To err is human — and to be insured is a smart business decision.
Whether it is a street-corner retail outlet or a white-shoe law firm, insurance is one headache that every business shares. From general liability policies to errors-and-omissions coverage for professionals, there are varied ways that enterprises can protect themselves from the risk of exposure to potentially devastating litigation related to simple mistakes — real or imagined.
But, for some business owners, recent years have seen the advancement of an insurance question they never really thought they had to ask. Should you protect your company with employment practices liability insurance?
“It is the type of coverage that everyone should have, but for smaller companies it might not be in the budget,” said Ethan Kosmin, principle at EKInsurance.com, a New York-based enterprise licensed in Missouri and 25 other states.
Once a niche product focused only on large-scale enterprises, employment practices liability insurance (EPLI) shields businesses accused of the sort of claims that are the traditional province of the human resources department, such as discrimination, wrongful termination, failure to promote or harassment.
According to statistics from Trusted Choice, a service that connects customers with insurers, employee lawsuits have quintupled in the past two decades, with more than two-fifths of suits being filed against private entities with less than 100 employees.
According to a 2014 article by Mindy Pollack on the website of Gen Re, a reinsurance provider, businesses are three times more likely to be sued by an employee than to experience a fire. Yet, while seven of 10 businesses lack EPLI coverage, most of those wrongly believe such issues are included under other policies.
It is an issue that might seem increasingly salient in the #MeToo era when the climate for claims of harassment against supervisors has become significantly friendlier.
Only exceptionally small companies wouldn’t benefit from EPLI coverage, according to Matthew T. Kincaid of Kincaid Business & Entrepreneurial Law LLC in suburban Kansas City.
“I think there is an advantage to having it,” said Kincaid, who practices in Leawood, Kansas. “I think nearly all companies can make the case for why it is good to have it.”
While some may argue that only large companies need such coverage because of their wider possible exposure, Kincaid said the opposite also could be true. Smaller companies can be at even greater risk because they may not possess the in-house legal resources to inform and educate their leadership on the dangers that suits by personnel can pose and how to mitigate them.
“They don’t have HR departments internally,” he said. “Oftentimes, you have an owner who is very passionate about the particular business that he or they have gotten into. But the other stuff — they are not necessarily lawyers, so some of the stuff doesn’t come to their minds as it might come to my mind.”
Worse, smaller businesses may not have the financial reserves to cushion the blow of a massive judgement. Kincaid notes that attorney fees alone in an employment case can be crippling for a small enterprise.
“I am not sure they are as aware of EPLI policies as the bigger companies, but I see just as much of a need — maybe even more so for small companies than the big companies,” he said.
That said, Kincaid cautions that there are considerations to examine before jumping onboard with a given policy. Most important is to understand what could be excluded. He notes that wage-and-hour claims typically aren’t part of EPLI coverage. In some cases, a company may need to seek an endorsement — an amendment or addition to the existing insurance contract that changes the terms or scope of the original policy — sometimes called a rider.
“You might be able to get that by getting an endorsement, but, at least out of the gate, they are probably not going to give it to you,” he said.
Businesses also should think about what happens when allegations arise in interactions between employees and customers, clients or others not employed by the enterprise. An endorsement may be required to fill important holes.
“I think especially if you are a client-facing-type company interacting with clients and customers, especially on an in-person basis, then it is really important to evaluate the third-party coverage issue,” he said.
Charles Jellinek, a partner and employment attorney at Bryan Cave Leighton Paisner in St. Louis, said that EPLI doesn’t have a long history, but it has made big gains in the market in a short time.
“It probably started, I would say, in the mid-’80s,” he said. “We saw a number of carriers start to write this type of coverage, and it really grew as an insurance product in the ’90s when there came an increased need for it.”
That need came from legislative action creating a bevy of new workplace rights at the federal level. In 1990, the Americans with Disabilities Act was passed, bringing about new requirements for businesses — and a slew of opportunities for litigation. The universe of HR issues expanded even further just three years later with the enactment of the Family and Medical Leave Act.
“We also saw a significant expansion of state coverage of these employment-discrimination laws, which in many cases had substantial potential liability,” Jellinek said.
