Employment practices liability insurance

Employment practices liability insurance (EPLI) protects your small business when a worker sues over employment-related issues.

Sometimes referred to as “EPL insurance,” this policy covers your legal defense costs when an employee or group of employees claim their civil rights were violated or they were unable to complete their work in a fair environment.

Even when you've done nothing wrong, a frivolous lawsuit can still prove costly, which is why all businesses with employees should consider this coverage.

If an employee sues over wrongful termination, sexual harassment, equal pay, or another violation of employee rights, employment practices liability insurance helps pay for your legal costs.

This includes the risk exposures you might face if an employee files a complaint with the Equal Employment Opportunity Commission (EEOC), or a lawsuit involving the Family and Medical Leave Act (FMLA).

Specifically, your EPLI policy provides coverage for:

While EPLI is not mandatory by law, every business with employees should consider carrying this policy. Even at a small business, an employee conflict could lead to a costly lawsuit.

Regardless of whether you win in court, you'll still be responsible for costly legal fees, which is why employment practices liability insurance is so important.

Good candidates for EPLI coverage include the following types of businesses:

While EPLI is an important part of risk management when you have employees, it does not provide all the protection you might need. For instance, your policy does not include coverage for:

Employment practices liability insurance offers protection for when an employee sues your business over their rights, but it doesn’t provide coverage for other common risks.

Small business owners should also consider:

General liability insurance: This policy can pay for expenses related to client injury and property damage, along with accusations of slander. EPLI can be added to a general liability policy as an endorsement in most locations, often up to $25,000 in coverage.

Business owner's policy: A BOP bundles general liability insurance with commercial property insurance, usually at a lower rate than if the policies were purchased separately. EPLI coverage can often be added to the liability insurance portion of a BOP.

Professional liability insurance: Also known as errors and omissions insurance, this policy can help cover legal expenses if a business is sued for unsatisfactory or negligent work.

Directors and officers insurance: D&O insurance protects board members and officers if they are sued for a decision they made on behalf of your business that led to financial loss. Both D&O and EPLI are types of management liability insurance.

Workers’ compensation insurance: This coverage is required in nearly every state for businesses with one or more employees, and can help cover medical costs for work-related injuries and illnesses.

Employment practices liability insurance is a claims-made policy, which means that a claim is covered only if your policy is active both when the incident occurred and when the claim is filed.

It's important to maintain continuous coverage with this type of insurance, as a lapse could leave you vulnerable to legal defense costs. You may want to set a retroactive date for coverage, which provides protection for work done in the past up to a specific date.

For example, your house painting business is forced to close, so you cancel your EPLI coverage. A few months later, a former employee sues you for discrimination, but since you no longer have an EPLI policy, the insurer likely won’t pay for lawsuit costs. Note that in some situations, you may be able to extend a policy beyond its original end date.

Unfortunately, employment-related claims are both common and costly. You're actually more likely to be sued by an employee than you are to have a fire at your office – even though more businesses carry insurance to protect against the fire, not the lawsuit.

The risk increases for businesses that are too small to have a human resource team. Businesses with a small staff often lack the time, energy, and expertise to resolve employee disputes before they become legal issues.

Employee lawsuits can devastate your reputation and finances. The Massachusetts Commission Against Discrimination gives examples of employment liability cases:

• $100,000 for an employee terminated because they could not perform all of their duties while in a wheelchair
• $70,000 for an employee who faced sexual harassment from a high level executive
• $230,000 for an employee terminated after requesting leave for hip surgery and planning to retire within three years

EPLI coverage keeps you from paying these high costs out of pocket. It can cover any legal defense costs, including a settlement or judgment if an employee presents a valid claim.

Bundles usually cost less than purchasing standalone coverage, and with EPLI you may have a few options depending on the carrier.

Small businesses can often bundle employment practices liability coverage with directors and officers insurance (D&O), another type of management liability insurance. D&O protects a business’s board members and officers against lawsuits over decisions they made on behalf of the company that resulted in financial loss.

Together, these two types of management liability insurance provide a broad base of protection against liabilities related to hiring and firing, employee rights, investment decisions, and employee benefits.

While businesses often purchase EPLI with D&O insurance, they also have the ability to add EPLI as endorsement to other policy bundles, such as a business owner's policy (BOP) or commercial package policy (CPP).

Most EPLI policies include a deductible, which is an amount that you pay out of pocket toward legal costs before an insurer contributes.

Some policies limit coverage during acquisitions or major staff reductions. Others stipulate that the insurance company will choose your attorney if a claim is filed, usually because the insurer wants a lawyer who has expertise with relevant cases.

Employment dispute lawsuits can be expensive, so keep that in mind when choosing your policy limits and options for what EPLI covers.

Employment practices liability insurance covers lawsuits related to employment practices. Employer’s liability insurance helps pay for lawsuits over employee injuries.

Both policies protect business owners from employee lawsuits, which can cost your business more than $125,000. However, employer's liability insurance is a separate insurance policy that protects your business from legal defense costs if an employee claims your business's negligence caused their injury or illness.

Unlike EPLI, employer’s liability insurance is typically included in workers' compensation insurance.