Twenty years ago, employment practices liability insurance (EPLI) was rare in the United States, and even a decade ago, most companies didn’t buy it. Today, however, many firms have stand-alone EPLI coverage: 41% of those companies with more than 1,000 employees, 34% of those with 500–750 employees, 23% of those with 200–500 employees, 32% of those with 50–200 employees and about 20% of companies having fewer than 50 employees.

These numbers don’t even include the sizeable portion of EPLI coverage bundled with other lines of insurance such as directors and officers, or professional liability, so in reality even more firms are actually covered.

Traditional thinking says that EPLI claims increase during economic downturns, because even legitimate terminations and layoffs have a way of turning into lawsuits during times of financial insecurity. But, as the economy rebounds, more companies probably will consider EPLI for a variety of other reasons that have led to a new normal.

Demanding, Savvy Workers

With job growth comes increased competition for workers. Millennials are demanding greater work-life balance while, at the same time, fewer than half of Millennials expect to be in their current position three years down the road. Higher expectations and less loyalty have converged to create an environment in which employees are inclined to take action if they think they aren’t being treated well.

A complaint can be filed with the Equal Employment Opportunity Commission, which handles nearly a dozen types of discriminatory employment practices. In 2013, the EEOC handled more than 100,000 complaints, filed more than 130 lawsuits and recovered more than $370 million, a record high. Forty-three percent of total complaints were for retaliation, an all-time high.

Employees today are far more aware of their rights. The media has publicized many high-profile disputes: Silicon Valley’s sexism, unpaid interns, raising the minimum wage, the nationwide movement among retail workers for a “bill of rights.” Recently, Walmart workers complained in a national advertisement that they are being mistreated again, a situation that seems to boil up and simmer down on a regular basis.

Companies also have increased the frequency of employee training on appropriate conduct — knowledge that later can be turned against the company. The Internet provides employees a treasure trove of information. Search wrongful termination lawsuits and Google returns 316,000 hits, and 424,000 on workplace harassment cases.

Digging a little deeper, employees can find that most lawsuits are settled out of court, so employers can avoid defense costs ranging from $200,000 to $300,000 and litigation that drags on for 18 to 24 months. Along with private-party lawsuits, the increase in claims brought by federal, state and city regulators gives companies reason to consider EPLI protection.

What EPLI Is

Employment practices liability insurance protects an employer from employees’ claims alleging discrimination, wrongful termination or harassment, including sexual harassment. EPL insurance pays for liability damages and defense costs due to these charges brought by full-time, part-time, temporary and seasonal employees, applicants for employment and recognized volunteers.

Eighty-one percent of EPL claims are resolved for between $22,400 and $40,500, according to Hartford Steam Boiler Inspection and Insurance Company (HSB), a leading provider of the coverage. This includes defense costs and liability damage payments.

Do Small Businesses Need Coverage?

Nearly 50% of EPL charges are filed against small businesses, according to HSB. Employment laws that employees may use as a basis for action against their employer apply to the majority of businesses, including small firms.

Even groundless employment charges may require legal defense, and defense costs can be significant. Businesses need EPL coverage to have those defense costs covered and to get access to attorneys experienced in defending employers from employment-related charges.

Small businesses often don’t have human resource professionals to develop the formal personnel policies and procedures that can help prevent employment-related charges. And they don’t have deep pockets, so just the cost of defense them from EPL claims or charges can hurt a small business.

No matter how well a business is run, an employee can allege anything at any time. Employers need to be able to defend themselves from employment-related charges, even if the charges are without merit. EPL coverage pays for defense costs even when the charges are groundless.

What’s Changed?

Today’s business and legal climate is different from what it was years ago. Employees are more aware of employment laws, their rights and how to exercise them by taking action against employers. In addition, federal and state employment-related laws and regulations have been broadened.

Employees see a lot of news coverage and publicity about employment cases and awards against employers. The workforce is more diverse, with women, older workers and minorities representing a significant percentage of employees.

The need for EPLI arises from a number of federal and state laws under which employees may bring actions against their employers for such matters as sexual harassment, discrimination and wrongful termination.

In 2005, the EEOC reported that racial discrimination was the leading employment allegation at 35% of claims. Gender discrimination was alleged 31% of the time, followed by age discrimination at 23%, disability discrimination at 19% and sexual harassment at 17%. While the number of claims has increased, the percentages have remained largely unchanged.

Charles D. McCabe, CPCU, CIC, is president & CEO of McCabe Insurance Associates Inc. He can be reached at 443-283-0302 or [email protected].