Is EPLI Insurance Necessary? Here’s What You Need to Know

Jan 18, 2021 | Business Insurance

Every year, as many as 92,000 employees file charges of workplace discrimination against their employers with the Equal Employment Opportunity Commission (EEOC). These cases lead to hundreds of millions of dollars in fines and penalties for the companies charged. Even employers exonerated of the charges against them often face hefty legal fees.

EPLI insurance can protect your company from facing the same overwhelming costs. But what is it? Is it really necessary?

Keep reading now to get the facts.

What Is EPLI Insurance?

Employment Practices Liability Insurance (EPLI) is a form of business insurance that protects companies against lawsuits lodged against them by their employees. Specifically, EPLI covers lawsuits alleging illegal misconduct during employees’ time at the company or in conjunction with their termination. This includes:

  • Sexual harassment
  • General workplace harassment
  • Emotional distress
  • Discrimination
  • Retaliation
  • Mismanagement of benefits
  • Breach of contract
  • Wrongful termination

These types of lawsuits are not only on the rise, they are garnering employees more money than ever in damages.

But Doesn’t My Other Insurance Cover That?

Many businesses mistakenly believe that these types of cases are covered under their general liability policies. This, however, is not the case. Most liability policies only cover injuries, property damage, and copyright liability. They provide no protection for company decisions regarding employment or on-the-job treatment of employees.

Nor can businesses pass liability along to their managers or operators. When employees file charges against their employers, the company is liable for the:

  • Legal fees associated with negotiating a settlement or going to court
  • Misconduct of their managers or operators
  • Damages awarded to employees if they win their cases

Workers Compensation insurance also does not cover these things, despite common misinformation to the contrary. Workers Comp policies cover only physical injuries, not any other types of wrong or harm done to employees.

Only EPLI insurance coverage protects employers in these situations.

Who Needs EPLI Insurance Coverage?

All businesses need EPLI insurance. This is true regardless of your business’s:

  • Size
  • Age
  • Industry
  • Reputation
  • Other insurance coverage

A quick look at the numbers shows why.

Harassment and discrimination cases take an average of 275 days to resolve. When companies settle out of court, the average total cost of a case is $125,000.

When cases do go to court, the median cost jumps to around $200,000. A full one-quarter of cases that go to court end with companies paying damages of more than $500,000. That’s half a million dollars in damages alone, not counting the legal fees and other associated costs.

That kind of financial hit can devastate even a large, well-established business. Companies that are smaller or already suffering financial strain can fare even worse. EPLI insurance provides a buffer that protects your company from this kind of financial storm.

No One Is Exempt

Often, business owners object to the idea that their company would need such insurance. “But my company is responsible!” they argue. “We would never mistreat our employees!”

Unfortunately, business law is complex. So are human beings. Unconscious bias is very real.

Even companies and managers dedicated to diversity and best practices can make mistakes. These can be poor choices or even just a failure to properly document their process.

Whatever the case, the result is the same. An expensive lawsuit that must be paid for out of pocket unless you have EPLI insurance.

What Does an EPLI Policy Cover?

An EPLI policy covers most of the expenses associated with a discrimination or lawful termination lawsuit. This includes:

  • Legal fees
  • Settlements
  • Damages

Under some policies, employers also gain access to professional assistance from lawyers and HR specialists. These experts can help them navigate the case against them and minimize the negative effects on their business.

Things EPLI Does Not Cover

While EPLI provides vital protection for your business, it does not cover all actions or situations. An EPLI policy will not cover:

  • Criminal acts, including fraud
  • Intentional and malicious actions and behaviors
  • Workers Compensation claims
  • Disability claims
  • Unemployment claims
  • Employee Retirement Income Security Act of 1974 (ERISA) violations
  • Wage law violations
  • COBRA violations
  • Expenses related to strikes or lockouts
  • Worker Adjustment and Retraining Notification Act of 1988 (WARN Act) violations

All of these incidents fall under other types of insurance and should not be confused with the equally important coverage EPLI policies provide.

“Duty to Defend” vs “Duty to Reimburse”

There are two primary types of EPLI policies. The first is a “duty to defend” policy. The second is a “duty to reimburse” policy.

In a “duty to defend” policy, the insurance company will often select the legal counsel representing the client when a claim is filed. The insurer may choose different legal teams for different cases and the client may or may not be familiar with the legal team enlisted on their behalf. This allows the insurer to choose the best counsel for each individual case, maximizing the likelihood of a good result.

In a “duty to reimburse” policy, the client chooses its own legal team. The insurer then reimburses the client for their legal expenses. This is best for clients with a preferred legal team they want to work with every time.

Other Things to Know About Choosing a Policy

Depending on your insurer, EPLI coverage may take the form of an endorsement added to your existing business policy. Other insurers sell it as a stand-alone policy.

However you purchase it, it is helpful to buy an EPLI policy sooner rather than later. This is because most policies operate under a “claims-made” rule. This means that the policy covers any cases in which charges are brought while the policy is in effect, regardless of when the alleged misconduct occurred.

For example, imagine that you purchase a policy today. Next week, a former employee files charges against you with the EEOC for misconduct alleged to have occurred two months ago. Your EPLI policy would cover the costs of that claim because the policy was in effect, even though you did not hold the policy at the time of the alleged incident.

This means that buying a policy now protects you both retroactively and in the future.

Read the Terms Carefully

Under some policies, the insurer has the final say over whether to settle or go to court. In many cases, this makes little difference as both the client and the insurer want the same thing. In some cases, it can lead to conflict when the client and insurer disagree over the best course of action.

For example, a client may want to go to court to prove they are in the right. The insurer may realize that settling for a small sum is much more in the company’s best interest than a long, drawn-out court case would be.

Similarly, as with every form of insurance, your EPLI policy will have its limits. It will not cover an endless amount of costs and if a case exceeds the total of your policy, you may be required to pay some portion of the costs yourself.

For example, imagine that you have $1 million in coverage. You are sued and, in a rare case, the court awards the plaintiff $750,000 in damages. The legal fees total $300,000.

Your policy, then, would cover the $750,000 in damages and the first $250,000 of your legal fees for a total of $1 million. You would be responsible for the remaining $50,000 in legal fees.

These types of circumstances are uncommon. In most cases, EPLI insurance will cover the whole of your costs and you will face no conflict with your insurer. Reading your policy carefully, however, ensures that you understand your coverage.

This prevents surprises and allows you to make changes to your policy terms so that they align with your priorities before you end up in court.

The Importance of EPLI Insurance for Small Businesses

It is easy to associate big lawsuits with big companies. It is often much harder for small businesses to imagine themselves on the hook for hundreds of thousands of dollars over a hiring or firing mistake.

“Who would sue me for that kind of money?” many small business owners wonder. “They must know I don’t have it.”

While this logic makes sense, it sadly provides no protection. Even if your farm or other small business does not have hundreds of thousands of dollars, disgruntled employees or former employees can still take you to court. Even if you win the case, the legal fees can be enormous.

If you made a legitimate mistake, it won’t matter to the court how honest or accidental the situation was. You will still be liable, and there is no cap on liability related to business income. Even a single case that goes badly can be enough to cause severe financial hardship.

Without the deep pockets of a major corporation to foot the bill, your only protection will lie in adequate EPLI insurance coverage. This is why EPLI coverage is even more critical for small businesses than it is for large ones.

Learn More

Learn more about how an affordable EPLI insurance policy can protect your business today. Schedule an appointment and let one of our insurance experts help you get the answers and coverage you need right away.