Employers Without This Insurance Could Face a Legal Nightmare
[Note: I originally wrote this blog post in 2016, and I updated it in 2018 and 2023, but only to remove outdated links and enhance readability. This post reflects the blog structure used in 2016 and my writing style at the time. Both have changed measurably since then. Estimated reading time: 11 minutes.]
Brian’s* residential rehab business was finally beginning to get legs. It had been a challenging first few years, but he was finally having some major successes. Projects were getting bigger and more profitable.
He still had to keep a close eye on expenses, but he was more confident of success. He’d hired his first two employees—an office manager and an assistant.
Brian made the decision to put off purchasing employment practices liability insurance his attorney warned him he needed with employees. But, Brian insisted he could forgo it for a while longer while he generated the revenue to cover the expense.
Hiring a Troubled Employee
The office manager was keeping things running smoothly but the assistant, a recent college graduate, was another issue. Now Brian’s assistant for just over a year, he not only was bored but he also seemed a bit angry and depressed. Not one to press, Brian suggested once he go ‘talk’ to a career counselor or another professional to sort out his issues.
When the young man angrily muttered something about not needing help, Brian dropped the subject. Wishing he'd known how to avoid hiring a problem worker, Brian kept a close eye on his assistant. The young man frequently seemed transfixed on his smartphone screen like it made him calmer. "There just no way to know I hired wrong until it was too late," Brian had lamented to a friend recently.
Brian had to warn his assistant a couple of times in writing about using the smartphone at work, especially on rehab sites and around construction equipment.
Then, the young man tripped over a bucket of tools in a storage room at the office. While he wasn’t hurt that time, Brian worried he wouldn’t always be so lucky. That incident also generated a third written warning.
At the time of that incident, Brian told his assistant that he faced termination if there was another similar one. He warned him there could be real trouble for him if that incident caused injury to himself or someone else. The assistant improved his performance for a few weeks but went back to being engrossed by the smartphone.
Disaster Strikes with a Work-Related Accident
One morning, Brian was doing one of his most significant rehab projects to date and realized he’d forgotten some of the construction drawings. He called his assistant and told him to bring them to the construction site. He reminded him to use a company vehicle and not use his smartphone while he was driving.
The assistant made it to the rehab site but, looking at his smartphone screen while walking instead of what was in front of him, he tripped over the handle of an unattended shovel sticking out of a mound of dirt.
He broke his fall into a stack of construction cinder blocks Brian had purchased to repair an exterior wall on the flip property with the left side of his body. Brian, was inside the house when the assistant arrived so, he hadn’t even seen him, yet.
A subcontractor who’d seen the event alerted him, and Brian ran and tried to help his assistant up. But, he was in real pain, holding his left shoulder, whimpering, and Brian couldn’t move him. A few feet away sat the smartphone with a shattered screen.
Brian was furious about the assistant being distracted by his smartphone, falling and injuring himself on the construction site. He composed himself, said nothing to the kid and called an ambulance.
Brian was grateful for his worker’s compensation insurance probably would cover this, but he knew he had to terminate the assistant to prevent further liability for his business and potential harm to others.
After all, there was a documented history of problems surrounding the assistant's smartphone use at work. Brian also knew it might be risky to fire an employee injured at work, but he felt he had no other choice.
When the assistant returned to work a few weeks later, wearing a cast from his left hand to his left shoulder, Brian took him into his office and closed the door. There, he informed him that his firm's worker's compensation would pay all bills, including rehab, related to his injury.
Though the young man tried to apologize, Brian told him despite his apology, his behavior forced him to terminated his employment. He gave him a check for his last two weeks of work and escorted him off the premises.
The Former Employee Sues for Wrongful Termination
About a week after the termination, Brian received the news he’d worried he might. The former assistant sued Brian for wrongful termination and discrimination against a mentally-challenged person.
The suit alleged that Brian had violated the Americans with Disabilities Act by terminating the former employee. According to the suit, Brian knew about the former assistant's depression and that he used his smartphone to comfort him.
The claim further alleged that, by regularly and wrongly disciplining him for using his smartphone, Brian prevented him from doing his job in a fair, acceptable work environment. Thus, it was Brian’s fault he was forced to fire the former assistant.
The lawsuit also blamed Brian’s business for the former assistant’s injuries and claimed pain and suffering for the discrimination and embarrassment of being a terminated disabled person. It even claimed replacement costs for an $800 smartphone.
The former assistant had gotten the help of a local attorney who, as Brian learned later, had filed many suits like these against local business owners, even small employers like him.
Brian thought the lawsuit was frivolous and retaliatory, especially since he wasn’t fighting the former assistant's workman’s compensation claim.
But he called his attorney who told him to call his insurance agent about liability protection. He called his insurance agent, hoping to get good news from her about insurance protection. But, he remembered, too, that the agent had suggested extra coverage to keep his business protected for when one of his employees sued.
Brian had considered the coverage but hadn’t figured an employee would file a frivolous lawsuit after an injury that was his fault. So, he put off buying the extra protection. He was about to learn that was a risk he shouldn’t have taken.
Gambling with His Business and Losing
Just as Brian suspected, the insurance agent told him he didn’t have the right coverage in place to protect from employee lawsuits. He had a business owner’s policy or BOP that provided him general liability protection, property insurance, and business income coverage.
