In an economy riddled with layoffs, a smart insurance policy can go a long way toward helping you sleep at night
Frank L. Buckley had never heard of employment-practices liability insurance, or EPLI, before someone mentioned it at a Young Entrepreneurs' Organization meeting two years ago. What he learned was that EPLI was a relatively new insurance product designed to indemnify businesses against the costs of employment-related litigation. Buckley, president of Banana Bungalow Management Inc., a $5-million chain of youth hostels and hotels headquartered in Hollywood, Calif., decided to buy a policy. Couldn't hurt, he figured.
Today he's glad that he did. Since Buckley bought EPLI in 1999, his company has been hit -- unfairly, he claims -- with two wrongful-termination suits filed by former employees. The first case was settled for $50,000, and Banana Bungalow's attorneys' fees would have pushed the total cost still higher. Yet the company paid only $5,000, its policy's deductible. "It's a tremendous comfort," Buckley says. "EPLI allows you to rest at night."
In an economy where more and more companies are laying off employees -- which increases the risk of employment litigation -- EPLI makes sense even for businesses that pride themselves on the way that they treat employees. "You can be thrown a curve ball," warns Buckley. Employment-related civil-rights suits filed in federal courts between private parties more than tripled from 6,936 in 1990 to 21,540 in 1998, according to the U.S. Department of Justice -- a disturbing fact that has made EPLI increasingly popular in the past few years. Insurance companies first started making EPLI available in the early 1990s, and today about a third of insurance carriers offer it.
Still, some careful shopping is in order, since the breadth of coverage and the cost vary widely. (See "The Fine Print," below.) A survey by Betterley Risk Consultants Inc. found that a company with 50 employees can expect to pay anywhere from $1,500 to $7,000 a year for a policy with a $2,500 deductible and $1-million limit. Carriers generally calculate the price of a policy based on the insured company's industry, number of employees, rate of employee turnover, and prior history. The litigation against 150-employee Banana Bungalow has resulted in an increase in the company's premiums from about $6,000 to $14,000 a year, says Buckley.
Not everyone is a fan of the insurance. Jason Mendelson, director of legal services at Softbank Venture Capital in Mountain View, Calif., advises start-ups not to bother with EPLI on the premise that young companies have better things to spend their money on. "Sometimes it's a good deal for my clients," says John C. Fox, an employment-litigation lawyer at Fenwick & West in Palo Alto, Calif. "Most of the time it's not." One client bought a policy with a $150,000 deductible, not realizing that most employment claims can be resolved for much less.
The Fine Print
How should you size up an EPLI policy? Arm yourself with these questions and recommendations:
Do you want to insure against all employment claims or just the big cases that could lead to catastrophic losses for your company? Choose the latter and you can save on premiums by opting for a higher deductible.
How much control will you have over the conduct of litigation? Scorched-earth tactics in the courtroom can come back to haunt you. "The way that litigation is handled has an impact in the workplace, because the other employees are watching," says employment lawyer Zan Blue of Constangy, Brooks & Smith in Nashville. Will the insurer allow you to choose your own lawyers? Who decides whether to settle the case? And if the plaintiff wants nonmonetary damages, such as changes in your company's employment practices, will you have the right to say no?
As a rule, EPLI policies don't cover punitive damages. If your state permits it (some, like Massachusetts, do not), ask your insurance carrier to cover such damages.
Consider buying an EPLI that covers third-party liability. Such coverage is important for certain industries, such as the hospitality business. For instance, third-party liability coverage would kick in for Banana Bungalow if a guest filed a sexual-harassment suit.
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