A fast growing product in the insurance markets is employment practices liability insurance (EPLI). EPLI is a relatively new form of liability insurance. It provides protection for an employer against claims made by employees, former employees, or potential employees.
EPLI covers discrimination (age, sex, race, disability, etc.), wrongful termination of employment, sexual harassment, and other employment-related allegations. It covers your entire firm, including its Directors and Officers.
As soon as a company starts to hire employees, EPLI should be purchased. Most investors and directors will require that you carry this coverage as part of your Directors and Officers Liability Insurance since they can also be held liable in suits relating to employment practices.
An EPLI Suit can happen to any company. It could be a joke told in the break room, an employee you had to fire, or a person you chose not to hire. Every employer faces the reality that it will be the target of legal action from past, present, and prospective employees. Even if the claim is groundless or fraudulent, the defense of a suit can be expensive in time, resources, and financial cost.
In the mid-2000’s, EPLI was still predominantly a product only large companies purchased. Employees suing an employer do so, largely, to get the substantial financial awards associated with settlements. The range of small business cannot sustain a quarter-million-dollar award and stay in business.
Price reductions in 2005 by many insurance carriers helped the growth of EPLI for companies with 50 or fewer employees who chose to purchase EPLI coverage. EPLI insurance pricing is usually built on a formula based on employment size and industry.
For the first 50 employees, a target premium would be around $400 annually; however a minimum premium of $1000 is more likely for many industries.
Analysis of annual claims totals suggests that EPLI claim rates correspond to unemployment rates. From 2007-2008 total claims jumped 13% as mass layoffs increased by roughly a third. In 2012, charges of retaliation, race, and sex discrimination (including harassment and pregnancy) were the most common types of discrimination.
If you’re considering an EPLI policy to help protect you from massive overtime claims from workers who say they were misclassified, forget it. Insurers still aren’t covering wage-and-hour claims. EPLI language usually excludes coverage for claims under the federal Fair Labor Standards Act “and similar state laws.”
Something to watch for is third party liability. EPLI generally covers three types of claims: 1) wrongful discharge, 2) unlawful discrimination, and 3) unlawful harassment.
Under most EPLI policies, the “wrongful act” must arise from an “employment practice” as defined in the policy and an “employee” must make the claim. Some insurance carriers are adding new coverage to the EPLI policy, third-party coverage. Simply put, third-party liability extends potential claimants to include anyone (i.e. customers and vendors) who has contact with the business or its employees.
All that is required for a third party to bring a claim is harassment, coercion, or discrimination of the third party by the insured. No employment relationship need exist between the claimant and the insured. Certainly, this was not the intent of the EPLI policy. The objective was to insulate employers from the increasing number and costs of employment suits. However, given the changes in the marketplace, this coverage is being offered more readily and merits some attention and understanding.
All companies should assess whether EPLI coverage makes sense for them. The best protection of all is to have good policies and practices in place, stay familiar about employment matters. When issues arise be proactive and preventive it will go far in limiting cost, exposure and liability.