The PC Professional
Chapter 2
Employment Practices Liability Insurance
Employment Practices Liability Insurance, or EPLI as it is commonly referred to, is a form of liability insurance. It provides protection for an employer against claims filed by employees, former employees, or even those who merely applied for employment. EPLI covers discrimination, wrongful termination of employment, sexual harassment, and other employment related allegations. It covers the company, its directors, and its officers.
In order for a former, current or potential employee to sue a specified company he or she must prove that the employer or potential employer violated their rights in some way. All types of lawsuits are on the rise, so employers must be aware of their employment practices liability. Most employment practices lawsuits involve allegations that an individual’s civil rights were violated in some way.
There are different types of liability policies. Any person can be sued, but some are more at risk than others. Obviously, those with assets are more likely to be sued than those without, but all individuals experience some risk. Insurance agents are certainly at risk, so they have coverage available to protect them financially; it is called Errors and Omissions insurance.
A Policy Overview
The policy name says it best: employment practices liability insurance. This type of coverage insures against liability arising from employment practices, even if it is merely an allegation rather than an actual company “practice.” Comprehensive General Liability (CGL) policies provide only general liability coverage insuring against claims for bodily injury and property damage; they do not typically include coverage for employment practices. CGL policies basically insure against tangible damages rather than the intangible damages of employment practices. Intentional acts (which are commonly claimed in employment lawsuits) and bodily injury to employees from or during the course of employment or out of performing duties related to an employer’s business typically are excluded under CGL policies.
Another important difference between EPLI and CGL policies are the way in which claims are generally covered. CGL policies cover occurrences that caused damage during the period of coverage. In other words, if an employee files a claim today for an injury that occurred years ago, as long as the CGL policy was in effect at the time of loss, valid claims will be covered. EPLI policies on the other hand cover only claims the employer knew about or should have known about and that the employer reported to the carrier during the coverage period.
Not all EPLI policies are the same. Most policies provide “duty to defend” coverage, requiring the carrier to defend against claims brought under the policy. This aspect of the policy is typically true regardless of whether the deductible or amount of the employer’s out-of-pocket expenses has been met. The insurer usually has the right to choose the counsel who will defend the company against the claim.
Some EPLI policies contain a provision that gives the carrier the right to recommend settlement. This is often referred to as the “hammer” clause. If the employer does not follow the recommendation, the carrier’s liability is limited to the amount recommended. Some hammer clauses allow the carrier to force the case into arbitration, mediation, or other alternative dispute resolution mechanisms.
While policies vary, some common EPLI policy features include:
1. Covered Insured: policies cover claims brought against the insured company, its directors, officers, and employees. The policy term “employee” must be carefully read since some policies may exclude coverage for part-time, temporary, leased, or seasonal employees.
2. Subsidiaries: The policy may also cover any subsidiaries if so stated under the policy terms.
3. Claims: EPLI policies cover civil judicial proceedings, and virtually all plans cover arbitration and administrative proceedings, such as those that might come before the Equal Employment Opportunity Commission or a state equivalent of that. Some contracts may cover claims before litigation or the actual filing of a grievance.
4. Employee Claims: All EPLI policies cover claims brought by current full-time employees. Some contracts will also cover current part-time employees, temporary employees, and seasonal employees but the insured must check his or her policy to determine this.
5. Wrongful Acts: Most EPLI policies cover claims of wrongful termination of employment, workplace harassment, and discrimination. Many offer a more comprehensive list of covered acts that might include new employment torts including negligent hiring/supervision/evaluations, invasion of privacy, defamation and intentional infliction of emotional distress. The amount of coverage will be determined by the policy.
