A few years ago, Janet Lightner realized that her company was exposed to too much risk, so she did something about it. Boundary Bay Brewery in Bellingham, Wash., was founded in 1995. By 2014, it had added a bistro and employed nearly 120 people. That’s when Lightner bought employment practices liability insurance (EPLI) to help protect against allegations of sexual harassment and other workplace transgressions.
“There were a lot of considerations that led us to take EPLI,” says Lightner, the brewery’s general manager. “Notably, we had grown.” At the same time, employment-related claims were on the rise nationally, and in the brewing industry in particular. Then came the #MeToo movement and the headlines alleging sexual harassment and assault by celebrities and senior executives. “It validates that the decision we made was a … necessary one,” she says.
While Boundary Bay hasn’t faced any claims under the policy to date, Lightner is glad to have the peace of mind. And she’s in good company. Fearing lawsuits alleging wrongful employment practices, a growing number of business leaders are girding themselves with EPLI. But HR professionals will have to do their homework to determine whether such coverage is appropriate and whether it will limit potential liability as they hope. After all, a big judgment for an aggrieved employee, not to mention the cost of litigation, could be devastating. But the right insurance policy could soften the blow. It might even save your business.
A Critical Hedge
Even unfounded allegations can come with a price—which is why some HR professionals believe EPLI is essential. “A company can do everything right to follow best practices and policies, but that doesn’t stop employees from filing lawsuits. And the cost of defending against those claims and paying them can be very expensive,” says Danna Hewick, SHRM-SCP, vice president of human resources and business development at USSI, a Bethesda, Md.-based janitorial services firm.
The average cost for defending and settling employment law cases is $160,000, according to business insurance company Hiscox.
EPLI “is a good way to mitigate risk to a company, and it’s unfortunate that many small and midsize companies don’t carry it,” Hewick says. (Some of her past employers purchased EPLI to limit potential liability, and USSI is considering it.)
For some, it is standard protection. “Most PEOs [professional employer organizations] offer EPLI insurance to their clients and, as a rule, recommend companies procure this type of coverage,” says Katie Stewart, senior director of HR client service at Tandem HR, a Chicago-based PEO that outsources human resources services.
Claims Covered by EPLI
Rise of A Niche Product
The use of EPLI has been growing, according to ISO MarketStance, an insurance data company. Another 49 percent rise is expected in the coming years, eventually reaching $3.1 billion in 2025.
Overall, though, not many company leaders purchase this niche product. Only about 4 percent of U.S. firms had it in 2016. Still, that covered 33 percent of all U.S. employees, since larger employers with more workers are more likely to buy it. Nearly 56 percent of organizations with 5,000 or more employees carry it, compared with less than 2 percent of businesses with 1 to 4 workers, according to ISO MarketStance.
Before purchasing EPLI, you’ll need to know a few things. For example, does the policy cover claims made by people outside your company? Consider paying more to ensure that it includes complaints made by third parties, especially in the retail and restaurant industries—such as an accusation by a customer of sexual harassment by a waiter. “I would certainly recommend third-party coverage if the business is open to the public,” says Todd Aidman, a Tampa, Fla.-based lawyer specializing in labor and employment issues at law firm FordHarrison.
[SHRM members-only HR Q&A: What is Employment Practices Liability Insurance?]
Standard EPLI policies generally don’t include wage and hour claims, like allegations of shortchanging employees on tips or failing to pay for time spent putting on protective clothing, says Jim Blinn, executive vice president of client solutions at Advisen, an insurance data and services provider. Other types of claims that typically are excluded relate to the Worker Adjustment and Retraining Notification Act, COBRA, the National Labor Relations Act, the Occupational Safety and Health Act, and the Americans with Disabilities Act.
The key parameters of coverage―what limit, at what cost and how much you must pay before it kicks in—vary significantly by employer size. Boundary Bay Brewery spends more than $6,000 per year for a policy that will pay up to $2 million annually against employment law claims. But before that coverage takes effect, the brewery is responsible for a $15,000 retention, which is effectively a deductible.
That’s a pretty typical policy for a business of its size. From spring 2016 through spring 2018, the median EPLI limit for employers with less than $25 million in revenues was $1 million in coverage, according to Advisen. The median annual premium was $4,900 a year, and the median retention was $10,000.
At the other end of the spectrum, for companies with $5 billion or more in revenues, the median limit purchased was $30 million, the median premium was $255,000 and the median retention was $1 million.
While executives at large employers buy coverage to protect against big litigation proceedings, like class-action suits, Blinn says, they often pay the costs of relatively minor employment disputes themselves.
|EPLI Coverage Grows with Company Size
Median EPLI Limit Purchased
Median Premium Price
Less than $25M
$25M to <$100M
$100M to <$250M
$250M to <$500M
$500M to <$1B
$1B to <$5B
$5B or more
Prices May Vary
The price of EPLI has increased significantly since 2011 compared to other liability lines, according to Advisen. From the first quarter of 2011 through the third quarter of 2017, it rose about 30 percent, compared to a 12 percent rise in the cost of directors’ and officers’ liability insurance and a 4 percent decline in general liability insurance.
