. As time went by different versions of WC emerged in different countries but most of them fell into one of two categories, namely: § § Schemes where employees are not permitted to file common law claims against the employer (German model); and Schemes that allow injured employees to claim damages from the employer provided fault (negligence) is proved on the part of the employer. Countries whose WC schemes bar common law claims against employers follow what is called the exclusive remedy principle. This principle provides that WC is the sole and exclusive remedy for all workers that get injured or contract a disease in the course of employment. This position holds true in South Africa for the general industry scheme governed by COIDA. 3|Page The main elements of WC as a system for compensating injured workers are: § § § § § § § WC is born out of legislation. It operates on a strict liability (no fault) basis – negligence on the part of the employer or the injured employee is irrelevant. Because it is a social insurance system, WC operates on a compulsory basis. WC pays compensation (pecuniary/economic losses only) not damages as is the case under EL. Benefits payable under WC are defined in legislation. Employers finance the system and payments made to finance the system become costs of production through the pricing mechanism. The injury to the employee must occur in the course and scope of employment just like it is with EL. WC is an administrative process hence it is liberal in its approach to work-related injuries and diseases. Work-related injuries and diseases can arise from three main sources. They are: i) Injuries and accidents arising from the negligence of the employee. ii) Injuries and accidents arising from the negligence of the employer. iii) Injuries and accidents arising from hazards of the industry i.e., trade risks where it is not possible to attribute fault to either the employer or the employee. From these sources, WC outperforms EL in two fundamental respects. Firstly, WC compensates injuries and diseases from all three sources above whereas EL only responds to injuries and diseases attributable to the negligence of the employer. In other words, EL responds where there is legal liability of the employer towards an employee. EL does not indemnify for claims caused by the negligence of the employee or those arising from hazards of industry simply because there is no legal liability in respect of these. Secondly, from as far back as the early 1900s, studies showed that of the 3 sources of occupational injuries above, hazards of industry (trade risk) account for the largest number of occupational injuries and diseases. By excluding this source from coverage, EL provides narrow coverage compared to WC which responds to claims from all 3 sources because of its no fault basis. For a claim to fall under WC, it must meet the following requirements: § § § § The claimant must be an employee, The injury must arise from an accident, The injury must arise in the course and scope of employment, and The injury must result in disablement or death. Therefore, from the above even if the employee is injured due to his/her own negligence, WC will still pay. This is not the case under EL as alluded to earlier. WC statutes of most countries interpret each of these conditions liberally to facilitate rather than hinder the award of compensation to the injured employee. 4|Page Employer’s Liability Insurance and Workers’ Compensation Compared Although EL and WC can cover occupational injuries and diseases severally or jointly, they differ in several fundamental ways. Firstly, EL is a contractual arrangement between the insured employer and the insurer. Typically, the insurer and the insured can agree on whatever terms and conditions they wish. By contrast, WC is a statutory scheme where all the main operational features and benefits are defined in legislation. Secondly, EL operates along pure insurance principles in terms of which the premium paid by the employer depends on the risk that the employer presents. Typically, employers involved in highrisk activities from an occupational health and safety standpoint pay higher premiums than those whose business activities pose a lower risk. WC on the other hand is an administrative process run along social insurance principles. The idea is not to profit from risk taking as is the case under EL. Assessments paid by employers under WC bear a weak link if at all to the risk posed by the employer’s business activities. Thirdly, EL responds to amounts that the employer is liable to pay as damages. This means it responds to both economic and non-economic losses. Therefore, EL responds to things like pain and suffering and loss in future amenities of life in addition to economic losses such as loss of income and medical expenses. WC on the other hand pays compensation only defined as economic losses in line with statutory guidelines. It does not cover non-economic losses such as pain and suffering. Fourthly, EL responds to claims where there is proof of legal liability of the insured employer. This means it pays where there is proof of fault or breach of statutory duty. EL will never respond to a claim where there is no proof of legal liability. WC operates on strict liability basis. Proof of fault is irrelevant. WC responds even when the injury to the employee resulted from own negligence. Even if the employee suffers injury from a cause unknown, WC would pay compensation if the injury occurred in the course of employment. Fifth, EL being a pure insurance product comes with many terms and conditions that delimit coverage. Breach of these terms and conditions often disqualify claims from coverage. WC being an administrative system comes with very few terms and conditions. It is meant to facilitate compensation hence conditions for getting compensation are not onerous. The main condition for compensation to become payable under WC is that the injury occurred in the course of employment. Finally, EL to the extent that it pays damages seeks to place the injured employee to the position he/she was in had the accident not taken place. WC on the other hand pays partial compensation in the sense that even for economic losses like loss of earnings the employee is never paid 100% of the lost income. Typically, income replace under WC can be anything