Many business owners think of their company as a tight-knit group and their employees as a family. That may be true in good times, but what happens when something goes wrong and an employee — or potential employee — sues you?
If you don’t have employment practices liability insurance, a lawsuit could put you out of business, says Cliff Baseler, vice president, Best Hoovler Insurance Services Inc., a SeibertKeck company.
“It is such a critical part of a commercial insurance program today that every company should have this coverage,” says Baseler. “It’s important coverage to round out property and casualty insurance. It doesn’t matter if you have one employee or 1,000 employees, it is a must, and the cost is relatively small in relation to the potential costs in the event of a lawsuit. Because it’s not a question of if you are going to have an EPLI claim, but when.”
Smart Business spoke with Baseler about what employment practices liability insurance covers and the risks of failing to have it.
What is EPLI and what does it cover?
EPLI is an insurance policy that provides employers with protection against claims of discrimination, wrongful termination, sexual harassment or other employment-related claims made by employees or potential employees.
Employers may see themselves as one big happy family, but happy families can be broken up when a company has a downturn and has to lay off employees. In an age of corporate downsizing and mergers, one of the biggest areas of employment practices claims is discrimination, be it sexual discrimination, racial discrimination or, the largest single driver today, age discrimination. The second biggest area of claims in this area is retaliatory claims, for example, when someone is a whistleblower.
When the first EPLI policies were offered, coverage was related to claims associated with the Americans with Disabilities Act and only large corporations carried these policies. Today, however, coverage is much more broad and it’s gotten to the point where even very small companies need to have it.
What steps can companies take to avoid EPLI claims?
All major insurance carriers have loss prevention consultant services. Businesses should take advantage of those services, because they can help your company be proactive in avoiding suits, providing best practices and loss prevention services. Some even offer a hotline where, if you’re in a sticky situation and don’t know how to handle it, you can call and talk to an attorney before you take action. For example, if you are going to fire someone, the attorney can advise you on what documents you need to have and what steps you need to take before doing so.
Your carrier can also help you set up your employee handbook with sexual harassment and discrimination policies outlining unacceptable behavior. Having those policies in place can go a long way toward helping you mitigate these types of claims.
If a company is doing everything right, and has these policies in place, why does it need this insurance?
Any company can be targeted for an EPLI lawsuit. And even if the company is innocent of any wrongdoing, it still has to defend itself against the charges of illegal employment practices. If you are accused of misconduct, you will need an attorney to defend you. The average cost to defend a simple EEOC discrimination claim starts at $25,000 to $35,000, and that’s for a dismissal. If the claim ends up in court, you could be looking at six figures or more.
In addition, these types of suits are more plentiful in this economy. As companies lay off employees, the frequency of claims for wrongful termination and discrimination has increased dramatically.
How would a potential employee have a claim against a company?
For example, if you have a potential employee who is 58 and very well qualified, and one who is 35 who is equally qualified, you can’t use age in your decision to hire. It’s amazing how many employers will have the discussion about the 58-year-old only being around for a few years before retiring, while the 35-year-old will probably be around a lot longer. If that potential employee learns of those discussions, and especially if they are documented, you may have a discrimination suit on your hands. This is where your insurance company’s loss prevention program can come into play to create policies to avoid this type of situation.
Another potential area of liability is if an employee leaves your company, is interviewing with another company, and someone at your company says negative things about the former employee. If that gets back to the employee, who finds out he or she didn’t get the job because of something someone at your company said, that can also result in a lawsuit.
How does third-party coverage work?
Third-party coverage is attached to your EPLI policy and covers accused wrongdoing outside your company. For example, if you have a salesperson who makes sexual advances to a client’s receptionist, and she sues your company for sexual harassment, that’s where third-party coverage would come into play.
Do EPLI policies cover prior acts?
In most cases, yes, but the caveat is that any known prior incidents and pending litigation are specifically excluded. Prior acts could be something that happened years ago, but you weren’t aware of the problem and no supervisor had been notified. But any known prior acts that might give rise to a claim would be excluded.
Cliff Baseler is vice president, Best Hoovler Insurance Services Inc., a SeibertKeck company. Reach him at firstname.lastname@example.org or (614) 246-7475.