6. Excluded Acts: EPLI policies generally exclude claims based on or related to the Fair Labor Standards Acts. The only exception might be claims related to the Equal Pay Act provisions. Policies would also exclude claims based on the National Labor Relations Act, the Worker Adjustment and Retraining Notification Act, and those arising from downsizing, layoffs, workforce restructurings, plant closures or strikes, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), the Employee Retirement Income Security Act (ERISA), the Occupational Safety and Health Act (OSHA), and the costs associated with providing “reasonable accommodation” under the Americans with Disabilities Act (ADA) for disabled employees, or the costs associated with modifying facilities to make them accessible to the disabled.
Many types of industries face liability risk. With the numerous lawsuits in recent years against IT companies, they seem to be especially at risk of being sued. Another industry that faces high liability is permanent and temporary staffing companies. Both the people they place in jobs and the companies they supply staffing for can sue them.
Since all EPLI policies are not the same, many industry professionals stress the importance of choosing a carrier that has experience in the liability field and financial strength (no one wants their carrier to fold). Such liability insurance should never be purchased on the basis of a low premium, although high premium is not necessarily a guarantee of quality either. In most cases, however, the buyer gets what he or she pays for. The more coverage in the policy, the higher the cost will be.
While many insurance buyers want their agent to make decisions for them, in this case that may not be wise for the agent, unless he or she does some investigative work before choosing a policy. Underwriters for the insurance company are not going to know all the personal risks the business faces in their hiring practices. The company must be able to tolerate any uninsured risk the policy leaves them and exclusions must be understood prior to purchase.
Some companies want to be able to choose their own lawyers; if this is important to the policy buyer it is necessary to address this issue with the carrier being considered.
While all types of liability contracts are designed to pay when the insured is determined to have been at fault, each type of liability insurance will have its own unique qualities. Employee lawsuits against their employers are not new, but the growth of such lawsuits is. Additionally, we are seeing lawsuits against employers that were not previously seen, such as suits brought by individuals against companies that did not hire them. There are multiple reasons for this, including lack of company loyalty, lack of company support for employees and their personal needs, changing demographics of the workforce, and lots of legal encouragement to sue anyone at any time for any reason. Who can resist a potential financial windfall that is promised simply by filing a lawsuit?
We must also realize that employment is not the same today as it was thirty or forty years ago. People no longer stay with the same company through their lifetime. Companies do not feel an obligation to their employees as they once may have. Competition is no longer between two companies in the same geographical area; competition is now worldwide making the stresses on business owners and CEOs much more severe than they once were. Stockholders are requiring greater accountability from the companies they invest in and this is not a bad thing. It is necessary to have accountability, but it also means employees may take a back seat to profitability and other financial measures.
The changing times means companies must acquire Employment Practices Liability Insurance (EPLI) to protect company assets. This is an area of insurance that can no longer be ignored.
Do Employers Really Need EPLI?
Employment Practices Liability Insurance covers businesses against claims by workers who feel their legal rights have been violated; in some cases, claims are even brought against the company by those they never hired, merely interviewed for work. Agents are often the individuals that alert companies to potential risks in the workplace. In today’s litigious environment, employers must constantly consider financial risks, and this certainly includes employment practices liability. In fact, agents that do not recommend necessary insurance place themselves at risk of lawsuits. Agents are legally termed a professional. With this designation come responsibilities. One of those responsibilities is the knowledge necessary to know and understand their client’s potential risks.
It is not difficult to demonstrate the need for Employment Practices Liability insurance (EPLI). One need only consider the climate businesses operate in to know that where a lawsuit might succeed, one will eventually be filed. Large employers have been aware of their liability for some time, but small and mid-size employers are just beginning to realize their vulnerability. Unfortunately, some of the smaller companies do not think they will need such coverage, even when they may be at risk. For years smaller companies have operated successfully never experiencing this type of lawsuit; they do not always believe they are at risk as a result.
Many smaller (and even mid-size) companies employ a group of people that have been with them for many years. They are, in effect, a “family.” It is hard for the employer to believe that a member of this business family might mistreat a fellow employee because of their gender, race, religion or sexual preference. Employers may treat the squabbles among their employees as minor problems and fail to recognize the financial risk involved. This may especially be true when it comes to sexual harassment. An inappropriate joke, touch, or insinuation may be shrugged off once too often, prompting a lawsuit.
