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 liability risk
You're at risk of an employment claim from the moment you interview a prospective employee. For example, if you choose not to hire the interviewee, that individual could allege some sort of discrimination.
Or, if you hire that person and later fire them due to poor attendance, that discharged employee could claim wrongful termination.
To significantly lower your employment practices liability risk, do the following:
- 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 periodic 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.
Employment practices liability insurance coverage
The cost of insuring your business for EPLI 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), a General Liability Policy (GL), or a specific stand alone policy can be written in conjunction with a BOP policy.
EPLI 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 months or even years after the alleged incident, an employer might be vulnerable if the insurance coverage was dropped or if tail coverage (liability insurance that extends beyond the end of the policy period) wasn't purchased.
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.
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:
- Title VII of the Civil Rights Act of 1964, which 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.
- The Equal Pay Act of 1963, which prohibits employers from paying different wages to men and women who perform essentially the same work under similar working conditions.
- The Civil Rights Act of 1966, which prohibits discrimination based on race or ethnic origin.
- The Immigration Reform and Control Act of 1986, which prohibits discrimination on the basis of national origin or citizenship of persons who are authorized to work in the United States.
- The Americans with Disabilities Act of 1990, which prohibits discrimination against persons with disabilities.
- The Bankruptcy Code, which prohibits discrimination against anyone who has declared bankruptcy.
- Equal Employment Opportunity Act of 1972, which prohibits discrimination against minorities based on poor credit ratings.
- The Age Discrimination in Employment Act, which prohibits discrimination against individuals who are age 40 or older.