Employment Practices Liability Insurance (also known as EPLI) provides financial protection for your business against lawsuits by employees accusing your business of wrongful treatment such as discrimination, harassment, or other employment-related issues.
EPLI can reimburse your business for the cost of defending a lawsuit in court, as well as any judgments and settlements against you. It covers legal costs whether you win or lose a lawsuit, but it does not cover any punitive damages or civil or criminal fines.
EPLI covers your company as well as directors, officers, managers, employees and former employees as insureds. EPLI covers claims filed by your current employees, former employees, and employment candidates whom you did not hire. Also, it usually covers claims from seasonal employees, leased employees, and independent contractors.
Although most people think of employees suing large employers when they think of discrimination lawsuits, in reality, small businesses are the most vulnerable to employment claims. Most small businesses lack a legal department, employee handbook, or other procedures to reduce the risk of claims.
The risk of an employment claim begins when you interview a candidate. If you choose not to hire a candidate that you interview, they could allege some kind of discrimination, whether or not your decision to hire them was discriminatory or not.
Employment Practices Liability Insurance can be added to a Commercial General Liability insurance policy, or a Business Owner’s Policy (BOP). It can also be written on a standalone basis.
What does EPLI cover?
EPLI covers a wide variety of actions in the workplace that may lead to employer liability including:
- Wrongful termination.
- Illegal discrimination (based on sex, race, age, disability, pregnancy, religion, or national origin).
- Sexual harassment.
- Breach of an employment contract.
- Wrongful discipline.
- Wrongful infliction of emotional distress.
- Invasion of privacy.
- Failure to hire or employ.
- Failure to promote.
- Deprivation of a career opportunity.
- Negligent evaluation.
- Violation of the Family Medical Leave Act or other leave laws.
Examples of EPLI Claims
A woman claims that she was the victim of sexual harassment over a 2 year period at her company. She presents evidence for her claim including specific incidences of harassment and her daily encounters with abusive language. The woman sues the company for damages.
A job applicant who is unable to walk and uses a wheelchair is not hired for any of several positions at a retail store. The applicant is qualified for all the positions, but the store manager tells the applicant that he won’t hire anyone who uses a wheelchair. The applicant sues the company.
Employees belonging to a racial minority feel they are being denied promotions at a regional restaurant chain due to their race. The employees file a class action lawsuit against the employer.
An employee is injured at work and files a workers’ compensation claim against the company. The employee takes time to recover, and returns to his job. However, a month after he returns to work, he is fired. He sues the company for retaliating against him for filing the claim.
Types of claims covered under other types of insurance such as general liability insurance are usually excluded from EPLI coverage. These exclusions are:
- Bodily injury.
- Property damage.
Additionally, as with most types of insurance, intentional or dishonest acts are excluded from EPLI coverage.
Several other types of wrongful acts are also excluded from EPLI coverage, as compliance with these laws is expected from every employer. These exclusions are:
- Wage and hour law violations. EPLI will not pay for claims that your business has underpaid employees or failed to pay overtime.
- ERISA violations. The Employee Retirement Income Security Act of 1974 (ERISA) establishes standards for health and pension plans run by private companies.
- COBRA violations. The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides regulations so that employees who leave a job can continue their health insurance coverage for a limited time after leaving.
- WARN Act violations. The Worker Adjustment and Retraining Notification Act of 1988 (WARN Act) requires employers who lay off 50 or more workers at one time to provide 60-day advance notifications to employees and labor unions.
- Failure to pay unemployment benefits.
- Breach of contract and claims under the National Labor Relations Act. The National Labor Relations Act protects the right of employees to unionize and collectively bargain with employers.
Employment Practices Liability Insurance is usually written on a claims-made basis. Claims against a policy are only valid if both the incident causing the claim as well as the reporting of a claim occur while the policy is still active. Once you cancel an EPLI policy, you no longer have coverage for actions that occurred while the policy was active.
It is especially important to be aware of the claims-made provision of EPLI coverage because employment claims sometimes may not be filed until months or years after an alleged incident. If your coverage is not continuous, you may not have coverage for events that occurred in the past.
Employment Practices Liability Insurance features “shrinking limits” of insurance. This means the costs of legal defense reduces your limit of liability. For most general liability policies, legal fees are not counted towards your limit of liability. However, since legal fees account for a high proportion of the cost of EPLI claims, they are counted towards your insurance limits.
Employment Practices Liability Insurance usually includes a deductible. The deductible is the amount of each claim your business is responsible for before the insurance company’s coverage begins. This is a form of risk sharing and provides a financial incentive for your company to avoid claims. You can usually choose your deductible, and the higher the deductible, the lower your insurance premiums will be.
Pricing of EPLI Insurance
A number of factors influence the pricing of Employment Practices Liability Insurance. The most important factors include:
- Number of employees in your company.
- History of prior lawsuits and claims against your company.
- Rate of employee turnover.
- Whether you have established employment rules and practices in place.
Reducing the risk of an EPLI Claim
Although Employment Practices Liability Insurance can protect your business financially in the event of a lawsuit, there are steps you can take to reduce the risk of a lawsuit in the first place. Preventing lawsuits will lower your EPLI premiums and will also save you from the distractions of having to defend against employment-related lawsuits.
Some recommended steps to reduce your risks include:
- Create a written employee handbook and keep it up to date. In your handbook, be sure to detail company policies and procedures, including policies on attendance, discipline and employee complaints. Your employee handbook should include a statement informing employees that their employment is at-will, meaning they can be terminated at any time for any legal reason. It should also contain an equal opportunity employment statement, which states all qualified applicants will receive consideration for employment regardless of factors such as age, sex, race or disability.
- Have written job descriptions for each job in which you clearly define your expectations for the job. The job description should include a description of required skills and expected performance.
- Perform performance reviews with your employees on a regular basis, and write down the evaluations of your employees in an employee file.
- Before bringing candidates in for interviews, establish a screening program to eliminate unqualified candidates based on an evaluation of their written application or resume. Conduct background checks on all candidates before hiring them.
- Require your applicants to complete an employment application. Include on your application an equal opportunity employment statement. Also, include an at-will statement which informs employees that they can be terminated for any legal reason at any time. It is also important to ensure your employment application doesn’t have fields that could indirectly be used for age discrimination, such as high school graduation year.
- Post your corporate policies in visible locations in your workplace.
- Implement a zero-tolerance policy for any kind of harassment, discrimination, or substance abuse. Create procedures so that employees can report harassment or discrimination without any fear of retribution or negative consequences for their career. Document every employee complaint as well as what steps the company took to address their complaints.
Discrimination and Labor Laws
A number of federal laws have been enacted to prohibit different types of discrimination. Having some familiarity with the key anti-discrimination and labor laws will help your business reduce the chance of encountering an employment practices claim. Some of the key laws are:
- Title VII of the Civil Rights Act of 1964 prohibits discrimination based on race, color, religion, sex or national origin.
- The Equal Pay Act of 1963 requires men and women who perform the same work to receive the same pay.
- The Age Discrimination in Employment Act of 1967 prohibits age discrimination against workers aged 40 and older.
- The Americans with Disabilities Act of 1990 prohibits discrimination against workers that have disabilities.
- The Genetic Information Nondiscrimination Act of 2008 prohibits discrimination against candidates or employees based on genetic information.