Why Your Business Needs Employment Practices Liability Insurance
What do you think is more likely in your business -- that you'll suffer a small fire or that an employee will sue you? Your answer may reflect your past experiences, of course, but it's a fact that you're three times more likely to be sued than to experience a blaze.
What is the most common cause of a lawsuit? That, in some way, you allegedly discriminated againstthe individual. You'll be on the receiving end of an employment practices liability (EPLI) lawsuit.
And how much will it cost you to defend yourself against this action? A lot. In fact, the cost of defending yourself and paying any subsequent settlement is climbing by an average 8 percent a year. Defense costs alone of around $250,000 are not unusual.
Yet, remarkably, although employers practices liability insurance is widely and affordably available at very reasonable cost, many firms don't have it.
That's either because they don’t think they need it or because they think they're already protected under an existing insurance policy, such as commercial liability or directors and officers (D&O) insurance.
Almost certainly they're not, unless they have employment practices liability insurance coverage endorsement on one of these or in a business owners policy (BOP)
They may not find out the uncomfortable truth until it's too late! Contact Newbridge Coverage today for your free EPLI quote!
What is employer practices liability insurance?
A simple employers practices liability insurance definition is that it's a form of insurance protection against wrongful acts arising from the employment process.
It relates not just to current employees but also to past employees and job candidates. Increasingly these days, it can also refer to treatment of customers.
These acts might include wrongful termination, discrimination, sexual harassment, emotional distress, retaliation, breach of contract, violation of leave laws, defamation, failure to promote, invasion of privacy, deprivation of a career opportunity and negligent evaluation.
A policy might cover all of these risks of just specific named ones, such as sexual harassment. Make sure you know and understand the extent of your protection.
Either way, that's quite a list. And the extent to which businesses, large and small, are exposed to these risks is staggering.
There are two different types of policy providing coverage respectively for claims no matter when reported (provided they're alleged to have taken place during the policy term), and claims only made during the period the policy is in force.
What does employer practices liability insurance cover?
Generally speaking, EPLI insurance covers both defense costs and the amount of any subsequent judgment/settlement.
Policies are usually subject to shrinking limits, which means that the employment practices liability insurance limits in the policy apply to the combined total of the above costs.
This contrasts with a commercial liability policy where policy limits more generously apply only to the settlement costs. Defense costs are covered separately and additionally.
In both cases, however, payment of defense costs is regardless of whether your business wins or loses the lawsuit action.
On the other hand, policies won't pay for punitive damages -- that is, sums intended as a punishment beyond simple compensation -- or fines.
Liabilities covered by other insurance policies, such as workers comp, are excluded from employment practices liability insurance claims and settlements.
Employment practices liability insurance limits, by the way, range from $1 million to about $25 - 30 million.
Who is covered by employer practice liability insurance?
The scope of this type of insurance protection can be wide-ranging to the point of covering everyone employed by the business. In other words, not just directors, officers and other senior managers, but also supervisors and line managers, indeed anyone who could be accused of discriminatory behavior.
Consequently, the wording of your policy is crucial. Expect your insurance agent to be able to clarify this for you.
How much does employment practices liability insurance cost?
As you might expect, that depends -- not just on the limits of your coverage but also on the size of your business, past instances of being sued by employees and other risk factors.
Rates also differ between individual insurers, so it's important to work with an agent who knows this market and is able to shop around for a policy that precisely fits your needs.
For a small to medium size business, you might expect to pay an annual premium in the range of $2,500 to $5,000.
So, is employment practices liability insurance necessary?
Against that premium mentioned above, compared with average lawsuit settlement costs of between $125,000 to $150,000, getting yourself protected would seem to be a no-brainer. As previously mentioned, defense costs can be even higher. In total, you could be looking at a bill of perhaps $400,000.
Not convinced? How about the fact that a search on the term "wrongful termination lawsuits" produces around 600,000 hits on Google!
Coverage is not just for big businesses either. Recent research from Advisen shows that one-on-five firms with less than 50 employers have EPLI coverage -- and that doesn’t include those that have employment practices liability insurance coverage endorsement in another policy.
That said, there are certainly actions a business can take to mitigate the risk of being sued by an employee. For example:
- Educating all employees about likely possible issues -- providing formal training and role-playing for front-line managers if necessary.
- Enshrining company policy in a handbook and posting notices around the workplace.
- Exercising full disciplinary action to set an example when individuals do infringe the rules.
It's also important to carefully document all complaints and subsequent actions. This could be critical in the event of a lawsuit.
Where to Get More Information on Employment Practices Liability
You can download a useful and more in-depth lawyer's-eye perspective on these issues from the American Bar Association here: http://tinyurl.com/EPLI-BarAssn .
The State of New York offers a wide-ranging definition of an employer here: https://labor.ny.gov/ui/dande/whoisemployer.shtm . You might be surprised at some of the categories.
And you can learn more about the state's discrimination laws here:http://tinyurl.com/NY-discrim
Finally, and importantly, remember that an experienced and expert insurance broker should be able to provide the advice and guidance you need to get properly protected against the increasing risks of an employee lawsuit.
You'll find all the expertise you need at Newbridge Coverage. For a free and confidential chat, please give us a call at 516-781-9000. Don't wait until that lawsuit lands on your desk!