Another problem is educating small employers to the acts that might cause a financial loss. An older business owner may feel fatherly towards some of the younger female employees, not realizing that many of his actions are inappropriate for the workplace and places him and his business at employment liability risk. How does an agent tell this older man that he is not supposed to put his arm around his female workers? How does the agent explain this opens him up to a lawsuit that he could lose? Even an innocent question (he thinks) to a prospective employee could give rise to an action by the U.S. Equal Employment Opportunity Commission (EEOC).
Legal cases brought against employers by their employees (and even individuals who merely applied for jobs) are on the rise. It has been estimated that three out of every five employers will experience this type of lawsuit by a current employee, a former employee, or an individual who merely applied for employment. Companies are at risk from the pre-hiring process through the exit interview.
Ideally companies should obtain employment practices liability insurance from the moment they begin to interview their first applicant for employment. Investors often require such coverage to protect not only the company, but their investment as well. Director’s and Officer’s Liability insurance coverage should also be purchased as part of the overall company protection program. Directors and Officers can be found liable in suits relating to employment practices.
Lawsuits can happen to anyone and any company. This has never been truer than it is today. Lawsuits have been filed because an inappropriate joke was told in the employee lunchroom, because the boss or another employee touched someone (even when the “touch” was intended non-sexually), following the firing of an employee, and by individuals who did not get hired following an interview or application. Most people realize that there are individuals who look for reasons to file a lawsuit in the hope that riches will follow. Even if the claim is groundless, the defense of a suit is expensive and takes up valuable time and resources.
Individuals are often able to use existing laws to their advantage, even when it may not fit the situation exactly. The Equal Pay Act of 1963 prohibits sex-based wage discrimination between men and women in the same company performing under similar working conditions. Title VII of the Civil Rights Act of 1964 prohibits employment discrimination based on race, color, religion, sex, and national origin. This act applies to employers with 15 or more employees. Also applying to companies with 15 or more employees is Title I of the Americans with Disabilities Act of 1990; it prohibits discrimination in all employment practices against qualified persons with disabilities.
The EEOC, who has the responsibility of enforcing employment laws, considers all employees including part-time and temporary workers. This often means that small companies are required to meet the same standards as their much larger counterparts.
Employers may not realize their potential risk because the numerous lawsuits that are filed do not usually end up in the papers or on the news. However, many employers find themselves being sued for employment discrimination. According to the U.S. Equal Employment Opportunity Commission (EEOC) 88,531 charges of workplace discrimination were filed in fiscal year 2024. In 2024, retaliation continued to be the most frequently filed charge. Between the years of 2018 and 2024, the agency received a total of 154,225 charges alleging harassment under any basis and 58,645 charges alleging sexual harassment.
It is likely that we will begin seeing discrimination lawsuit statistics gathered more often as time goes on since they are on the rise. Defending the business from these lawsuits is also increasingly expensive. Even when the business knows it is completely innocent there are legal fees involved. Any type of lawsuit is expensive, and it doesn’t matter whether there is any actual guilt involved. Not only are there legal fees, but the company must also use staff time to gather information and documents, perhaps conduct an internal investigation, and perhaps put other aspects of business on hold.
Class action lawsuits are also on the rise. These result in a lower per-claimant award than single person lawsuits but the collective cost can be extremely high, typically in the millions of dollars in cash and millions more in business costs.
For smaller companies one problem is the lack of a clear statement about workplace behavior. Often there is not even a simple employee manual that is given to new employees. Even though the employer thinks he or she has stressed what type of behavior is proper at the workplace, the lack of a written guide puts them at risk. One of the services now being offered by some insurers is guidance through the EPLI contracts regarding risk management. The type of risk management will vary; some provide online training, sample policies, procedures and guidance on law trends. Others may offer their policyholders actual consultations with their agents, management officials, or even with an employment attorney.
