Employment Practices Liability Explained

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As a business owner, you probably have an outstanding team of employees that support your company goals and make your organization successful. But, as an employer, you also run the risk of employment disputes arising that could seriously hurt your brand and finances. When you have a staff member make claims that they were discriminated against or harassed, you stand to lose everything. 

In 2020, the Equal Employment Opportunity Commission (EEOC) fielded over 750 million inquiries that resulted in 70,804 charges leading to damage claims totaling over $439 million. How can businesses, regardless of their size, afford this level of financial loss? Business insurance. 

With adequate coverage, companies avoid paying expensive settlements, damage awards, and exorbitant litigation fees that often come with a costly employee lawsuit. In fact, an employment practices liability policy (EPLI) is essential to protect your livelihood. Curious how this insurance works and if your business needs it? Read on! 

Employment Practices Liability Coverage: Do You Need It?

When you consider that 18% of employees work for a company of 20 workers or less, it may come as no surprise that an even smaller percentage of these companies have an EPLI policy. This could be due to not knowing this protection exists or that it's an optional coverage that isn't worth the price tag. 

Whatever the excuse, businesses with any number of employees should carefully consider the risk of forgoing such a policy. Especially if in an industry with higher turnover rates, which leads to ongoing hiring initiatives. All it takes is one allegation that your business either discriminated against, harassed, or wrongfully terminated a candidate or employee, and a costly lawsuit could be at your doorstep. When evaluating what business insurance you need, make sure to learn more about EPLI coverage.

Which Industries Benefit from EPLI Insurance?

If you're still not sure that an employment protection liability policy is necessary for your organization, determine if you're in an industry that's more susceptible to employee claims. For example, construction firms, food service companies, and manufacturers have a significant chance of a worker alleging they were wrongfully terminated or discriminated against. Again, you can see the statistics by simply reviewing the EEOC's latest cases

Even if your business isn't in a prone market, understand it only takes one case to devastate your finances and your brand's reputation. Several studies show that most companies will face employment-related lawsuits at some point in their lifetime. 

The risk level your organization faces can also be significantly impacted by its state, like California or Alabama. You've probably already read or watched news stories about employees suing over being laid off during the pandemic. Some may feel they were let go because of their age, religious preference, or other protected characteristic under the guise of economic strife on the part of their employer because of COVID.

What an Employment Practices Liability Policy Covers

An EPLI defends businesses against employee claims regarding company violations of their civil rights. To get a better understanding of what would qualify as a claim under these circumstances, we've put together a list with some examples: 

  • Sexual harassment
  • Discrimination based on age, disability, gender, national origin, race, or religion
  • Workplace retaliation against whistleblowers
  • Wrongful termination
  • Defamation
  • Invasion of privacy
  • Discriminatory acts like failing to promote or offering career opportunities
  • Employment contract breaches
  • Inadequate accommodation for pregnancy or disability

Due to not verifying work statuses, wage and hour claims and immigration-related suits may have some limited coverages. Be sure to discuss these issues with a knowledgeable insurance agent before purchasing this policy type.

Primarily, EPLI coverage handles any incidents of employee rights violations, regardless if it's a CEO or coworker who committed the acts. Covered costs include out-of-court settlements and legal defense expenses. Always take time to read the fine print and ask specific questions about any exclusions before purchasing this coverage. Insurance companies often limit how much they will pay, though ideally, you want a policy that offers unlimited defense costs.

What EPLI Policies Won't Cover

Of course, countless employment claims don't fall under the scope of an employment practices liability policy. Below is a quick overview of just a few of the many scenarios where this coverage won't help:

  • Employee Theft - When employees are dishonest and steal from your company, a fidelity bond or additional commercial crime policy is necessary to cover the loss. 
  • Workplace Illnesses and Injuries - While it's true an employee could allege wrongful termination because they got hurt on the job, the fact they got injured isn't grounds for an EPLI claim. However, if they say you retaliated for seeking care and fired them, they might have a case. 
  • Management Decisions - You may wonder if a board member or manager decides to misuse your business funds or violates company bylaws that, an EPLI would protect you from the fallout if an employee sues over these scenarios. In this case, no, since it isn't a violation of their rights, per se.
  • Unemployment Claims - While it's possible an employee may sue for denied unemployment benefits, this generally falls to your state's unemployment agency to handle these claims. 
  • Professional Mistakes - When a professional mistake gets made by a company, or one of its employees makes a professional mistake that leads to other workers suffering damages, an EPLI policy won't cover the resulting lawsuit. Instead, you need to have professional liability coverage to handle the case. 
  • Union Disputes - If your organization has a labor union with collective bargaining rights, the disputes that inevitably arise from these relationships are not part of an employment practices liability policy's scope. 

Another important factor to consider when buying this policy is your relationship with those who work for you. For example, many EPLI policies won't cover lawsuits brought against you by independent contractors and only those who receive W2s from you as staff employees. 

However, workers that receive 1099s can still potentially sue for harassment or discrimination. For example, maybe they found out you purposely misclassified their status as contractors to avoid claiming them as employees.

EPLI Coverage Options

When choosing an EPLI policy, you will likely have two coverage options to choose from: 

  • Claims-Made - This EPLI type only employee lawsuits made regarding incidents taking place while this coverage is in effect. Employers that choose this option need to ensure their policy remains in effect by renewing on time to avoid coverage gaps. 
  • Occurrence-Based - You may opt for this form of EPLI if you're concerned about employee lawsuits occurring after your policy expires. However, the claimed occurrence still must have taken place while your coverage was in effect.

Regardless of which version of an EPLI policy you buy, your company has protection against damaging claims throughout every stage of your employment cycle. For example, you never have to worry about getting sued for discrimination because you made an adverse hiring decision. This coverage will ensure that your company's best interests receive full protection under the law and that your brand's reputation remains in good standing. 

Have Peace of Mind Throughout the Entire Hiring and Employment Process

Unfortunately, it's impossible to prevent a lawsuit if a worker is set on holding you accountable for what they believe were wrongful employment practices on your company's part. However, there are actionable steps you can take to create a professional environment that minimizes this liability and mitigates instances where discrimination or harassment could occur. 

Ensure you create and maintain an employee handbook that describes in detail the expectations you have for your team's behavior in the workplace. Your organization must enforce these policies from day one ad make no exceptions. Regularly educate yourself and your employees about the importance of these matters and provide ongoing training.

Finally, don't forget to protect your company and employees by carrying a comprehensive business insurance policy that includes employment practices liability coverage. This protection is essential to prevent costly lawsuits and reputational damage to your company. Without it, your entire livelihood could be brought to ruin, even if the allegations aren't true.

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