The results were clear.
“In the early ’90s, there was somewhere between 5 to 10 percent of employers insuring this type of risk in some fashion,” he said. “By the end of the ’90s, it was closer to 25 percent. By the mid-to-late 2000s, 50 percent of employers were insuring this risk in some fashion.”
Today, most big general-liability carriers offer the coverage as an option, either as a standalone product or an add-on to a larger policy, Jellinek said.
Still, there are choices for business owners to make. The deductible amount is one important area of interest. Smaller companies might want to consider whether they want a comprehensive policy or take a more “bare-bones” approach with excess coverage that would simply protect the enterprise from fiscal ruin in the event of a catastrophic judgement.
Company size makes a difference in another way as well.
“The size of the company will often determine whether you are even covered by certain employment laws,” he said. “You want to take a look and say, ‘OK, what does my company have in the way of employees? What are the laws that my company is exposed to as far as risk?’”
Caps for punitive damages and emotional distress also can vary based on the size of the employer. Moreover, Jellinek suggests examining your sector’s claims history.
“What has been the risk here?” he said. “Am I in an industry where we see a lot of frequent claims or not?”
For some small companies, all of that calculus could mean that they are better off going without EPLI coverage.
“If I have one claim every five or 10 years, it is probably not worth it to me to pay a premium that would otherwise be the same as that verdict,” Jellinek said.
In fact, some local small enterprises that have EPLI may be reconsidering their need for such policies altogether in light of action by the Missouri General Assembly.
“In August of 2017, the legislature passed sweeping changes to the Missouri Human Rights Act which placed damage caps,” Jellinek said. “It had previously been an uncapped-damages law.”
Recent changes at the state level also have eliminated individual liability for supervisors and tightened the language on the burden of proof in discrimination suits. Discrimination now must be a motivating rather than merely a contributing factor.
“It will be interesting to see as far as companies talking with their brokers and carriers about the scope of coverage that they need,” he said.
Like Kincaid, Jellinek warns that wage/overtime issues generally will not be covered by EPLI because suits in that area are liable to come in the form of class or collective actions and involve potentially massive amounts of exposure.
According to the Insurance Information Institute, EPLI generally covers sexual harassment, discrimination, wrongful termination, breach of employment contract, negligent evaluation, failure to employ or promote, wrongful discipline, depravation of career opportunity, wrongful infliction of emotional distress and mismanagement of employee benefit plans.
Jellinek said that exclusions might include intentionally caused harms, certain breaches of contract or violations of the Worker Adjustment and Retraining Notification Act of 1988, which pertains to layoff notifications.
Hidden pitfalls, however, may run deeper than exclusions or deductibles, Jellinek said. Control of the case may be another issue of contention. The insurer may insist on maintaining the authority to settle claims or proceed to trial — whether you want to or not.
Insurers also may mandate who is representing you when a case does go to court.
“Let’s say you are a family-run company and you’ve been using the same lawyer for 20 years. You get yourself embroiled in one of these employment cases, and you want to go with that trusted advisor and valued confidant,” Jellinek said. “It is often the case under an EPLI policy that the carrier is going to have certain counsel that they are going to require the employer to use. That’s a factor that an employer has to consider.”
“In essence, once you get into the carrier’s money, they want the right to control how things are going to go,” he added.
Neither Kincaid nor Jellinek said they’d seen major changes since the rise of the #MeToo movement, but Jellinek won’t rule them out.
“If I were a betting man, I’d say yes,” he said. “These sexual-harassment or workplace-misconduct claims have significant exposure.”
Still, while nothing can protect completely against the possibility of a false claim, experts agree that the best defense is awareness and training, which can help to ward off misunderstandings or avoidable errors in conduct.
Kosmin of EK Insurance said he believes that the #MeToo era will see a significant uptick in bigger companies making sure they are shielded against possible bad behavior by a rogue supervisor.
He notes that an ounce of prevention is worth a pound of cure.
“To prevent these lawsuits, managers and employees should have an education program to let them know about hiring and screening practices and corporate policy should be known in an employee manual,” he said. “If a company is prepared for it, like anything, you can handle it better.”