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Employment Practices Liability Insurance - PDF

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					EMPLOYMENT PRACTICES LIABILITY INSURANCE

              George T. Solomon, D. B. A.
            Associate Professor of Management
  Director, Center for Entrepreneurial Excellence (CFEE)
 Editor, Academy of Management Conference Proceedings
            The George Washington University
                     2201 G Street NW
                   Funger Hall Suite 315
                 Washington, DC 20052
                    202 994-3760 voice
                     202 994-4930 fax
                    gsolomon@gwu.edu

            Lloyd W. Fernald, Jr., D. B. A.
                  Professor Emeritus
             University of Central Florida
Literature Review

Definition

Employment Practices Liability Insurance (EPLI) provides company protection against many
kinds of employee lawsuits, such as sexual harassment suits, discrimination suits, wrongful
termination actions and breach of employment contract lawsuits (Strauss, 2005).

History

The roots of Employment Practices Liability Insurance (EPLI) started in the 1930’s due to the
increasingly complex issues surrounding employers and the resulting need for the intervention of
the federal government. Until the 1930’s the federal government did not regulate the workplace
with respect to child labor, occupational hazards, minimum wage, overtime, and the unions. In
essence, the employer had the ability to terminate employees at will (Schaffer & Schmidt, 2000).
Thus, in the past, employment-at-will was the general guideline that employers followed. This
rule stated that an employer might discharge an employee for any reason, regardless of whether
the employer’s motive was reasonable, unreasonable, justified, unjustified, indifferent or
malicious. Employees neither had a right to work nor a sense of security from termination
(Levin, 2000).

The above is no longer the case. Employment-related lawsuits are more common than ever.
State and federal regulations mandating employment practices continue to broaden, giving
employees who feel they have been wronged greater recourse. In addition, the courts are
imposing greater liability on employers in discrimination laws. One of the most significant
examples of this is a recent ruling that makes it critical that employers present evidence of their
efforts to "prevent and correct" unlawful employment practices in order to avoid the enormous
punitive damages that can accompany employment practices claims (AIG Small Business, 2006).

What does an EPLI policy cover?

Comprehensive general liability is the most commonly held type of business insurance. These
policies cover employers for all forms of third party liability such as property damage or bodily
injury. Most of these general liability policies only offer limited EPLI protection, if any. As the
increases in claims against employers for employment practices have increased, the need for
EPLI insurance became more evident (Bolens, 2000).

EPLI policies have been evolving since they were first offered in early 1992. This insurance
provides security to businesses against hurt, loss or damage. It covers defense costs, as well as
settlements and judgments arising from employment claims related to ten basic areas: (1)
discrimination, (2) sexual harassment, (3) wrongful termination, (4) breach of employee contract,
(5) negligent evaluation, (6) failure to employ for or promote, (7) wrongful discipline, (8)
deprivation of career opportunity, (9) wrongful infliction of emotional stress, and (10)
mismanagement of employee benefits (Webel, 2003).
Assessing the Need for EPLI Coverage

The main reason an entrepreneur needs EPLI insurance is to protect against low-probability risks
that have disastrous consequences. Among restaurants and hotels, from small diners to the fast-
food giants, from boutique hotels and roadside motels to the national chains, estimates of those
operations that do not carry employment practices liability insurance (EPLI) coverage run as
high as two-thirds. Some of the characteristics that make the industry such fertile ground for
employment practices and customer discrimination lawsuits also lead to owners and corporations
that do not insure themselves for this risk. Verdicts and settlements in EPL lawsuits against
restaurants can be very large. The negative publicity generated can be damaging as well. For
restaurants and hotels, some of the best loss control procedures include: 1) the development and
posting of concise and clear policies and rules for workplace behavior, and 2) tangible and
visible top management support of such policies (Diamond, 2005, 2004).

Methodology

A survey of small business owners was administered in two rounds. The first survey was sent to
87 local small businesses in the Orlando area. They were randomly selected from the Orlando
Chamber of Commerce Directory of Area Businesses. This produced only ten usable surveys
(11.5%). Telephone discussions with many of the businesses who did not return the survey
revealed they were not returned because they did not have EPLI. The second round therefore
was administered to 98 local small businesses that were insurance policy holders of either the
Fleming Agency and/or Brown & Brown Insurance. These firms provided targeted lists of
respondents for our survey. From this second round of surveys, forty-two (42.9%) completed
surveys were returned, twenty-four (24.5%) of which had actually purchased an EPLI policy.
Copies of actual policies also were obtained from the insurance providers. They proved
invaluable in analyzing the results of the survey.

Results

The survey solicited personal information such as those who purchased the EPLI insurance, how
large the company is (in terms of number of employees), how long the company has been in
business, and when the business was started. The firms surveyed were small businesses that were
service-oriented in nature. Additional findings also included an even mix of small businesses
that were started by the entrepreneurs or purchased from some other entity.

Demographics

Other results of the survey have been placed into three separate tables discussed below. The first
round of surveys yielded ten respondents and the second yielded 24 respondents (actually
purchased EPLI).

