When does a small business need employment practices liability insurance?
Employment practices liability insurance (EPLI) protects your small business when a worker sues over employment-related issues. This policy covers your legal costs when an employee or group of employees claim their civil rights were violated or they were unable to complete their work in a fair environment.
EPLI protects against claims of:
- Mismanagement of benefits
- Sexual harassment
- Wrongful termination
- Wrongful discipline or demotion
- Breach of an employment contract
- Privacy invasion
Facts to know about EPLI coverage
EPLI is usually a claims-made policy
In a claims-made policy, a claim is covered only if your policy is active both when the incident occurred and when the claim is filed. For example, your house painting business is forced to close, so you cancel your EPLI coverage. A few months later, a former employee sues you for discrimination, but since you no longer have an EPLI policy, the insurer likely won’t pay for lawsuit costs. Note that in some situations, you may be able to extend a policy beyond its original end date.
Employment lawsuits are costly and common
Lawsuits over employment practices disputes occur frequently. You're actually more likely to be sued by an employee than you are to have a fire at your office – even though more businesses carry insurance to protect against the fire, not the lawsuit.
The risk increases for businesses that are too small to have a human resource team. Businesses with a small staff often lack the time, energy, and expertise to resolve employee disputes before they become legal issues.
Employee lawsuits can devastate your reputation and finances. Small to medium-sized businesses pay an average of $160,000 to resolve this type of lawsuit.
EPLI coverage keeps you from paying these high costs out of pocket. It can cover any legal defense costs, including a settlement or judgment if an employee presents a valid claim.
EPLI coverage can have deductibles and exclusions
Most EPLI policies include a deductible, which is an amount that you pay out of pocket toward legal costs before an insurer contributes. Some policies limit coverage during acquisitions or major staff reductions. Employment dispute lawsuits can be expensive, so keep that in mind when choosing what an EPLI policy covers.
Your insurance company may choose an attorney for you
Some EPLI policies stipulate that the insurance company will choose your attorney if a claim is filed, usually because the insurer wants a lawyer who has expertise with relevant cases.
Small businesses can often bundle EPLI with D&O insurance
Small businesses can often bundle employment practices liability insurance with director and officers’ insurance, another type of management liability insurance. D&O protects a business’s board members and officers against lawsuits over decisions they made on behalf of the company that resulted in financial loss.
Together, these two types of management liability insurance provide a broad base of protection against liabilities related to hiring and firing, employee rights, investment decisions, and employee benefits. The bundle usually costs less than purchasing each policy separately.
EPLI can cover wrongful termination claims, including those related to the coronavirus (COVID-19)
Businesses forced to lay off workers due to the coronavirus should prepare for potential wrongful termination lawsuits. Employment practices liability insurance can likely provide coverage if employees sue because they were fired for failing to fulfill work obligations because of COVID-19. Check with your insurance company's claims department to find out if you're covered.
Employment practices liability insurance costs
EPLI policies can be affordable for a small business. Factors that affect policy cost include:
- Number of employees
- Hiring and termination practices
- Employee turnover rate
- Risk profile
- Past EPLI claims history