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. Some of the events that may be covered by EPL insurance include liability lawsuits involving a company's directors and officers, negligence lawsuits affecting a company's human resources department, and liability lawsuits over fiduciary duty. It can also provide protection 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 fires 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 develop with large companies in 1991. But between that year and 1994, according to Michael Schachner in an article for Business Insurance, the number of employment-related lawsuits increased by over 2,000 percent. As a result, the need for EPL insurance coverage has expanded to businesses of all sizes. "The growing number of employment-practices suits directed against not only prominent companies but also small-to medium-sized ones is creating a new market," Charles Luchs noted in an article for Best's Review . "EPL insurance has become a standard risk management purchase for many companies," Stephanie D. Esters added in an article for National Underwriter Property and Casualty—Risk and Benefits Management.
Despite the growing need for such coverage, however, insurance industry surveys indicate that a majority of small businesses think that they are already covered for such events under their regular liability insurance. In fact, most standard liability policies do not provide adequate coverage. All businesses need to protect themselves against the risk of lawsuits, but it is especially important for small businesses. Oftentimes, the life savings of the small business owner are tied up in the company, so the owner must take steps to protect his or her family from the financial consequences of events that could disrupt operations, reduce profits, or even cause the business to go bankrupt. EPL insurance, like other types of coverage, can help a small business be successful by reducing the uncertainties under which it operates. It places the economic burden of risk elsewhere so that managers can focus their attention on running the business. In addition, the premiums paid for EPL and many other types of insurance are usually considered tax deductible business expenses.
EPL insurance policies should be reviewed carefully before making a final selection, however. 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," admitted 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 is the best fit for your 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.
Bernstein, Wayne E. "Tis the Season for EPLI Claims." National Underwriter Property and Casualty—Risk and Benefits Management. January 15, 2001.
Betterley, Richard S., and Sandra Jane Meindersma. "Evaluating Employment Practices Liability Insurance Policies." Risk Management. December 1993.
Bland, Timothy S. "Liability Insurance Needs to be Customized." Memphis Business Journal. February 25, 2000.
Esters, Stephanie D. "Customer Sophistication Fuels EPL Market." National Underwriter Property and Casualty—Risk and Benefits Management. November 10, 1997.
Luchs, Charles. "Small Companies, Large Exposures." Best's Review—Property/Casualty Insurance Edition. January 1997.
Prahl, Robert J. "Employment Practices Liability Insurance: A Review and Update." Rough Notes. November 2000.
Trexler, Stephen H. "Extra Insurance." HR Magazine. September 1996.
Weiss, Stephen J. "How to Eliminate EPLI Coverage Gaps." Directors and Boards. Fall 2000.