Employment Practices Liability Insurance: A Viable Preventive Strategy

EPLI: Can Your Company Afford Not to Insure Against Employment Claims?

"EPLI" -- employment practices liability insurance -- is insurance against employment lawsuits. For a number of reasons, employers cannot afford to ignore the potential exposure to employment lawsuits which have increased dramatically over the last several decades:

  • Employment discrimination cases are the most common in the federal courts, next to criminal and prisoner-related cases;
  • In 1997, there were 23,800 employment cases filed in federal courts, nearly doubling in numbers over the four-year period since 1993;
  • At the EEOC, 79,600 new charges were filed in fiscal year 1998, up from 72,300 in FY 1992.

In combination with other effective loss prevention or risk management initiatives, EPLI can reduce a company's vulnerability to a potentially devastating loss.

The Origins of Today's Employment Litigation Explosion

In great measure this phenomenon is a function of the plethora of employment laws passed in the 80's and 90's -- such as the Family and Medical Leave Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Worker Adjustment Retraining and Notification Act, Amendments to the Privacy Act, and the Employee Polygraph Protection Act.

Other more dramatic events have propelled the growth of employment litigation. The issue of sexual harassment, for example, has become one of the major concerns for businesses everywhere due to a number of legal and societal developments. The effect of these developments is an increase in sexual harassment lawsuits against employers.

In 1991, Congress amended Title VII (which is the principal federal anti-discrimination law) in several important respects. Employment discrimination cases (which previously could only be tried before a judge) can now be tried before a jury. And, damages in these cases are no longer limited to lost wages but now can include "compensatory" and punitive awards.

In the face of these developments, employment litigation took off in the 1990's -- and juries have played a big role in this trend:

  • A Michigan jury awarded $5.5 million to a former truck driver with epilepsy in an ADA case.
  • A New Jersey jury awarded $8.8 million to three employees laid off in a reorganization based on age discrimination.
  • A Missouri jury recently awarded $4.2 million to an insurance claims adjuster in an age case.
  • A jury awarded $80.7 million to a UPS female supervisor who alleged a male supervisor poked her breast during an argument.
  • A Manhattan jury found that the NBA sexually discriminated when it failed to make a woman a regular season referee, awarding $100,000 in lost wages, and $8 million in punitive damages.

The view from the jury box seems to reflect the perceptions of individuals who have been terminated or laid off. A recent study indicates individuals sue employers not only for economic gain but to vindicate feelings of injustice in the way they were treated during employment and termination

Costly Settlements

The mere threat of jury awards -- and the sheer cost of litigating -- has had quite an impact on the frequency and the amount of settlements. Plaintiffs. lawyers and government agencies have learned that the news media is hungry to publicize the "facts" of a charge or complaint well before the judicial process has run its course. Trial in the court of public opinion has brought a number of corporate giants to the settlement table with offers to pay millions of dollars to claimants, open their internal records and practices to public scrutiny, and conduct diversity training and consciousness raising at all levels within their organizations. Consider the following:

  • State Farm settled a sex discrimination class action for $157 million;
  • Mitsubishi settled two sexual harassment cases arising out of the same incidents for $45 million; and
  • Publix Supermarket announced an $81 million settlement of a sexual harassment lawsuit.

Smaller Employers: Hardest Hit In A Battle Where "Winning" Can Mean Losing

This phenomenon is not limited to large corporations. Mid-sized and smaller companies are being hit hard - - and ultimately hit hardest. A recent case tells the story. A Philadelphia jury returned a verdict for a plaintiff who worked at a water treatment company. Apparently, the plaintiff was subjected to national origin slurs and the jury deliberated for less than one-half hour and awarded the plaintiff $200,000 in front and backpay, $100,000 for emotional distress, and $265,000 for the plaintiff's attorneys, for a total of $565,000. The company has fifteen employees.

Not only can they not afford to lose, but small and mid-sized employers cannot even afford to win employment lawsuits. A company with fifty employees can ill afford to pay $100,000 or more in legal fees to win such a dispute - - the cost of the defense alone may be a disaster.

Most mid-sized or smaller employers may not consider the need for a program of insurance and risk management to help insulate them. By all indications, however, the employment litigation trend is not subsiding. When the Society for Human Resource Management (SHRM) randomly polled members recently, 57 percent of the 616 respondents said their organizations had faced an employment-related lawsuit at least once during the past five years. Sixty percent of them reported slight to substantial increases in litigation costs for employment matters; 85 percent felt the majority of employment-related litigation cases are not legitimate.

Based on these reports, the conclusion is that the majority of employers are paying ever increasing costs to defend employment litigation they believe is without merit. For more information, please visit the SHRM web site.

EPLI: A Viable Solution

No company bears the risk of fire, theft, or customer injury without the protection of insurance. Yet, it is far more likely that a company will face an employee lawsuit than the devastating effects of a fire. Almost 75 percent of all litigation against corporations today involves employment disputes, and the typical expense of such a lawsuit exceeds $250,000 in judgments, costs, and attorneys. fees.

Typically, general liability policies do not include coverage for allegations of workplace discrimination or wrongful discharge. Directors and officers liability policies may provide them some coverage, but most D & O policies do not cover the corporation or its employees. EPLI offers a way for employers to shift this risk. Yet, according to the recent SHRM litigation survey, only 22 percent of the respondents reported having EPLI coverage.

All employers - large and small - should develop preventive strategies to address exposure to employment lawsuits. Part of any preventive strategy should be policies and procedures that promote an issue-free workplace. However, no program is fail-safe. Employers must take action to limit this exposure which is undeniably a cost of doing business. Practical and cost effective, EPLI is on option to address this risk.

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