An entrepreneur’s laundry list of to-dos can be dizzying—from finding a location and signing a lease to hiring employees, securing clients and buying insurance. The latter may be the last on your list, but it can be the biggest pain if not properly handled.
There are several types of insurance—employment practices liability insurance (or EPLI) is one of the most important.
“This is coverage that covers employers and businesses in the event of a claim from an employee such as discrimination, sexual harassment, emotional retaliation, etc.,” says William H. Healey, certified civil trial attorney at New York-based Mandelbaum Salsburg.
Do you have EPLI? Think about it. You may just have general liability insurance.
“Usually, small business owners will have commercial package liability coverage, which covers break-ins, fires, etc., but EPLI isn’t part of that, when in fact most people need EPLI,” says Philip L. Pillsbury, Jr., founding partner at Pillsbury & Levinson, LLP, a San Francisco-based law firm specializing in insurance disputes.
EPLI is important for any size company, says Healey.
“If your broker thinks your company is too small for the coverage, get a new broker—I’ve had cases from businesses with as little as two employees,” he adds.
According to Pillsbury, the sooner you buy the coverage, the better.
“There is a phrase in the legal and insurance community—You can’t insure a burning building—if you are sued for discrimination and don’t have a policy, there isn’t a policy that will respond to you,” he notes.
Here are a few questions to ask when looking for an EPLI policy:
What’s my limit?
Pillsbury recommends small business owners have a limit of at least $1 million. This is because many policies have eroding limits, which means defense costs are taken out of policy limits.
“If you have $1 million in coverage and you, or the insurance company, has to pay $500,000 to in defense costs, there will just $500,000 remaining for the judgment and possible punitive damages,” he says, adding that it is important to consider the possible cost for legal fees before agreeing upon a limit.
Eroding limit policies are often the only policies available to small business owners, says Pillsbury.
Next, look at aggregate limits. How much money would the insurance company pay if you have multiple suits going at once?
“Ask yourself if you have enough of an aggregate—is your policy $1 million for one occurrence only, or $1 million per claim?” says Pillsbury.
Is it a claims-made or occurrence-based policy?
A claims-made policy will cover you as long as you report a claim to the insurance company within the policy period, says Pillsbury. An occurrence-based policy doesn’t require you to report a claim immediately.
“Most EPLI policies are claims-made; if the beginning of the policy is before you had notice of the claim and you present it quickly, you will be covered,” he says.
What is the retroactive date?
This is the date the policy was first taken out and, according to Pillsbury, excludes any losses arising out of conduct that occurred before that date.
“Carriers keep track of this because they don’t want you to walk in and buy a policy, and within a month have a claim arise out of stuff that happened last fall,” he explains.
When applying for a claim, Pillsbury says it’s important to disclose any potential claims before signing on the dotted line. For example, if you have a bitter employee that stormed out a week before you went to the insurance company, tell them.
“They can rescind coverage if you don’t disclose,” he notes.
In a case where there is a potential claim before insurance is taken out, the policy may include exclusion to that claim. Pillsbury recommends negotiating with a broker ahead of time for a ban on exclusions—but it doesn’t always work.
Note: Check out my recent article 3 Legal Landmines You Must Avoid for more information on touchy legal issues, and this graph for data on the rise in employee discrimination charges.