Are you in denial about your liability risk for employment-related claims?

“My people would never do that.” “We have a family-like environment.” “I know everybody here and I trust them.” These are the sentiments of employers who have a false sense of security when it comes to employment-related claims, says Chris Zito, president of Zito Insurance Agency, Inc.

“They feel it couldn’t, or wouldn’t, happen to them,” he says. “The problem is when somebody does get terminated that relationship changes immediately — and generally not for the better.”

Employers also use the fact that it has not happened to them yet as rationale that it isn’t likely to occur in the future. Zito says that’s like saying: my house has never burned down, so there is no reason to buy homeowner’s insurance.

Much like in a divorce, once people believe they have been harmed due to unfair or illegal treatment (i.e. termination of employment), an employee’s mindset can change from loyal to vindictive. There are few cases where employees who have been terminated accept responsibility.

Smart Business spoke with Zito about what employers today need to remember about employment practices’ risk and insurance.

Why does employment practices liability (EPL) play such a big role?

EPL claims were relatively uncommon 20 years ago, but their frequency has increased dramatically over the past decade, with claims coming from past, current or even prospective employees. (Some people interview with the intention of getting the employer to say or do something to violate employment law, so they can file a lawsuit.)

As with many types of liability insurance, protection against legal defense costs are as much a reason to purchase coverage as the fear your company will be deemed liable for damages.

Damages alleged in EPL claims often are intangible, so it typically boils down to the current or former employee’s word versus that of the employer. Accordingly, a significant amount of discovery is required to build a defense, including deposition of other employees, review of personnel files, etc., making the cost of defending EPL claims disproportionately high.

Are claims costs rising?

Yes. The combination of increases in the rates charged by law firms and the inflationary impact on settlements continue to inflate claim costs annually.

How does EPL insurance help companies?

In addition to paying for the cost to defend and as necessary settle EPL claims, many of the better policies on the market include access to employment law specialists. These specialists can provide guidance on sensitive employment-related issues — advice that could prevent a claim from occurring. They also can provide guidance about how to mitigate damages if a claim occurs.

What scenarios could fall into this coverage?

Although wrongful termination is the most common allegation in EPL claims, complaints can include harassment, discrimination for age, gender or health related issues, improper evaluations, wage and hour disputes, etc.

Beyond insurance, how do you limit EPL risk?

Keys to preventing EPL claims from occurring or controlling damages in the event they do occur largely center around:

  • Proper communication and education of employees regarding the terms and conditions of their employment.
  • Adequate documentation of employee files regarding disciplinary hearings or actions, as well as performance evaluations.

You also should review all employment related documents, such as employment applications and employee handbooks, to assure the language adheres to the current employment laws in your state.

Is there anything else you’d like to share?

In spite of the fact that some employers remain in denial, most:

  • Have incurred an incident that was settled internally, when no coverage existed.
  • Are aware of situations that could have easily turned into employment claims.
  • Know of other employers who have dealt with employment-related suits.

EPL coverage, even if at a nominal level, should be a standard component in most company’s insurance and risk management programs.

Insights Insurance is brought to you by Zito Insurance