Employment practices liability insurance

Numerous state and federal laws provide job candidates and employees with protections from discrimination and other unfair workplace practices. The number of employee lawsuits has increased in recent years, and any size business is vulnerable to this type of risk. Small businesses can be especially vulnerable because they are less likely to retain employment attorneys or have detailed employment policies and training programs.

In addition to taking steps to reduce your risk of employee lawsuits, you can financially protect your business by purchasing employment practices liability insurance (EPLI). Employment practices liability is generally not covered by general liability insurance, but can be purchased as a stand-alone policy or added as an endorsement to a Business Owners Policy or Commercial Package Policy. Bear in mind that EPLI coverage may have more limits and exclusions as part of a package policy.

EPLI covers companies against claims or lawsuits filed by employees, former employees and employment candidates regarding their employment relationship with an employer. This type of coverage protects the company, its directors, and officers, as well as current and former employees. EPLI policies may also cover seasonal employees, leased employees and independent contractors.

What EPLI covers

EPLI provides coverage for legal costs, settlements and judgments that arise from claims of:

• Discrimination, based on age, race, gender and other factors.
• Sexual harassment.
• Wrongful termination—including constructive discharge, in which an employee resigns as a result of the employer creating a hostile work environment; and retaliatory discharge, in which an employee is fired as punishment for engaging in a legally protected activity.
• Breach of employment contract.
• Infliction of emotional distress or mental anguish.
• Failure to employ or promote.
• Wrongful discipline or demotion.
• Mismanagement of employee benefits.
• Defamation.
• Privacy violations.
• Violation of the Family Medical Leave Act or other such laws.

Some policies contain a catch-all category to provide coverage for claims of discrimination based on protected categories (e.g., sexual orientation) that are not covered under federal discrimination statutes, but may be covered by state or local law.

EPLI coverage can also protect the business owner from meritless claims brought by disgruntled employees.

What’s not covered

While EPLI covers many areas of employment risk, most policies have certain exclusions, such as violations of the National Labor Relations Act, the Worker Adjustment and Retraining Notification Act, Occupational Safety and Health Act (OSHA), and the Employee Retirement Income Security Act (ERISA), as well as claims arising under workers compensation laws. EPLI also will not cover punitive damages or claims resulting from criminal acts. Privacy violations caused by a computer breach also may not be covered by EPLI.

Types of EPLI coverage

Coverage is available on a claims-made or occurrence basis. Most EPLI policies are “claims-made,” meaning that the policy must be in effect both when the event took place and when a lawsuit is filed for a claim to be paid. The only time this isn’t the case is if the policy has a retroactive date, which allows coverage for an incident prior to the start of the policy. An “occurrence” policy will cover any claim for an event that took place during the period of coverage—even if the suit is filed after the policy lapses.

Defense provisions in EPLI policies may also vary. EPLI policies can be written with two types of defense provisions: a “duty to defend” provision places responsibility for managing defense claims with insurers; and a “non-duty to defend” provision assigns responsibility to the insured. Be sure to discuss these details with your insurance professional.

Steps to limit employment liability risk

Purchasing EPLI is an important way to manage employment risk, but ideally, your business will never face an employment practices lawsuit. Taking the following steps can help minimize the risk of such a lawsuit arising in the first place:

• Establish clear workplace policies—Create written workplace policies on employment practices; post them and include in employee handbooks. Establish a policy for employees to report concerns and for management to respond.
• Educate management and employees—Train management, supervisors and employees about ethical and legal workplace practices. You may want to include diversity and sensitivity training as part of your employee education program.
• Hire carefully—Screen employees thoroughly, avoiding any discriminatory practices.
• Provide job descriptions—Clearly define job expectations for all employees.
• Perform regular employee reviews—Review employee performance and keep a written record of reviews.
• Keep documentation—Maintain written records of all employment related practices, complaints, investigations, responses and so on.