between 70 and 90%. This done to create incentive for the injured employee to return to work. Paying 100% income replacement removes the incentive on the part of the employee to get back to work. Interaction between EL and WC: A Global Overview 5|Page A study of compensation systems of various countries shows that EL and WC interact in 3 main ways, namely. i) Countries where EL is the sole method of compensating injured workers, ii) Countries where WC is the sole and exclusive method for compensating injured workers, and iii) Countries where EL and WC co-exist on a complementary basis. Countries falling under category (i) are very few. Notable examples are Bangladesh, Nigeria, and Thailand. Beyond these, it is rare to find a country that relies exclusively on EL to compensate employees for injuries and diseases arising in the course of employment (Parsons, 2002). There are many countries that fall under category (ii) including Germany, Austria, Canada, the USA, New Zealand and to some extent South Africa for those whose WC claims are governed by COIDA. Countries in this category use WC as the sole and exclusive remedy for injured workers and do not allow common law claims for damages to be filed against the employer even where the employer is negligent. New Zealand has the most radical version of the exclusive remedy principle. In most countries, one must prove that the injury occurred in the course and scope of employment to qualify for WC benefits. In New Zealand, one qualifies for benefits for work and non-work-related injuries alike (Parsons, 2002). So radical is New Zealand’s compensation system that no other country in the world has copied it. There are perhaps even more countries falling under category (iii) i.e., mixed systems including the UK, Ireland, Italy, Netherlands, France, Zimbabwe, and South Africa (for those whose claims for diseases are governed by ODMWA). In these countries, an injured worker qualifies for WC benefits and in addition can sue the employer for damages. However, there is variation among these countries when it comes to suing the employer. In the UK and Ireland, an injured employee only needs to prove ordinary negligence on the part of the employer to get for damages. In France, an injured employee is only allowed to sue the employer for damages where faute inexcusable (inexcusable fault) can be proved. This is equivalent to what many call gross negligence. Therefore, in France proof of mere negligence is not enough to qualify for damages. How EL interacts with WC has important implications for the level of risk that insurers face under EL. For example, although injured employees can sue the employer for damages in the Netherlands such claims remain rare because benefits under WC are attractive (Parsons, 2002). When benefits under WC become less attractive, leads injured employees to pursue alternative options for compensation (Danzon, 1987). For countries where WC is the sole and exclusive remedy for injured workers, the necessity for EL may not exist. Workers’ Compensation in South Africa – Structure and Issues 6|Page Since 1911, the South African WC system has developed around 2 pillars: § § Pillar 1 – Compensation for injuries and diseases in general industry governed by the Compensation for Occupational Injuries and Diseases Act 1993 (COIDA). Pillar 2 – Compensation for diseases in mines and works governed by the Occupational Diseases in Mines and Works Act of 1973 (ODMWA). Pillar 1 is the main WC pillar while Pillar 2 addresses the specific issue of diseases in mines and works only. Therefore, if a person employed in mines and works suffers injury the WC claim falls under COIDA since ODMWA only applies to diseases. The main features of the COIDA system for the general industry are: § § § § § § It covers accidental injuries (Section 22) and diseases (Section 65). Where the injury or disease is due to the personal negligence of the employer or vice employer as defined or patent defects in plant machinery and premises, the injured worker can claim additional compensation in terms of Section 56. Any person who has a claim under the Act cannot sue the employer for damages by Section 35 of the Act. Whether or not a claim succeeds is irrelevant as far as the application of Section 35 is concerned. If the claim falls within the sphere of the Act i.e., if it relates to injury occurring in the course of employment the injured worker cannot sue the employer for damages. In other words, an employer is not legally liable to an employee because of Section 35. Where an employee suffers injury in the course of employment by the negligence of a third party, the employee can claim no fault compensation in terms of Section 22. In addition, the injured employee can sue the third party in delict for damages in terms of Section 36 provided they prove fault. A third party for purposes of Section 36 is any person who is not the employer or vice employer. Therefore, a fellow employee can be a third party for purposes of Section 36. For diseases, Section 65 makes a distinction between diseases where work is the presumed cause (Section 65 (1) (a)) and diseases where the presumption of work as the cause does not apply (Section 65 (1) (b)). Diseases falling under Section 65 (1) (a) are listed in the Third Schedule of the Act. For these, the injured employee does not have to prove that the disease arose out of and in the course of employment – the law presumes this to be so. For diseases under Section 65 (1) (b), the sick employee has the burden of proving that the disease arose out of and in the scope of work. Where the degree of disability from an injury or disease is more than 30%, the injured employee receives a disability pension for life. Main features of the ODMWA system are: § § § 7|Page It only applies to ‘compensable’ diseases in mines and works as defined in the Act. The diseases are covered on a no-fault basis – once an employee contracts a compensable disease he/she qualifies for compensation automatically. ODMWA has no provision equivalent to Section 35 of COIDA. However, for decades the prevailing view was that an employee cannot sue the employer for damages § regardless of whether the applicable Act is COIDA or ODMWA. But in the case of Thembekile Mankayi v AngloGold Ashanti 2011 ZACC 3 the Constitutional Court ruled that workers whose WC are