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Employment Practices Liability (EPL) Insurance: The Most Important Coverage You May Not Have

Small business owners know their companies need to be protected by a variety of basic insurance products, such as property, liability, automotive and worker’s compensation. Yet many entrepreneurs fail to buy the coverage that will protect them in the event of an employee lawsuit.

Employment practices liability insurance, known in the trade as EPL insurance or EPLI, provides coverage to employers against claims made by employees alleging discrimination (based on sex, race, age or disability, for example), wrongful termination, harassment and other employment related issues such as breach of contract.

Large corporations typically have substantial employment practices insurance coverage in place and are prepared to deal with just about any employment lawsuit. However small or new businesses are often the most vulnerable to employment claims. That’s because they usually lack a legal department or company handbook detailing the policies and procedures that guide hiring, disciplining or terminating employees.

“Employment practices is the most underinsured peril, and we have trouble getting people to realize that,” says Nationwide Agent Doug Pyron, president, The Pyron Group, Jackson, Miss. “If you have employees, you need this coverage to protect your business. Even if the claim is proven false or dismissed, you still have the cost of defending yourself, and that can quickly eat up your cash reserves.”

You could face extensive employee exposures

From the moment a business owner interviews a prospective employee, that company is at risk from an employment claim. For example, if you choose not to hire the person you interviewed, the individual could allege some sort of discrimination.

If you hire the person and later fire them due to poor attendance, that discharged employee could claim wrongful termination. This kind of situation would be covered by your employment practices liability coverage. “We advise our clients to consult with their attorney first before letting an employee go just to make sure there won’t be problems afterward,” says Pyron.

More troubling are claims stemming from sexual harassment allegations that often come down to a matter of “he said, she said.” An off-color joke in the break room, an overly friendly hug or pat on the back, or a lingering glance across the room can be interpreted as an unlawful advance, no matter how innocent the intention.

“It’s not easy getting people on the same page,” says Pyron. “You’ve got to have rules stating that certain things are not tolerated. You need to have a handbook detailing all of your office policies and make sure that the office has an open door policy for people to report things.”

Best practices = prevention

Companies can significantly lower their employment practices liability risk with some smart thinking, good planning and excellent record keeping.

• Review any loss exposures with your insurance agent and purchase adequate amounts of employment practices liability insurance.
• Develop a handbook detailing your company’s employment policies and procedures for disciplining or terminating an employee. Make sure all employees read the handbook and sign a statement to that effect.
• Create a job description for each position that clearly defines expectations of skills and performance.
• Conduct periodical performance reviews of employees and carefully note the results in the employee’s file.
• Develop a screening and hiring program to weed out unsuitable candidates on paper before calling them to interview in person.
• Conduct background checks on all possible candidates and avoid hiring workers with a history of alcohol or substance abuse.
• Institute a zero tolerance policy regarding discrimination, substance abuse and any form of harassment. Make sure you have an “open door” policy in which employees can report infractions without fear of retribution.
• Create an effective record keeping system to document employee issues as they arise and what the company did to resolve those issues.

Get protection with an EPL insurance policy

“Because of the weak economy, companies could see an increase in employment liability claims as they seek to trim expenses by laying-off weaker employees or those whose performance isn’t up to par,” says Pyron. “That’s when keeping detailed employee records as well as reports of any misconduct can often work in your favor if a claim is made.”

“If you’ve got an employee with five write-ups in their file for missing work and they’re on the bubble, and all of a sudden that person alleges harassment, the claim isn’t as strong,” he says.

The cost of insuring your business for employment practices liability coverage depends on a variety of factors, such as the number of people you employ, if you’ve had prior suits lodged against the company, the percentage of employee turnover, and if you have established rules and practices in place. Depending on the size of the company, EPLI can be offered as an endorsement to a Business Owner’s Policy (BOP), or as a specific stand-alone policy.

The coverage is usually written on a claims-made basis. This means the incident resulting in the claim had to occur during the coverage period. Because employment claims often come out of the blue, months or even years after the alleged discrimination, harassment or termination occurred, an employer might be vulnerable if the insurance coverage was dropped or if tail coverage (see glossary below) wasn’t purchased. If you’re ready to protect yourself and your business against potential employment practices lawsuits, get a EPLI business liability insurance quote today.

By purchasing employment practices liability coverage, companies may decrease their chance of being a target of a lawsuit. That’s because most insurers will review a company’s employment practices and make recommendations to reduce their risk before insuring the company.

Startling EPLI Statistics

According to the U.S. Equal Opportunity Employment Commission, discrimination claims in most categories have continued to increase, with significant gains from 2009 to 2010.

According to Jury Verdict Research, service and retail companies account for 41% of employee lawsuits, and the approximate greatest number of employee discrimination jury awards are for sex discrimination, race, disability and age.

Learn more about employment practices liability insurance and be safe

For more practical employment tips and to discuss your need for insurance coverage, contact a Nationwide insurance agent today.

Understand employment law

A variety of laws are in place to protect the rights of people you hire, or are considering hiring. While employment practices liability insurance is a smart investment for many companies, it’s important to understand and carefully follow these laws. For more details, visit the U.S. Equal Employment Opportunity Commission online.

1. Title VII of the Civil Rights Act of 1964. Prohibits discrimination on the basis of race, color, religion, national origin, and sex. It also prohibits sex discrimination on the basis of pregnancy and sexual harassment.
2. The Equal Pay Act of 1963. Prohibits employers from paying different wages to men and women who perform essentially the same work under similar working conditions.
3. The Civil Rights Act of 1966. Prohibits discrimination based on race or ethnic origin.
4. The Immigration Reform and Control Act of 1986. Prohibits discrimination on the basis of national origin or citizenship of persons who are authorized to work in the United States.
5. The Americans with Disabilities Act of 1990. Prohibits discrimination against persons with disabilities.
6. The Bankruptcy Code. Prohibits discrimination against anyone who has declared bankruptcy.
7. Equal Employment Opportunity Act of 1972. Prohibits discrimination against minorities based on poor credit ratings.
8. The Age Discrimination in Employment Act (ADEA). Prohibits discrimination against individuals who are age 40 or above.