A trend that was found involved the level of education among respondents. The majority had
completed their undergraduate degree, and most of those who had not had some college
education. Only two respondents had obtained a Master’s degree. The respondents that did
carry EPLI had an Employee Practices audit before they purchased this insurance. All of these
small businesses had the audit conducted by the insurance company. The completed surveys
additionally indicated that the insurance carrier provided suggestions on how to limit exposure to
employee liability suits, as well as offering a designated attorney to be contacted when needed.

Specific information regarding EPLI

There were several common themes in the completed surveys. Of this targeted audience
approximately 70% of the respondents did not seek legal advice before purchasing EPLI. The
small business owner/manager merely accepted the advice of their respective insurance agent. In
fact legal representation, whether through an attorney hotline or a pre-or post-audit of
employment practices, was rarely if ever sought.

Most EPLI policies do not include coverage for punitive damages. This is in concurrence with
the research discussed earlier in the paper. For example, only 17 percent of respondents stated
that their EPLI policies had coverage for punitive damages that arose from employees who filed
successful lawsuits. Another issue addressed through the survey referred to retaliation claims.
According to the survey results, retaliation falls under the punitive damages section in many
EPLI policies. While only four responses were used, 75 percent of them had coverage for
retaliation under federal and state laws. The other 25 percent had a paragraph in the exclusions
section stating that retaliation is not covered.

In regards to employment practices, almost 100% of the small businesses surveyed, do utilize
employee handbooks. Yet, these businesses did revise some of their human resource practices
after having their initial employment practices audit. Approximately 83% of the insurance
carriers used do have consulting services available when their clients run into this situation after
completing an audit. 92% of these businesses continue to audit themselves, or have the
insurance company complete an audit annually in order to stay proactive regarding their human
resource practices.

Finally, the survey results indicated that certain policies do not adequately protect the small
businesses during the grace periods and/or for multiple claims. Only eight percent of the policies
have a grace period that will cover claims first made during the 30 days immediately following
the expiration of the policy. Also, only eight percent of the respondents had EPLI that covered
multiple claims by the same individual deemed to have been made all on the date of the first
claim. This would be hindering to an organization if an individual made a sexual harassment and
a gender discrimination claim on the same day. The insurance carrier would then only cover one
of the claims made by the individual, even though he or she may have two separate and unrelated
cases.

Eighty-five percent of the respondents had a labor or employment attorney on retainer or had a
designated attorney to contact in case an EPLI issue did arise. In regards to the employment
practices themselves, eight percent of the small businesses use polygraphs or intelligence tests
during the hiring process. All of the respondents, however, stated that they use questionnaires to
screen prospective employees. Only 17 percent of respondents stated that their EPLI policies
had coverage for punitive damages that arose from employees who filed successful lawsuits.
Another issue addressed through the survey referred to retaliation claims. According to the
survey results, retaliation falls under the punitive damages section in many EPLI policies. While
only four responses were used, 75 percent of them had coverage for retaliation under federal and
state laws. The other 25 percent had a paragraph in the exclusions section stating that retaliation
is not covered.

Finally, the survey results indicated that certain policies do not adequately protect the small
businesses during the grace periods and/or for multiple claims. Only eight percent of the policies
have a grace period that will cover claims first made during the 30 days immediately following
the expiration of the policy. Also, only eight percent of the respondents had EPLI that covered
multiple claims by the same individual deemed to have been made all on the date of the first
claim. This would be hindering to an organization if an individual made a sexual harassment and
a gender discrimination claim on the same day. The insurance carrier would then only cover one
of the claims made by the individual, even though he or she may have two separate and unrelated
cases.

Training and Development

As suggested earlier, an ounce of prevention is worth a pound of cure. Employee and manager
education, as well as installation of policies designed to minimize the possibilities of
employee/manager transgressions and mistakes, can go a long way toward reducing and even
eliminating many of these potentially company-bankrupting claims (Moses, 2004). Almost
100% of the small businesses surveyed do have a training and development program in place. An
interesting fact was the varying content of their training and development programs. Sixty-two
percent of them include discrimination. Ninety-two percent include sexual harassment, 62
percent include age discrimination, 50 percent include the ADA, and 87 percent include the
company confidential communication system. Ninety-one percent of respondents include
training regarding the company investigation process that is used if a covered allegation arises,
which is encouraging that employers are educating employees on the ramifications of
allegations.

Conclusions

Employment practices liability - related suits have steadily grown during the last few decades,
starting in the 1980s and increasing dramatically since in the 1990s. This growth was laid by
various federal and state statutes and regulatory guidelines. These include the Civil Rights Act
of 1964, as amended in 1967 and 1991, the Americans with Disabilities Act of 1990, the 1980
Guidelines on Discrimination Because of Sex of the Equal Employment Opportunity
Commission and subsequent 1988 Policy Guidance on Current Issues of Sexual Harassment, the
Family and Medical Leave Act of 1993, and the Equal Pay Act of 1963. The escalating
frequency and severity of suits alleging employment-related wrongful acts comes from a variety
of factors, including employees' heightened awareness of their rights under these myriad laws
and regulations (Diamond, 2004).

