Why Employers Should Consider Obtaining EPLI Insurance

By Kevin Rivera on January 8, 2019

As you may already have learned as a business proprietor, employers are exposed to the risk of lawsuits every time they take action related to their employees. According to a 2017 study of employment litigation data, businesses in the United States with at least 10 employees have a 10.5% chance of having an employment-based lawsuit filed against them. This figure is even more staggering for California employers, who have a 46% higher chance of being sued by an employee over the national average. This is likely because California law goes far beyond federal requirements in protecting employees, creating additional obligations and risks for employers.

The cost of non-compliance with the law can be steep, leading to time-consuming lawsuits and large penalties, settlements and jury verdicts. Even defending meritless employment claims can be costly for employers. The same study referenced above found that 24% of employment-based claims resulted in defense and settlement costs averaging a total of $160,000 per case. Many employers simply are not prepared to absorb the risk of this type of financial hit.

How Employment Practices Liability Insurance Can Help

One way to minimize the financial impact of employee lawsuits is through Employment Practices Liability Insurance (EPLI). EPLI is specialized insurance designed to protect against loss incurred in litigating wrongful employment practices claims by covering the costs of a company’s legal fees, as well as costs for settlements and judgments. The policies generally cover claims of unlawful conduct in connection with the employment relationship by current and former employees and applicants. Common claims covered by EPLI policies include discrimination, harassment, wrongful termination and retaliation.

Under a standard EPLI policy, the employer is responsible for covering all damages and defense costs up to the policy’s deductible. The insurer’s obligation to furnish defense expenses arises when the amount of damages and attorney fees exceeds the deductible.

EPLI policies usually provide coverage on a “self-consuming” or “burning limits” basis, meaning the amount available to settle the case or to pay damages awarded by a judge or jury is reduced by the amount of legal fees and other defense costs the insurer has paid. This makes it important for employers to purchase insurance with limits adequate to cover potential settlements or judgments plus attorneys’ fees.

A major benefit of EPLI coverage is that policies typically require the insurer to defend covered claims as well as any reasonably related claim, even if the related claim is not otherwise covered by the policy. Because discrimination and harassment claims (which are covered by EPLI) are often combined with related claims, such as wage and hour claims (typically not covered by EPLI), a policy with a broad duty to defend may provide employers with greater protection against the substantial costs of defending even excluded claims.

Selecting the Right Policy

An EPLI policy can be purchased as a stand-alone policy or as an endorsement (or addendum) to another type of policy, such as a Commercial General Liability policy or a Directors and Officers liability policy. However, there are key differences between stand-alone EPLI policies and EPLI coverage purchased as an endorsement. Stand-alone EPLI policies often have broader coverage than endorsement policies and have separate policy limits.

Costs for EPLI policies are dependent upon the size of the organization, the type of business and other risk factors. When evaluating and selecting insurance policies, employers should review the scope of coverage and adequacy of limits. Selection of an appropriate policy for your company’s needs is an important decision and should be carefully considered. Competent insurance brokers can analyze the EPLI coverage and potential risks to the company, as well as advise on issues such as deductibles, premiums, and other provisions within the proposed policies.

An EPLI Policy Should Supplement, Not Replace, Sound Personnel Practices

An EPLI policy is not meant to replace sound and secure employment practices. In fact, most insurance companies will not insure a company unless it has some basic employment practices and policies in place. Employee handbooks and complaint and investigation policies are some of the major items that insurance companies expect an employer to have when applying for an EPLI policy. You should be prepared for the insurance company to scrutinize all of the human resources functions within your organization during the application process.

The best defense against employee-based lawsuits is to have legally compliant personnel policies and practices that are uniformly implemented. An EPLI policy is not a substitute for sound policies and practices, but rather, is a tool to minimize your out-of-pocket legal fees and liability in the event you find yourself facing an employment claim, as almost every California employer is likely to do at some point.

Importantly, EPLI policies usually do not cover claims under state and federal wage and hour laws, such as claims for unpaid overtime and meal and rest break violations. (However, these claims may be covered if the employee also brings claims that are covered by EPLI policies, such as for discrimination or wrongful termination.) Therefore, it is critical that your organization complies with all wage and hour laws and issues legally compliant wage and hour policies to your employees.

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