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Why employment practices liability insurance is more important than ever

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Employment-related liability is something that every company that employs people needs to think about. Employment practices liability insurance (EPLI) can help provide protection against the financial fallout employment disputes may bring. With employment-related claims increasing, it’s becoming more important than ever before.

The Rise in Employment-Related Claims

Employment-related claims have always been a risk for employers, but this risk appears to be increasing. According to the 2024 Carlton Fields Class Action Survey, defense spending on class-action lawsuits has hit a record high. Labor and employment disputes now account for 43.4 percent of all class-action lawsuits and 38.9 percent of all class-action spending. In 2023, 61.9 percent of companies were facing a class-action lawsuit. The situation is not expected to get better – in fact, companies are bracing for a record number of new class-action lawsuits in 2024.

Employment Practices Liability Coverage

Employment practices liability insurance can provide coverage for claims alleging wrongful employment practices that infringe on a worker’s rights. Employers can purchase EPLI coverage on a standalone basis or combine it with other policies in a commercial insurance package.

If a company is sued over employment-related matters that are covered under their EPLI policy, this coverage can help pay for defense costs, settlements and awards, up to the policy’s limit and under the terms of the policy.

What does EPLI cover?

Since terms vary, it’s important to review your policy for exclusions and requirements. In general, though, EPLI covers the following types of claims:

  • Wrongful termination or discipline
  • Discrimination
  • Harassment
  • Breach of employee contract
  • Discriminatory or retaliatory failure to promote

Covered lawsuits could come from job candidates, current employees or former employees.

What does EPLI not cover?

Although EPLI covers many employment-related claims, insurance policies may exclude certain types of claims or losses. These could include:

  • Civil and criminal fines
  • Punitive damages
  • Claims involving worker injuries, which are usually covered under workers’ compensation insurance
  • Wage and hour claims, although employers may be able to secure coverage for these claims through a policy endorsement

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Examples of EPLI Claims Scenarios

EPLI claims could arise in a number of situations. Consider the following hypothetical scenarios:

  • You’re interviewing candidates for an open position. One of the candidates is highly qualified, but she comes across as antagonistic and potentially difficult to work with. Several times during the interview, she corrects you or refuses to answer questions. Despite her qualifications, you decide she is not a good fit for your company culture and hire a different applicant, who happens to be a man. The woman you decided not to hire finds out and files a lawsuit alleging gender discrimination, claiming you passed her over for the position, despite her being more qualified, due to her gender.
  • You have an employee (a white male) who has been with your company for several years. In that time, he has done an adequate job but has never proven to be an exceptional worker. Financial issues mean you need to lay off an employee, and you choose him. He files a lawsuit for wrongful termination, claiming you fired him because he’s a white male. He points to a more recent hire (a black woman) who kept her job, even though he had seniority.
  • Your female employees complain that some male customers are calling them inappropriate names and making them uncomfortable. As their manager, you want to create a safe work environment, but you’re unsure what you can do about this, so you decide to ignore it. Then, an employee states that a regular customer touched her inappropriately and files a lawsuit alleging that you allowed sexual harassment and fostered a hostile workplace environment.

How to Avoid Employment-Related Claims

Business leaders should take steps to protect their company’s reputation and finances against both founded and unfounded employment-related claims. Some steps your organization can take include:

  • Creating clear written policies on discrimination and harassment. These policies should be in your employee handbook. State exactly what types of behavior are not allowed and the consequences for inappropriate behavior.
  • Having a procedure to collect, investigate and respond to complaints. Keep in mind that employees may need to file complaints about their immediate supervisors. Therefore, it’s important they have someone else who will receive the complaints. You should take all complaints seriously and investigate them.
  • Training your managers on employment-related laws. Managers should know what is and is not allowed, especially if they are involved in hiring, firing or disciplinary matters. In some cases, managers may give applicants, employees or former employees fuel for a lawsuit by saying something inappropriate, even if the company’s actions were otherwise within the law.
  • Seeking advice for difficult situations. For example, if you want to fire someone who is currently on FMLA or pregnancy-related leave for reasons unrelated to the leave, you will need to navigate the situation carefully to avoid the appearance of illegal discrimination. If you have any doubt about what is permissible, it’s smart to seek outside advice before taking any action.
  • Documenting the reasons for employment-related decisions. If you are sued for discrimination, good documentation will be key to your defense. Don’t just document your reasons for hiring or promoting individuals – also document reasons for passing over job candidates. When terminating someone, investigating a complaint or taking disciplinary action for any reason, documentation is also important.
  • Checking your insurance coverage. Beyond verifying you have coverage in place, work with your insurance broker to determine whether your limits are high enough and whether you should add any endorsements.
  • If you have a potential claim, contact your insurer. Make sure to check your EPLI policy for requirements regarding the reporting of claims and lawsuits. Failing to notify your insurer in a timely manner could jeopardize your coverage.

Does your company need additional support with EPLI issues? Higginbotham can review your coverage to help ensure that you have the protection you need. We can also look at your other liability policies, such as directors and officers liability insurance, to help identify coverage gaps. Get in touch with our business insurance team to learn more.

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