In addition, there is a more aggressive and growing body of plaintiffs' lawyers specializing in
employment law. There are more multiple-claimant and class-action suits filed against both large
and small businesses. The traditional doctrine of employment at will no longer protects business
firms. Also, economic downturns and resulting job losses also spike liability suits, especially
when a layoff trend has touched virtually all employee sectors-blue collar, white collar,
professional, and middle- and even upper-management (Diamond, 2004).

EPLI has become a very popular product in the insurance industry. With the rising allegations
and settlements brought against small business employment practices, this is a natural evolution.
The federal government, as well as activist groups, is bringing more awareness to the injustices
that sometimes are common in the employer/employee relationship. Employee rights have
increased significantly during the past several decades. This also has forced small businesses to
protect themselves from damages caused by wrongdoing in employment practices. Through the
inception of certain laws and regulations, such as the National Labor Relations Act, the Civil
Rights Act and Title VII, and the Fair Labor Standards Act many employees have found avenues
to seek justice through unfair practices made by businesses. Yet, these laws also bring many
businesses to court which cost employers capital. For many small businesses, this can mean sink
or swim.

Many policyholders appear to have purchased their policies based upon recommendations from
their insurance agent, not from an attorney. One insurance agent that was interviewed by the
authors attributed the increase in EPLI policies to the media. He claimed that the public
awareness of employment practices lawsuits have reached very high levels, making his job easier
in selling EPLI. Many policyholders do not consult with an attorney prior to purchasing an
insurance policy, but these individuals do have legal counsel on retainer if the situation ever
arises that they would need the lawyer.

The results of the survey supported information encountered during the review of the literature.
It should be noted, however, that many recently sold policies do not include punitive damages or
damages for retaliation. Most policies also do not cover grace periods or multiple claims. The
study data suggests that the insurance companies consistently appear to be proactive on advising
the entrepreneur/small business owner/manager on issues that they may face, as well as solutions
for those issues. Most insurance agencies will be able to answer questions about and provide
EPLI coverage. By examining recent damages paid by businesses in the specific industry for
these types of suits, small business owners will be able to determine with some accuracy their
exposure to potential claims, as well as the extent of potential financial damages that may be
assessed (Moses, 2004). EPLI insurance covers many aspects and allows small business
owner/managers to review their employment practices with the knowledge that they have an
expert in the industry helping to guide them. This is a very beneficial protection for any
employer.

Ultimately small business owner/managers need to evaluate and continue to improve upon their
own human resource policies. EPLI will continue to evolve and fit the needs of today’s society,
but it will only provide a shield against catastrophic risks. The majority of small businesses do
have training programs in place for their employees. These programs may not be formal in
nature, as many large corporations execute, but small employers do attempt to train their
employees through the means that they have available. Each and every small business owner
needs to continue to put resources into developing effective policies, training, and development
of their employment practices. The fact that the employer is proactive and has policies,
procedures, and human resource strategies in place will assist in thwarting the claims in the first
place. Also, if a claim does arise and makes it to the judicial system, these policies will support
the employer’s defense in the case. The policies, procedures, and strategies will ultimately
benefit the entrepreneur more than any employment practices liability insurance policy.

References

______. (2006) “Why Companies Need Employment Practices Liability Insurance.” AIG Small
      Business,
      www.aigsmallbusiness.com%2Fsmallbusiness%2Fbroker%2Fasbproduct%2F0%2C2187
      %2C142-14-477-13-4263%2C00.html.
      http://www.nfib.com/object/IO_18456.html?method=$$!METHOD!$$&location=http%3
      A%2F%2Fwww.aigsmallbusiness.com%2Fsmallbusiness%2Fbroker%2Fasbproduct%2F
      0%2C2187%2C142-14-477-13-4263%2C00.html

Bolens, Lisa. (2000). Employment Practices Liability Insurance- Is It for You? Journal of
       Property Management. Volume 65, Issue 3, Institute of Real Estate Management:
       May/June.

Diamond, Dale. (2005). Many Hotels, Restaurants Exposed On EPL. NationalUnderwriter. P &
    C. Erlanger, Jan 10-Jan 17, Vol. 109, Issue. 2, p. 24-25 (2 pp.)

Diamond, Dale. (2004). Going Bare On EPL Is Risky For Firms Of All Sizes. National
      Underwriter. P & C. Erlanger, Jul 19, Vol. 108, Issue. 27, p. 16-18 (3 pp.)

Levin, Amanda. (2000). Competition Spurs EPLI Services. National Underwriter. Property &
       Casualty/Risk & Benefits Management Edition, Volume 104, June 5. National
       Underwriter Company.

Moses, Jeffery. (2004). Considering Employment Practices Liability Insurance. Business
       Toolbox, https://www.nfib.com/object/4287586.html.

Schaffer, David J. & Schmidt, Ronald A. (2000). The HR Manager’s Guide to Employment
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Strauss, Steve. (2005). What Types of Insurance Will You Need Through the Three Phases of
       Growth? Business Toolbox, www.nfib.com/object/IO_23605.html.

Webel, Michael G. (2003). Employment Practices Liability Insurance, Is It Right For Your
       Firm?” www.aepronet.org/ge/no4.html.

				
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