Large corporations typically have substantial employment practices liability insurance (EPLI) coverage in place and are prepared to deal with most employment lawsuits. However, small and medium-sized enterprises (SMEs) or start-ups are the most vulnerable to employment claims. They often lack a legal department or employee handbook detailing the policies and procedures that guide hiring, disciplining or terminating employees. They may also have a less-than-adequate human resources department.

According to a Chubb study, 67% of companies that have 25 to 49 employees don't purchase EPLI coverage; 61% of companies with 50 to 249 employees don't buy it, and 48% of businesses with 250 or more employees refrain from carrying the coverage. Agents and brokers must educate their business clients about the need for EPLI in such a litigious environment. They can let their business clients know coverage is available either as an endorsement to their Businessowners Policy (BOP) or as stand-alone coverage.

The cost of EPLI coverage depends on the type of business, the number of employees and such risk factors as whether the company has been sued over employment practices in the past. The policies will reimburse your client against the costs of defending a lawsuit and for judgments and settlements. The policy covers legal costs whether the company wins or loses. (The average cost of defending a case through discovery and a ruling on a motion for summary judgment costs an employer between $75,000 and $125,000, according to Hiscox).

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Stop problems before they start

An important part of the overall risk management process is to minimize problems in the first place:

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      • Create effective hiring and screening programs to avoid discrimination in hiring.
      • Post corporate policies throughout the workplace and include them in employee handbooks so policies are clear to all.
      • Show employees what steps to take if they are the object of sexual harassment or discrimination by a supervisor.
      • Make sure supervisors know just where the company stands and what behaviors are not permissible.
      • Document everything that occurs and the steps the company is taking to prevent and solve employee disputes.
      • Boards of directors can be exposed to an employment liability lawsuit, too. Make sure your client purchases Directors and Officers' (D&O) coverage and broadens it to include coverage for employment practices liability.

HR policies, procedures, and training programs can help prevent losses, but they're not a panacea for what's unfolding in today's legal climate.

Loretta Worters is vice president of Communications for the Insurance Information Institute (I.I.I.). She can be reached at [email protected].

The opinions expressed here are the writer's own.

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