With the high cost of employee lawsuits on the rise, small businesses should not overlook employment practices liability insurance, or EPLI. Although this type of policy isn't required by law in the United States, EPLI offers coverage beyond a general professional liability plan by protecting your company if current, past or prospective employees sue for alleged wrongful treatment.

This type of liability insurance is increasingly important, especially since companies in the U.S. spent $5.1 billion on employment litigation in 2019, according to Statista research. Industry analysts expect these types of losses to continue to impact businesses across various industries throughout 2021.

According to a recent report by insurance technology data provider Zywave, a Property & Casualty 2021 Market Outlook data set shows that 11% of pandemic-related losses by line of business were related to employment practices liability claims by current and former employees. This number was only surpassed by cyber liability at 14% and other liability and undetermined liability at 17% and 28%, respectively.

Aside from losses due to COVID-19 and weather-related events, the report noted the trend of rising liabilities associated with employment-related claims of discrimination, harassment or other forms of unfair treatment. There has also been a rise in states passing stricter laws on employer liability in workplace disputes.

On the federal level, enforcement and litigation statistics from the U.S. Equal Employment Opportunity Commission (EEOC) show 67,448 charges of workplace discrimination in fiscal year 2020, which ended on Sept. 30. As a result, the agency said it secured $439.2 million for victims of discrimination in the private sector and state and local government workplaces through voluntary resolutions and litigation.

Although businesses may be tempted to cut back on liability insurance after cuts to their workforce, it is still imperative to conduct an appropriate business risk assessment. The risk of rising legal costs, coupled with stricter state employment laws, could outweigh the cost of an EPLI policy that would cover certain losses. 

What does EPLI cover?

EPLI insurance typically covers claims against the employer associated with these allegations:

• Sexual harassment
• Discrimination (based on age, sex, disability, sexual orientation, national origin, etc.)
• Wrongful termination or retaliation
• Breach of contract or employment agreement

According to the EEOC, fiscal year 2020 data show that retaliation remained the most frequently cited claim in charges filed with the agency, making up more than 55% of all charges filed, followed by claims of discrimination based on disability, race and sex. The following categories of discrimination are noted in descending order of frequency:*

• Retaliation: 37,632 (55.8% of all charges filed)
• Disability: 24,324 (36.1%)
• Race: 22,064 (32.7%)
• Sex: 21,398 (31.7%)
• Age: 14,183 (21%)
• National origin: 6,377 (9.5%)
• Color: 3,562 (5.3%)
• Religion: 2,404 (3.6%)
• Equal Pay Act: 980 (1.5%)
• Genetic information: 440 (0.7%)

*These percentages add up to more than 100% because some charges allege multiple bases.

Most noteworthy is that claims are still being filed during the pandemic, despite many employees opting to work from home. EEOC legal staff resolved 165 merits lawsuits and filed 93 lawsuits alleging discrimination in fiscal year 2020. The EEOC said it recovered just over $106 million for charging parties and other aggrieved individuals through litigation, representing the largest recovery through the EEOC's litigation program in the past 16 years.

Given the legal risk, it is important to look for an appropriate EPLI policy for your business. In addition to the standard insurance coverage we mentioned earlier, you may want to consider a third-party EPLI policy, which covers costs associated with settlements, judgments, and discrimination and harassment claims from third parties.

What does EPLI exclude?

There are many common exclusions to EPLI. Although these vary from state to state, coverage typically excludes these areas:

• Penalties
• Punitive damages or fines (varies by state)
• Civil fines
• Fines associated with criminal, fraudulent or malicious acts
• Contractual liabilities
• Workers' compensation, disability or unemployment claims
• Violations of wage and hour laws
• Employee Retirement Income Security Act (ERISA) violations
• Consolidated Omnibus Budget Reconciliation Act (COBRA) violations
• Worker Adjustment and Retraining Notification (WARN) Act violations
• Strikes and lockouts
• Prior litigation and claims
• Claims related to the use of social media
• Claims related to unemployment benefits
• Property damage
• Claims of bodily injury
• Claims outside of the U.S.

How much does EPLI cost?

The cost of your EPLI policy will be a result of various factors. On average, according to a review of insurance providers, a standard $1 million EPLI policy for small businesses costs $800 to $1,500 per year (for up to five employees) or just under $2,000 per year (for small businesses with fewer than 20 employees and revenue under $500,000, for coverage of $500,000 and a deductible of $2,500). Zywave forecasts a 10% to 30% increase in average EPLI premiums for 2021.

Estimates and premiums are based on a business's location, industry, payroll, number of employees and experience. Underwriters typically examine the following risk assessment factors to determine the price of the policy:

• The number of employees (the primary determinant of a premium)
• Financial worth of the company
• Industry or business
• Turnover rates
• Hiring and firing procedures
• Claims history
• Coverage limits (lower premium for a smaller coverage amount, similar to other insurance plans)
• The company's risk management practices
• Deductibles (lower premium for a higher deductible, which is similar to health insurance plans)
• Written company procedures on employee conduct and training

Another determining factor in the cost of EPLI is the amount of coverage your business needs. Most EPLI policy limits range from $100,000 to $1 million. Also note that many EPLI policies have a deductible, meaning you can lower the cost if you raise the deductible. You may want to consult an attorney to make sure your policy amounts are adequate coverage.

EPLI policies will reimburse a company for the costs of defending a lawsuit in court, as well as for judgments and settlements. The policy usually covers the legal fees, regardless of the suit's outcome. Correct assessment of these risks and costs to your business in a worst-case scenario is important. EPLI is a type of insurance policy that many small and midsize employers simply can't afford to miss.