With a BOP, Brian had coverage for certain third-party lawsuits and from disasters like fires. He’d even be able to get his business rebuilt with his BOP in that case.
His business also had worker’s compensation, of course, and a commercial auto insurance endorsement on the BOP. But, what he needed—employment practices liability insurance or EPLI—he didn’t have. Like 7 in 10 employers, he hadn’t bought that protection. He wasn’t one of the many employers who believe they have coverage under other insurance products; he knew he should have added the coverage.
By not buying EPLI protection, Brian gambled his business wouldn't be sued...and lost.
But, because he hadn't gotten to a place in this business where he could afford more insurance coverage, Brian took the gamble that he wouldn’t need that coverage right away—and lost the bet.
His agent told him that she’d seen a number of employers face what they considered frivolous employee lawsuits because they were so prevalent today. Lawsuits filed by terminated employees are most common, she explained, though prospective and current employees are increasingly filing them. It's what she said next that really stunned Brian.
She said that not only are claims rising but their costs are because of how long they take to resolve. It can take 18-24 months and cost up to $300,000 to resolve an employer liability claim. While she also told him that EEOC statistics revealed that 81% of claims settle for between $22,000-$40,500, she cautioned him that 19% of settlements are far larger.
And, those statistics are for employers with EPLI coverage. According to an Advisen study, 77% of businesses Brian's size don't have EPLI and can expect to pay steeper costs on their own.
Of course, Brian hoped that this kid’s attorney would allow him to settle since that’s what many litigants are looking to do anyway, get a quick settlement. But, he learned later that, according to the 2005 SBA study, many small business lawsuits don't get settled. They go to court.
Brian got off the phone with his insurance agent and called his attorney back with the bad news. He had a feeling that, pretty soon, he’d be writing a big check to a lawyer to defend this suit.
How Could EPLI Have Helped Brian?
Like most business insurance products, employment practices liability insurance is part of a business’s risk management strategy. In Brian’s case, EPLI would have covered the defense of this lawsuit up to the policy’s limits.
EPLI takes effect when a claim is filed by someone like his former employee who’s alleging unfair employment practices, violation of their civil rights, or the inability to complete their work in a fair and acceptable employment environment. According to Insureon, EPLI covers different types of employee claims, including wrongful termination or discipline, slander or libel, discrimination, and emotional or mental distress.
The former employee alleged that Brian engaged in most of these unethical business practices, though he knew the claims were false. But, that’s often the case with EPLI claims—there’s usually little evidence of their validity, which often is true on both sides of the lawsuit.
While Brian had proof the claims against him weren’t valid, he didn’t have the protection EPLI would have provided while he made his legal case.
If he'd had the coverage, like most liability policies, the EPLI insurance carrier’s legal team would battle the lawsuit on behalf of the employer policyholder. It also would pay the legal costs associated with the employee’s claim throughout the trial.
Brian would have had less to worry about as he continued to build his business. He would have strengthened existing firm policies on harassment and discrimination prevention.
Then, he would have hired a new assistant, doing a better job this time of choosing the employee. But his EPLI insurer would be handling the current lawsuit while Brian handled his business.
If Brian had EPLI, his insurer would handle employee lawsuits while he handled his business.
Now, however, to save his business, he would have to focus more time and money on fighting this claim than on running the company itself.
How to Obtain EPLI Protection for Your Small Business
To get the best EPLI protection for your enterprise, you should talk to a business property and casualty insurance agent. It’s important to work with an insurance agent who understands enterprises of the size (how many employees it has, specifically) and type (the kind of activities your business and employees conduct) yours is.
Your business site also is important because according to Advisen, businesses in some states are more likely to face lawsuits. Those states include Texas, New York, California, and Florida.
That’s why insurers base EPLI coverage limits on business risk, and your insurance agent needs to know how your business type affects its risk of an EPLI claim.
One factor agents consider is your firm's employee complaint history, especially if your enterprise has faced EEOC claims in the past. Once insurance agents decide how much risk your business needs to cover, they can help you get the right liability protection.
But, when purchasing this vital coverage, don't ask, "How much can I afford to pay for EPLI?" Ask, "How much can I afford to lose fighting an EPLI claim?" Remember, you buy business insurance to mitigate business risk so get enough to make sure you have minimal out-of-pocket costs of fighting such claims.
Accordingly, find an insurance agent who is an expert in this coverage. Then they can give you significant information and resources that help you understand your coverage while preventing situations where its activation would be necessary. That way, you're maximizing EPLI protection while minimizing EPLI claims against your small business.
(c) 2016-2023. Dahna M. Chandler for The Stellar Communicator, Inc., a division of Thrive Media Collaborative, Inc. All rights reserved. This blog post may not be reproduced or reposted in whole or in part without express written permission of the author.
[*Disclaimer: "Brian" is a fictional character, and this post is based on an entirely fictitious business account meant to illustrate the points made in this blog post. This post is written for informational purposes only. It is not meant to substitute for any legal, financial, accounting or other business or personal advice that should be provided by qualified professionals in those areas. Before taking any action based on the information contained here that could have legal, financial, or any other important consequences, consult with qualified professionals who can provide guidance that considers your unique circumstances. Since you maintain full responsibility and liability for applying this information to your business, contact licensed insurance providers, attorneys, accountants, other professionals, and your business partners/investors before deciding to apply information contained here to your enterprise.]
Image: Pixabay
