The recent recession saw a rise in employee lawsuits against their employers for such claims as age discrimination, sexual harassment, disability discrimination, racial discrimination, and retaliation—the latter being an up-and-coming growth industry for EPL lawyers.

While American firms were downsizing in 2010, the U.S, Equal Employment Opportunity Commission saw a record 99,922 discrimination claims filed in the fiscal year ending September 30.  It was the highest number of cases brought in the agency's 45-year history.

'There have been many layoffs and people felt unfairly persecuted so, based on that, this type of litigation is on the rise significantly,' says Chris Cavallaro, managing director of ARC Excess & Surplus in Garden City, New York, a wholesale insurance brokerage specializing in professional liability products and services. 'And you're going to see more of it if this economy keeps a heavy hand on the employment picture.'

Before a claimant can press a discrimination claim in federal court, they need to bring an action before the EEOC. But even if the claims wind up being ruled unfounded, EPL cases can be a drain on time and monetary resources for a small or mid-sized business. The average tally for a discrimination case exceeded $235,000, according to the EEOC.

What can a business do to protect itself against EPL lawsuits? The following guide will show how businesses can take out special insurance, called EPL insurance, to protect against employee claims, the types of claims covered under EPL insurance, and other steps legal experts recommend businesses take to protect against EPL claims. 

What Is EPL Insurance?

EPL insurance policies protect businesses from the financial costs incurred from employment-related lawsuits filed for a range of reasons, from wrongful termination to harassment to discrimination and so on. More than half of claims are filed against small businesses, according to business insurer Munich RE. However, less than two percent of businesses with fewer than 50 employees purchase EPL insurance.

'It's really the small employer that's taking a harder look at this insurance these days, especially when you think about the cost of the insurance compared to the cost of cases and the rising number of cases,' says Cathy Paladino, employment practices liability product manager for Chubb Specialty Insurance. 'Generally speaking, we tell small employers that they are more likely to have an EPL claim than they are to have a fire, statistically speaking.'

A recent Chubb survey found that 36 percent of private company executives understand the gravity of their exposure to EPL suits and 21 percent said they had an experience with an EPL suit in the last five years.

While every EPL policy is different, a company with $1 million in sales and 50 employees can likely get a policy for about $7,000 per year—$10,000 if they also take out coverage protecting directors and officers in the event of liability lawsuits against them personally, according to Cavallaro.

Dig Deeper: How to Determine Whether to Insure Directors and Officers

Leading Causes of EPL Claims

The leading charge filed in discrimination cases is an allegation of racial discrimination, at 36 percent of cases, according to EEOC figures from 2009. Gender-based discrimination was alleged in 30 percent of cases. Age-based claims made up 24 percent, and allegations from the disabled tallied 23 percent. In many cases, multiple allegations are made. One of the growing charges, according to the EEOC, is retaliation against employees for making discrimination claims, which can involve a job switch that the employee views as a demotion related to the initial claim.

'If you go to your supervisor and say you've been harassed by Joe, you can bring that claim to EEOC, but then if they decide to fire you or cut back your hours, that is the retaliation component,' says Tom Hams, Aon Risk Solutions's EPL practice leader. 'That retaliation component can survive much more than the allegation itself.' The employer may win on the allegation of whether or not you were discriminated against, but they may lose a case based on the retaliation claim for moving the complainant to a different job or office setting.

EPL policies often have a broad definition of actions that trigger the insurance, but usually the definitions include any written demands for monetary or non-monetary compensation, an administrative action or EEOC charge, a lawsuit or any type of formal statement that an employee—or ex-employee—has been harmed, experts say.

Dig Deeper: Do Employee Complaints Have to Be Written Down?

Protections Against EPL Lawsuits

In general, the more protections a small business puts in place against EPL claims and the better internal policies and procedures that are implemented, the lower the business's premiums will be for EPL coverage and the more likely the business will be considered a candidate for coverage. It's essential that businesses have a written employee handbook with strong anti-harassment and anti-discrimination policies, but other efforts can also pay off.

Training supervisors in HR procedures and policies is a good place to start, whether that training involves discharge procedures for employees who are being terminated or procedures for how to handle and prevent harassment or discrimination in the workplace. 'It's a good idea for the employer to periodically institute seminars for management staff in general on topics such as sexual harassment,' says Irving M. Geslewitz, an attorney with Much Shelist Denenberg Ament and Rubenstein, P.C., in Chicago, who has extensive experience representing employers from a broad spectrum of industries in all aspects of modern employment law. 'Things like that can help obtain a lower premium rate and make a business a better candidate for coverage.'

Geslewitz says the following steps are important for businesses to take in order to protect themselves against EPL claims.

  • Distribute an employee handbook. Generally speaking, it's not as important how long or detailed it is as what topics are in there, Geslewitz says. The handbook should contain the business's equal employment opportunity policy. It should also provide employees with an internal mechanism to complain about discrimination or harassment 'so maybe you can head off a lawsuit at the pass,' he says. If the employee doesn't use that procedure, your business may be able to use that as part of its defense, saying that the employee didn't exhaust internal channels for seeking resolution to the problem.
  • Develop a code of ethics policy. This policy tells employees that they shouldn't do certain things, like giving kickbacks and engaging in other ethical violations. Geslewitz says this reduces the employer's exposure to punitive damages, which may not be covered by EPL insurance policies anyway, if the business is sued over the actions of an employee.
  • Include an anti-retaliation provision. In light of the new rise in claims of retaliation, Geslewitz recommends including a statement saying that it's the policy of the business not to retaliate against employees over accusations of discrimination or harassment.
  • Institute handbook auditing procedures. Having an audit procedure in place under which the handbook is periodically updated to keep up with changes in the law is also important and can help in the defense of a business.

An employer considering an EPL insurance policy should be asking certain questions to make sure the policy will protect them, such as what kind of claims will be covered and what kind won't, Geslewitz says. In addition, look at the policy limits and deductibles. In general, the lower the deductible and the broader the scope of coverage, the more expensive the policy will be. Another issue is whether the policy allows your business to choose the lawyer who will represent you in the case of a claim. Most policies specify that the insurance company gets to choose legal representation and, Geslewitz says, if you have a preferred attorney for such matters you may want to look for a policy that allows you some choice in selection.

Dig Deeper: What to Include in an Employee Handbook


Recommended Resources

When Can You Legally Fire Employees?

National Human Resources Association

Society for Human Resource Management

Preventing Lawsuits for Wrongful Termination

25 Ways to Prevent Workplace Violence during Terminations