governed by ODMWA are not prevented by Section 35 of COIDA from suing their employers for damages. Therefore, as things stand, workers whose claims fall under COIDA cannot sue the employer for damages but workers in mines and works can. However, since ODMWA only covers diseases, it follows that only mineworkers who contract diseases can sue the employer for damages. ODMWA only pays compensation in the form of a lump sum – it has no provision for pensions as is the case under COIDA. Reflection Question. In view of Section 35 of COIDA evaluate the extent to which you think employer’s liability insurance is relevant in South Africa. That concludes the discussion on employer’s liability insurance and workers’ compensation. EMPLOYMENT PRACTICE LIABILITY INSURANCE Nature and Context of Employment Practice Liability Risk Employment practice liability (EPL) arises from violation of the civil rights of employees by the employer. It has nothing to do with health and safety an issue falling under the domain of employer’s liability insurance and workers’ compensation. EPLI deals with violations of rights something akin to pure economic loss. In South Africa, some of these violations could arise from violation of employment legislation such as the Employment Equity Act. In the US, employment practice liability claims are growing faster than any other liability claim type. Evidence shows that cases of violation of civil rights of employees tend to be more prevalent in times of economic downturn. It is easy to understand why this is so – in times of economic recession, employers are hard-pressed to adopt measures such as cutting costs and downsizing. In doing so, it is easy for civil rights of employees to be ignored. Evidence from the US shows that between 2006 and 2011, 3 in every 5 employers faced an employment practice violation lawsuit. Furthermore, 75% of all litigation against firms in the US over the same period involved an employment practice liability. Types of Wrongful Employment Practices There are different types of wrongful employment acts that constitute violation of the civil rights of employees. The most common of these are: 8|Page § § § § § § § Discrimination – this could be on grounds of race, ethnicity, gender, religion, or sexual orientation. Sexual harassment- causing mental anguish and distress, Wrongful dismissal – this is a common occurrence in employment situations i.e., dismissing an employee without due process, Breach of employment contract, Defamation, Invasion of privacy, and Victimization Any of the above constitute a violation of the civil rights of employees. Of these wrongful employment practices, sexual harassment is the most sensitive. Often the victims are women, and the wrongdoers are men. Therefore, the gender dimension of this wrongful employment practice act underlies its problematic nature in the workplace context. In most cases these, wrongful employment acts arise from the personal conduct of the employer or through vicarious acts of other employees. Therefore, if an employee such as a line manager sexually harasses another employee, the employer may be vicariously liable if the harassment took place in the course of employment. From an insurance perspective, coverage is for wrongful employment acts by the employer as defined in the policy. Insurers differ in terms of which of the above wrongful acts they cover in their product offerings. Sources of Employment Practice Liability Risk Civil rights of employees arise from three sources. The first is legislation such as the Labour Relations Act and the Employment Equity Act. A second is the contract of employment between the employer and the employee. Finally, civil rights of employees also arise from internal policies of the employer to regulate the workplace. From the above, we can extrapolate that EPL claims arise from one of 3 sources: i) Failure by the employer to operate within the framework of the law applicable to employment. ii) Failure by the employer to comply with provisions of the contract of employment concluded with the employee. The most common form of this violation is wrongful dismissal of employees. iii) Failure by the employer to uphold its own internal policies on employment. From the above, there is a strong link between employment practice liability risks and compliance. It is for this reason that compliance has become a big corporate responsibility in recent years. Corporation are required to comply with several requirements, notably: § § § Applicable legislative requirements, Applicable regulatory requirements, Applicable codes and practices, e.g., corporate governance standards or risk management standards such as ISO31 000 and 9|Page § Corporate policies and practices the corporation considers to be necessary for building its corporate brand and culture. Some compliance requirements are mandatory while others are purely voluntary. Compulsory compliance requirements are imposed by law or regulation. Voluntary compliance standards are those that may be designed by a profession or trade association for the benefit of its members. The likelihood of claims arising from any of these 3 sources is also a function of the labour laws of the country concerned. Some have laws that make it very difficult to lay off workers as a way of responding to changing market and economic conditions. In such highly regulated environments, EPL claims have a higher likelihood of occurrence. Therefore, what we discussed in Block 1 about the significance of the legal environment in shaping liability risks in general bears relevance here as well. Another factor relevant to the likelihood of EPL claims arising is the state of activism in the labour market of the country concerned. A good indicator of activism is the degree of unionism among the workforces. In countries where trade unions are strong and active, workers have a platform for protecting their rights and fighting for their protection. Employment Practice Liability Insurance EPLI is a relatively new product having first entered the market in the 1990s compared to EL insurance which entered the market for the first time in the 1880s in England. EPLI indemnifies an employer for amounts he shall become legally liable to pay as damages following the commission of a wrongful employment act as defined in the policy. Like other liability insurance