Protect Yourself before Workers Sue

John P. Mello Jr. -- Expert Business Source, 4/10/2007 12:35:00 PM

Many small business owners believe their company’s size protects them from the kind of deep-pocket lawsuits that employees file against large organizations. Insurance experts believe that assumption can be costly.

Small businesses tend to shy away from coverage against employee lawsuits, known as Employment Practices Liability Insurance (EPLI), for a couple of reasons, says Rick Betterley, principal with Betterley Risk Consultants in Sterling, Mass. “They think it’s expensive compared to the other kinds of insurance that they buy,” he observes, “and they think their employees love them and would never sue them.”

Of course, the probability of employee lawsuits against small businesses is lower simply because those companies have fewer employees. “But when it does happen to them, they are the least able to defend themselves financially,” says Paul Sullivan, vice president of Hartford Financial Products in Hartford, Conn. “Large companies have human resource departments, staff attorneys and legal resources on retainer ready to step in when there’s an allegation against someone or the company itself. Small employers often are unable to handle the expense of an attorney.”

Although seven-figure awards against sprawling corporations grab the headlines in employment practices cases, judgments against smaller companies don’t have to be large to devastate a business, Betterley contends.

“The settlements may be under $10,000, but the defense costs are big,” he says. “Even if you did nothing wrong, you still have to pay a lawyer to convince a judge and jury that you did nothing wrong.”

Basic EPLI policies usually apply to conduct of both employer and employee and cover:

Discrimination based on race, gender, national origin, disability, age and so forth
Harassment (sexual, as well as a hostile work environment)
Wrongful termination.

Beyond the basics, policies also can cover lawsuits arising from such things as:

Invasion of privacy, including unauthorized release of medical information about an employee
Employment-related defamation
Retaliation against whistleblowers
Genetic discrimination

A number of factors influence the cost of EPLI policies, including company size and its industry. For example, a company with 100 employees buying $1 million in coverage with a $10,000 deductible would pay $4,000 to $10,000 in annual premiums; a company with 50 employees buying the same amount of coverage with a $2,500 deductible could pay as low as $1,500 in annual premiums.

Industries such as construction and retail usually pay in the higher range for EPLI because they are seen as higher risks for worker dissatisfaction lawsuits, Betterley notes.

Key considerations to keep in mind when buying an EPLI policy include:

Don’t automatically take the lowest premium offered.
Buy from an established carrier in the field.
Identify whose attorney – the insurance company’s or yours – will be representing you in cases covered by your policy. Some carriers will allow you to use your own lawyer if he or she is qualified in labor law.
Check the type of employees covered by the policy. Some policies cover only full-time workers; others also cover part-time, leased, loaned and volunteer employees.
Evaluate any support services a carrier might provide to EPLI policyholders.

John Mello is a freelance business and technology writer.