Although employers should not depend upon their insurance agents to bring these types of risk to their attention that is often what happens. Even though employment literature may highlight the dangers, as every agent knows, policies seldom sell themselves. It takes an agent to point out the problem and the potential solution.
Temporary employment agencies are increasingly used as employers try to avoid interviewing new employees or finding part-time employees. Since employment taxes consume a large portion of a company’s resources it makes sense to hire someone on a per-hour-basis bypassing employment taxes. Companies that provide temporary help to outside companies face especially high risks of negligence. Unfortunately, even their agents may not realize the issues and challenges of professional liability insurance for technical staffing and temporary staffing agencies.
Most staffing companies prescreen their employees, sometimes even performing background checks, but it is surprising what can escape these background checks. Permanent and temporary staffing companies can be (and are) sued for the poor performance of an employee, for employee dishonesty, and any other issue that may arise. On the employee’s side, he or she can sue the company for sending them to a dangerous work environment, exposing them to discriminatory behavior, and a host of other experiences. In short, they can be sued from both sides.
Low Cost Protection
Employment Practices Liability insurance is relatively inexpensive for the protection it provides. Since even a perceived innocent action could bring about a loss, it simply makes sense for businesses of all sizes to purchase it. Agents have a duty to recommend this coverage and vigorously promote the purchase of it. While it may not make the news, there are far more lawsuits than most people realize against smaller companies. The laws governing employment practices apply to nearly all employers, so size is often not a consideration, especially for those employing fifteen or more people during the course of a year (despite what many small and mid-size companies believe).
Employees are generally considered the most valuable asset at most companies since they are vital to an efficient and profitable business. In the past, if two employees began exchanging inappropriate comments with each other, entered into a romantic relationship, or otherwise interacted in some detrimental manner the employer was not considered at risk. That is no longer true. Even if the employer is not aware that one of their employees is telling inappropriate jokes or causing work-related stress to another member of the company, they are still typically considered liable.
Lawsuits relating to employment practices and human resource issues continue to grow in both frequency and severity according to the latest employment liability insurance statistics. These lawsuits involve alleged discrimination, wrongful termination, sexual harassment, and retaliation. Over the last ten years both federal and state employment laws have expanded employee’s rights in the workplace, which allows an ever widening “causes of unlawful action” to be brought against employers and business owners. Company’s customers and clients are also suing more than ever before. For an agent, that means policyholders are suing over contract or policy issues, including what was (or was not) recommended, how the policy was explained, and how claims were paid. For business owners, it means their customers and general consumers are suing them.
These trends, along with expanded judicial interpretation of applicable laws, have gone far to encourage employees, applicants, and past employees to seek financial rewards for their perceived grievances. The employer can try to do everything right and still be sued. Even when the lawsuit is unfounded, the employers must defend themselves or settle out of court. There is no type of business with employees that is immune from such lawsuits.
New Technology Firms
Often the businesses most vulnerable to employee lawsuits are those that are growing faster than expected. This often includes technology firms where management is unprepared for the growing numbers of employees that must be hired. Procedures are often not in place for hiring, training, disciplining, and firing employees. As a result, mistakes are made. Even if the mistake is innocent and had no intent to harm a lawsuit may still result. It is very hard for an individual to pass up his or her perceived financial gains from a lawsuit.
There is no way for any employer or business owner to know in advance who will sue them. Even a longtime employee might decide to sue if he or she is dissatisfied with some aspect of their employment. Additionally, no business owner can personally monitor every aspect of hiring, training, and terminating employees. They must trust at least part of it to other managers who may not have the same temperament and abilities as the company owner. Additionally, it is a sad truth that some employees will lie if it means perceived wealth or if they feel the need to get even with their employer or manager for some perceived injustice: maybe the promotion went to another, maybe the employee expected a raise that did not materialize, or maybe there is simply a conflict of personalities. Whatever the issue, lawsuits happen every day.
