Small Businesses at Risk: A Growing Market for Employment Practices Liability Coverage

Small business owners are at risk from employment-related charges and lawsuits. Workplace discrimination claims are at an all-time high and small business owners feel vulnerable. Yet, although a recent survey showed that most are worried they might face an employment-related charge, a much smaller number of business owners had purchased employment practices liability insurance (EPLI).

The U.S. Equal Employment Opportunity Commission reported that discrimination claims soared 15 percent in 2008 and workers were awarded $376 million. All categories are up, with age bias claims showing the highest percentage increase and charges based on race, retaliation and gender the most frequently filed. A tight job market, a sluggish economy, and worker-friendly legislation have employers on the defensive. Right now, agents, brokers and other insurance professionals should be educating their clients about the risks.

EPLI for Small Businesses

Two out of three small business owners responding to a recent survey by Hartford Steam Boiler were concerned that their employees would bring an employment-related claim against them. More than 40 percent blamed the poor economy and 60 percent cited new laws that could make it easier for employees to file a charge.

The survey also found that 60 percent of small business owners believed it would cost less than $20,000 to defend against an employment charge. EEOC statistics show that 81 percent of claims settle for an average of $22,400 to $40,500.

More than 90 percent of small business owners participating in the survey said they would be interested in an affordable EPLI policy. Increasingly, insurers are offering coverage that is designed and priced specifically for small businesses. EPLI has evolved from a high-priced option to an affordable necessity, with more flexible limits and risk management services.

Insurance companies are packaging EPLI as part of their small business policies. In addition to responding to claims brought by employees, programs may also respond to claims brought by independent contractors and volunteers. Advanced coverage may include prior acts, punitive damages and third-party claims by customers. A loss prevention Web site can help an owner avoid a claim with ready-made employment policies. Some EPLI coverage even offers a legal telephone help line that makes local attorneys available to provide general employment guidance to business owners.

EPLI and Risk Management

The risk management services provided with EPLI coverage are equally important. Many small companies don’t have internal resources, such as in-house counsel and human resources departments. Inadequate job performance must be carefully documented to prevail in a wrongful termination or other type of lawsuit, but small business owners often don’t have the knowledge and professional advice to do so. When a problem arises, they are vulnerable.

“We don’t keep good records about our employees’ performance,” said the owner of a telecommunications business. “My human resources friends say we really need to do more, but it isn’t easy in a small company.”

The more intimate working environment of a small business can also lead to heightened risks. Large companies may lay off hundreds or thousands of people at a time. At a small firm, firings are much more personal and closely scrutinized.

Anger about a layoff and the inability to find a new job can also make employees more litigious. Some small business owners are reluctant to reduce staff because they fear an employment charge, even when it makes sense financially. “Instead of laying people off, we have been reducing hours instead,” said another owner who responded to the survey.

Any employment-related charge can seriously damage a small business. Defense costs can be expensive and the outcome is never certain. Even a mid-sized settlement or court award could threaten the survival of a company.

The combination of an aging and more diverse workforce, a difficult economy and a shifting political landscape has employers and employees feeling uncertain and anxious. Employment practices liability insurance helps fill a coverage gap for small business owners. It offers financial protection against employment-related claims and valuable risk management services.

Topics Claims Commercial Lines Business Insurance Risk Management