An overview on employment practices liability insurance

Employment practices liability insurance (EPLI) has gradually become a fundamental element of risk management for the majority of firms. As the number of lawsuits filed by employees against their employers has increased, employers seek for a response to significant changes that originate from the potential for a lawsuit. To their increasingly demanding need, insurers respond with employment practices liability insurance that provides coverage to businesses against claims by employees whose rights have been violated.

By and large, the majority of lawsuits are filed against large organizations on the grounds of sexual harassment, discrimination, wrongful termination, wrongful discipline, negligent evaluation, deprivation of career opportunity, wrongful infliction of emotional distress, breach of employment contract, failure to employ or promote, and mismanagement of employee benefit plans. However, even small or mid-sized companies are not invulnerable to such lawsuits. Recognizing that all businesses need this type of protection, insurers provide EPLI, mostly, as standard policy coverage, but also an endorsement to general liability insurance.

Employment practices liability insurance is normally purchased as soon as a company starts hiring employees. Statistics report that three out of five businesses are sued by a past, present or future employee. It can happen to any firm by any employee at any moment. Even if the lawsuit is unfounded or deceitful, the cost of defending the lawsuit for the business can be expensive in time, money and resources.

The EPLI premium largely depends on the type of business, the number of employees and the claims filed against the company over its employment practices in the past. Typically, a business of 10 to 20 employees with a clean HR record pays a premium of roughly $1,500 for EPLI coverage. EPLI reimburses the company for the costs of defending a lawsuit in court, the legal fees, judgments and settlements, while punitive damages, civil or criminal fines are excluded. Apart from the financial burden, the reputation of a firm can be destroyed by a lawsuit related to employment practices, which justifies why the 50 percent of employers have some form of EPLI. In many cases, EPLI is held as part of Directors & Officers Liability Insurance because top management can also be held responsible in lawsuits related to employment practices.

Practice has shown that the best way to avoid employee lawsuits is to educate management and employees. Employers should avoid age, gender or race discrimination in hiring and should communicate any relevant policy to all employees in the organization. Of course, it makes sense to avoid hiring employees with a drug or alcohol use record. Any procedure should be documented so that the company can prove that all necessary steps are taken towards the prevention of employee disputes. Finally, employers should teach top management what are the limits of their behaviour.