products, EPLI responds where there is legal liability of the employer for a wrongful employment act. When analysing the scope of EPLI in any given situation, it is vital to pay attention to how the policy defines a wrongful employment act for purposes of coverage. There are different types of wrongful acts that an employer could commit but it does not necessarily follow that all of them are insurable in every situation where EPLI is available. In addition, it is common for legal costs to be quite substantial in claims based on violation of the civil rights of employees. Therefore, it is important to understand how these are covered under the policy. In some cases, legal expenses of defending employment practice liability claims may exceed the actual damages awarded by the court. EPLI policies provide coverage on claims made basis. For the policy to respond, the claim against the insured must be made during the period of insurance. The policy defines a claim to mean any of the following developments: § § § A demand for money made against an insured employer as compensation for a wrongful employment act. Filing of a lawsuit against an employer with a view to getting compensation for an alleged wrongful employment act; and Initiation of arbitration proceedings against the employer with a view to getting compensation for a wrongful employment act. 10 | P a g e EPLI excludes claims covered under workers’ compensation, labour relations Act and occupational health and safety laws. In addition, the policy does not cover intentional acts by the insured. The reason for this is obvious – insurance does not cover claims brought about by the wilful and deliberate acts of the insured. It covers fortuitous events. An insurance claim should be an unintended outcome. Providing coverage for intentional losses is contrary to public policy. Risk Management Framework for EPL Risks What can employers do to manage, reduce, and mitigate their exposure to employment practice liability risks? There are simple and inexpensive measures that employers can take that have the potential to reduce the chances of incurring an EPL claims. The following risk management framework could go a long way to reduce a company’s exposure. § § § § § § Step One- identify all laws and regulations that govern the business activities of the firm concerned such as labour laws, laws promoting equity at the workplace among others. Every organization must have a perfect understanding of its legal and regulatory environment. Step Two – development of a comprehensive set of workplace policies and rules. The policies and rules must specifically address issues relating to the protection of civil rights of employees. Ideally, these policies and rules must be in writing preferably in all languages used at the workplace. Step Three – developing a mechanism for ensuring that all the workplace laws, policies and regulations are well communicated across the entire organization. This requires the firm to develop things like manuals dealing with various compliance aspects that the firm is subject to. Often, many organizations have a set of policies and rules aimed at upholding human values and rights. The challenge lies in ensuring that the message that these policies and rules seek to convey guides the conduct and behaviour of people at the workplace. Step Four – establishing a mechanism to ensure compliance with laws, policies, and rules of the organization. In other words, there must be some form of internal compliance mechanism. It is usually non-compliance with legal requirements or corporate policies that results in employment practice liability claims. Step Five – establishing an internal dispute/complaints and resolution repository where each internal dispute or complaint raised by employees in the organization are recorded. The repository must also contain details of how each complaint was resolved. Wrongful employment practices invariably take the form of grievances against the company. Therefore, having an efficient internal dispute resolution mechanism is important not only to ensure that grievances do not escalate to litigation, but also to provide the necessary evidence if the grievance does result in litigation against the company. Step six – developing an effective monitoring and evaluation system of the entire EPL risk management process. It is not good enough to simply have policies and rules at the workplace. It is equally important to have a mechanism to assess whether the policies are achieving their intended objectives. In this regard, compliance audits play an important 11 | P a g e role. A compliance audit is a process designed to determine the extent to which an organization meets its compliance requirements. The audit can be conducted by internal people or by an external and independent agency. The above framework needs to be as flexible as possible. It must allow for adaptation considering issues like organizational setting and organizational culture. Whether an organization is centralized or decentralized has implications of its exposure to EPL claims. Likewise, how decisions with legal implications on the welfare of employees are taken is also a relevant factor. Some firms make regular use of external legal services on matters of hiring and firing while others do not. Conclusion The workplace is a complex and environment. There are many things that could go wrong in that environment of which health and safety and civil violation of employee rights are the main ones. Workers’ compensation and employer’s liability insurance are the dominant methods used to deal with occupational health and safety violations by employers. Some health and safety risks arise from the hazards of industry and not necessarily from the fault of employers. Employment practice liability insurance is used to deal with violations of the civil rights of employees by employers in the course of work. Most countries have taken fault out of the considerations for occupational health and safety risks and rely primarily on workers’ compensation which is a no-fault system. Employer’s liability insurance may be used in some cases to complement the workers’ compensation system while in other cases workers’ compensation operates as the sole and exclusive remedy for victims of occupational health and safety risks. Albert Mushai – Apr- 2023 12 | P a g e