Employment practices liability (EPL) insurance is a type of coverage that protects businesses from the financial consequences associated with a variety of employment-related lawsuits. EPL may cover lawsuits involving a company’s directors and officers, negligence lawsuits affecting a company’s human resources department, and liability lawsuits over fiduciary duty. EPL can also protect against charges of racial or age discrimination, sexual harassment, wrongful termination, or noncompliance with the Americans with Disabilities Act. Finally, EPL insurance can help protect businesses against legal conflicts that flare up between employees and third parties, such as vendors or customers, if a third-party coverage endorsement is secured as part of the EPL policy.
The market for EPL insurance coverage began to expand with large companies in 1991 and grew rapidly as employment-related lawsuits exploded in the wake of the passage of two important pieces of legislation: the Americans with Disabilities act of 1990 and the Civil Rights Act of 1991. As reported by Barbara Bowers in Best’s Review, in the 1999–2003 period employees brought more than 403,000 charges under all laws with the Equal Employment Opportunity commission. “The median compensatory jury award for employment practices liability cases,” wrote Bowers, “rose 18% in 2003 to $250,000. About 75% of employee-generated claims are proven groundless, but they are expensive to defend.” The median award in 1997 was around $140,000. The usual cost of defending a groundless action is around $10,000.
In the mid-2000s EPL was still predominantly a product only large companies purchased. As reported by Steve Tuckey, writing for National Underwriter Property and Casualty-Risk and Benefits Management, price reductions by one insurance carrier in 2005 signaled that companies in the fewer-than-500 employee categories might soon be targeted by the insurance industry. Tuckey cited Richard Rupp, a senior vice president of Professional Indemnity Agency, to the effect that “the 500-and-under market is only about 30 percent covered.” The natural inference is that those covered are likely to be closer to the 500-employee than to the 50-employee range. Employees suing an employer do so largely in order to get substantial awards. The really “small” range of small business cannot sustain a quarter-million dollar award and stay in business. Insurance costs are also high: EPL insurance pricing is usually built on a formula based on employment size, with, for example, $400 premium per employee for the first 50 and then lesser additional amounts for larger groupings. A minimum annual premium of $1,000 is likely.
Obviously the small business owner must weigh risks and costs very carefully. Standard liability insurance policies do not provide adequate coverage for employment-related risks. If such risks are high, buying EPL insurance may be a reasonable expenditure. The life savings of the small business owner are often tied up in the company and may have to be protected.
But EPL insurance policies should be studied carefully before reaching a “buy” decision. Policies vary wildly, both in terms of price and breadth of coverage. “The problem is exacerbated by the difficulty of quantifying the risk-management value of particular policy provisions,” said Stephen J. Weiss in Directors and Boards. “For comparative valuation purposes, how do you properly account for the fact that [one policy] covers six employment practices violations, and has six exclusions and restrictive definitions, whereas [another policy] covers 15 employment practices violations but has 15 exclusions and restrictive definitions?”
In order to secure the EPL coverage that best fits the business, analysts counsel owners and executives to heed the following basic considerations:
Negotiate to build a policy that offers comprehensive coverage. Small business owners should select a reasonably priced policy, then make appropriate modifications. This is standard operating practice for insurers, and it can help ensure that the company is not left vulnerable to gaps in coverage. For instance, Weiss noted that “virtually all policies cover traditional wrongful employment practices such as harassment, discrimination, and wrongful termination of employment. However, employment practices law is rapidly evolving and the definition of ‘wrongful act’ in many policies has not kept pace with the creation or popularization of additional causes of action [such as] claims alleging ‘negligent hiring, training, and supervision.’” Weiss also observed that many standard EPL policies expressly disclaim coverage for punitive damages. But he added that determined business owners can often negotiate shortfalls in either wrongful-act definitions or punitive damages coverage without the payment of additional premiums.
Negotiate for control of legal decisions when claims are filed. “Before you buy a policy, make sure what rights to retain counsel that it gives you,” wrote Tim Bland in Memphis Business Journal. “Many policies give the insurance company the right to designate counsel of its own choosing…. [In such cases], more often than not it will focus more on the costs of the attorney, rather than the quality of representation the attorney provides.” He also noted that some EPL policies require that the company consent to financial settlements that are approved by the insurer or forfeit their coverage. As a result, “your right to influence the selection of defense counsel and defense strategy should be clearly set forth in the policy.”
Examine losses covered under the policy. The majority of employment practices business insurance policies provide coverage of back pay, lost benefits, and legal fees. However, front pay, fines, penalties, punitive damages, and cost of accommodations and travel are often not covered. “Look carefully at what types of losses are covered,” counseled Bland. “A policy that looks cheap on the front end may end up costing dearly if it does not cover all losses you could face in a lawsuit.”
Another possible option for small businesses in need of EPL insurance is a Business Opportunity Plan (BOP). A BOP provides basic property coverage for computers and other office equipment, plus liability protection for work-related accidents. In some cases, a BOP might also include business interruption coverage that will maintain the company’s income stream for up to a year if a catastrophe disrupts business. Many BOPs also offer optional coverage against power failures and mechanical breakdowns, liability for workplace practices (including discrimination, sexual harassment, and compliance with the Americans with Disabilities Act), professional liability, and other risks.