Insurance producers are often the individuals that alert others to potential risks in their lives. In today’s litigious environment, employers must constantly consider financial risks, and this certainly includes employment practices liability. It is not only the employer’s risks that must be considered; agents must recommend necessary products to protect themselves from lawsuits. Agents are legally termed a professional and can be sued for doing less than necessary to protect the risks of their clients. In today’s world everyone must consider the potential lawsuit, even agents.
All Companies are Vulnerable
America was built on small business owners. While many of these initially small companies grew into some of the largest in the world, each of them began as a small enterprise.
In our early history, individuals began a personal (often home-based) business in response to the needs of others. Shoemakers knew their product was needed by others; farmers knew their crops could be sold; garment makers sewed clothes to sell to those who didn’t want to make their own.
These early business owners never worried about being sued. It was likely that their employees were glad to find work; they would not have dreamed of suing those that employed them. Times change and with those changes come new attitudes.
Perhaps one of the most surprising changes is the number of people suing companies that merely interviewed them for a job. This type of lawsuit is rising with the claim typically being discrimination during the hiring process. Most suits are still brought against large corporations, but no company is immune. With the rise in suits against small and mid-sized companies some insurers are providing EPLI coverage as an endorsement to their Business Owners Policy (BOP). An endorsement changes the terms and conditions of the policy; other companies offer EPLI as a stand-alone contract.
EPLI provides protection against many kinds of employee lawsuits, including claims of sexual harassment, discrimination, wrongful termination, breach of employment contract, negligent evaluation, failure to employ (that’s the people that were merely interviewed), failure to promote, wrongful discipline, deprivation of career opportunity, wrongful infliction of emotional distress, and mismanagement of employee benefit plans.
Educating the Employers
It can be difficult educating small employers to their EPLI risk since small and even mid-sized businesses often feel they personally know those that work for them. An older business owner may feel fatherly towards some of the younger female employees, not realizing that many of his actions are inappropriate for the workplace and places him and his business at employment liability risk. How does an agent tell this older man that he is not supposed to put his arm around his female workers? How does the agent change behavior that may have existed since the business first opened, especially if the insured believes his or her employees are faithful? Agents do not bear the responsibility of changing the behavior of their clients, but they do have the responsibility to educate them as much as practical.
Insurers are encouraging companies to educate their management staff in the types of actions that bring about lawsuits. It is their intention to create effective hiring and screening programs to avoid discrimination in hiring, but also to alert business owners to the potential dangers they face if they fail to implement professional conduct in all work relationships.
Agents must encourage companies to obtain employment practices liability insurance (EPLI) from the moment they begin to interview their first applicant for employment. Lawsuits potentially affect more than the company itself since directors and officers can be found liable in suits relating to employment practices.
Lawsuits are less likely to happen when companies have firm employee policies in place and those policies are enforced but even if such company practices exist, lawsuits can still happen. Employees should have specific steps available to them if they feel they are the object of sexual harassment or discrimination by their supervisor or another individual working for the company. Supervisors and other employees must know where the company stands on behaviors that are not permissible. They will only know this if the company takes fast and firm action regarding unacceptable behaviors.
Every type of action should be documented, even when merely interviewing potential employees. Employment Practices Liability Insurance was created in response to significant changes in the law in the early 1990s when lawsuits began increasing sharply. By now employers should understand the steps they must take to prevent lawsuits; if they don’t then it is very likely that they will be sued at some point.
Even employers and companies that are careful can be sued. While the likelihood of a lawsuit is far smaller than many of the other risks faced by businesses, when a lawsuit is filed, the cost of even just one can bankrupt a company. Discrimination lawsuits can affect a company’s reputation as well as their pocketbooks. According to recent surveys, up to 50 percent of all employers now carry some form of EPLI. Most professionals feel this is money well spent.
End of Chapter 2