The price will often depend in part on your organization’s claims history and the insurer’s estimate of the strength of its employment practices. EPLI, which generally covers claims made by former employees and job applicants as well as current employees, must be renewed every year.
The cost is also contingent on the retention, or deductible. If you’re not sure whether you need EPLI, you can dramatically reduce the cost by increasing the retention from $5,000 to $50,000, for example, thereby covering only very large claims.
The availability and terms of EPLI haven’t really changed since the #MeToo movement began—at least not yet. “A lot of insurers are uncertain if we are in a new world given the events of the last months, and many typically do not react to these events right away, particularly given there have not been a lot of #MeToo claims yet,” says Richard Betterley, an insurance industry consultant who publishes the Betterley Report, an annual analysis of EPLI coverage trends and policies.
But if there is an uptick in such claims, and insurers start to believe the world has indeed changed, they may withdraw from the market rather than raise their premium prices. They might conclude that they won’t be able to charge enough in premiums to insure against risk of a $10 million loss, Betterley says. The 2017 Betterley Report notes that EPLI in California is already difficult to find, given losses in the state.
Some insurers scrutinize different industries and, in some cases, will not cover those that pose undue risks, including professional services, hospitality and entertainment, Betterley notes.
Because policies are underwritten on an annual basis and can vary significantly from year to year, it is important to ask an insurance specialist to re-examine a policy’s coverage annually and compare it to alternatives in the market, says Vikki Stone, senior vice president at Poms and Associates Insurance Brokers in Los Angeles. “I shop all clients every year,” Stone says. “We try to find the best terms and pricing, and sometimes the incumbent is not the best.”
But sometimes there are advantages to sticking with your carrier, especially if you have a clean history. “Generally, we try to not move around, in part because there are some price considerations if there have been no claims on a policy,” Stone says.
Unless you have specialized knowledge of the insurance industry, it’s best to rely on brokers and consultants to competently perform that type of analysis, Betterley says.
Which Product Covers What?
A brief primer on common business and employment insurance products.
Employment practices liability insurance (EPLI) protects against claims arising from the employer-employee relationship—from the job application process to termination, and including allegations of discrimination, harassment and similar charges. Lawsuits are often premised upon an economic injury to an employee. EPLI typically protects the company, directors and officers, and employees, including HR professionals.
General liability insurance covers liability for bodily injuries and property damage, as well as personal harm, such as defamation of character. It protects the business, company officers and employees.
Directors’ and officers’ liability insurance generally provides protection to these higher-ranking positions, and often to employees, for management errors and omissions. For example, it would cover harm caused by a business decision that results in losses and shareholder suits alleging improper market research. For private companies and nonprofits, protection can extend to the organization itself. Sometimes EPLI coverage can be added to this type of policy.
Errors and omissions insurance protects companies and their workers from lawsuits alleging inadequate work or negligent acts committed during business activities that result in a financial loss to a client. Examples include a printer’s failure to catch a typographical error on a large order or a plumber’s repair that fails and causes property damage.
Cyber liability insurance is for claims relating to inadequately safeguarding sensitive private data, such as credit card information and Social Security numbers, often due to a data breach caused by a hacker. It covers employers, directors and officers, and employees.
Workers’ compensation insurance is required by many states for numerous classes of employers and pays the expenses of an employee’s work-related illness or injury, including medical and recovery costs, and limited economic harm, such as some lost wages. Employees who collect workers’ comp insurance generally relinquish their right to sue the company for some related civil claims, such as negligence.
Usually, under an EPLI policy, you’ll be required to give notice within a defined period that a worker or former employee is threatening a suit. Upon reviewing the incident and determining that it falls within the scope of the policy, the insurer will either retain counsel to fight the claim or, far more likely, attempt to settle it.
It’s often difficult to determine which claims will turn into large ones, Betterley says. And trying to make a small claim disappear by settling it quietly and failing to report it promptly or at all will likely exclude it from coverage.
EPLI generally covers even the behavior of an employee whose actions were willful and not just negligent, such as quid pro quo harassment of a worker by a manager. But will it protect against the damage done by really bad actors like serial harassers? Likely not for long. “The price of this insurance will skyrocket if a company has a history of not doing the right thing,” Hewick says. “The insurance companies will adjust the price to where it is not cost-effective to maintain it.”
Training and other support services provided by insurers are valuable aspects of these policies. They are designed to reduce the risk of a claim and include policy review and consultations about difficult employee decisions.
Poms provides complimentary audits for its clients, says Steven Meilleur, senior vice president of risk services, human resources and employment practices at the insurance brokerage. He notes that these audits frequently turn up risk factors, such as a lack of employment practices training, policy manuals that prohibit employees from talking about their salaries (which is often illegal) and inadequate policies that apply only to certain forms of harassment (like sexual harassment) while ignoring others.
But business leaders can’t afford to ignore the chance that a workplace offense could put an organization in serious peril. “For any company trying to mitigate its risk, I would say that there is probably no other area [in which] the average company has hundreds of thousands of dollars of potential exposure without insurance coverage,” Aidman says. “I think obtaining such [EPLI] coverage is a prudent thing to do.”
David Tobenkin is a freelance journalist based in the Washington, D.C., area.