Hidden Exposure: Protecting Your Business with Third-Party EPLI

Coffee shop
In today’s increasingly litigious society, harassment and discrimination are trending upward. To protect your business from workers’ claims, including wrongful termination, breach of employment contract, wrongful discipline, failure to employ or promote, sexual harassment and discrimination, you likely have employment practices liability insurance (EPLI) in place.

But if your employees frequently deal directly with the public, there may be a glaring gap in your coverage. Your business and workers may also be at risk for harassment or discrimination claims from a customer, client, supplier, vendor or visitor. The bad news: these types of claims are not covered by commercial general liability insurance or standard first-party EPLI.

To protect your business from customer or client allegations, third-party EPLI is the answer.

The types of wrongful acts typically covered by third-party EPLI are discrimination and harassment. Discrimination can include claims based on nationality, sex, disability, age, race, religion, pregnancy or sexual orientation. Harassment can take on many forms, such as unwelcomed sexual advances, requests for sexual favors, and other types of verbal or physical abuse. Third-party EPLI reimburses your company for court and legal fees, as well as any settlements between the business and the accuser.

Third-party EPLI may be appropriate if you frequently meet with clients or deal with vendors. And it is absolutely essential for businesses that interact with the public. Examples include large customer service teams, cable television installers, contractors, restaurant, hotel and transportation workers, and real estate agents.

For example, a customer sued a New Jersey gas station after being sexually assaulted by an attendant who was filling up her car. The woman claimed the station attendant made inappropriate advances, performed a lewd act and touched her while she was buying gas, according to NJ.com. The woman also claimed that another employee at the gas station did nothing to prevent the incident or intervene during it.

In another example that made national headlines, thousands of African American patrons of Denny’s restaurants claimed they were refused service, were forced to wait longer, had to prepay for food, or pay more for food compared to white customers, the New York Times reported. These claims, which totaled 4,300 and spanned several years across multiple states, culminated in a class-action lawsuit against the national restaurant chain. Denny’s settled the suit in federal court, and members of the class-action suit were awarded $54 million for damages.

Starbucks was sued in federal court by a group of 12 deaf customers who said they were mocked and mistreated at a coffee shop in New York City. The group claimed being harassed multiple times because of their disability. During one instance, a Starbucks employee called the police in response to a group of deaf patrons who met at a Starbucks to hold their monthly Deaf Chat Group, although the patrons were paying customers, according to USA Today. The police apologized to the patrons and reprimanded the employee for calling the police when there was no illegal conduct.

As you can see, the level of interaction a company has with those who might claim a wrongful act, and the industry in which you operate, can affect the cost of third-party EPLI. Other factors come into play as well, like whether you’ve been sued in the past over employment practices.

While third-party EPLI helps defray the cost of lawsuits and judgments brought against your business, one thing it doesn’t protect is your reputation. Therefore, forward-thinking employers are doing more than just purchasing a third-party EPLI policy; they’re also taking steps to make it less likely they will have to use that policy. Effective training and education, no matter your level of exposure, can help prevent claims of wrongful acts against your business or employees. Creating training programs to educate employees on what constitutes harassment and discrimination, as well as putting processes in place about what to do in the event of an allegation, are good starting points.

When screening and hiring new employees, it is essential to create programs that help your hiring team vet candidates solely on their qualification for the job. Documenting your process helps everyone understand the requirements and will provide backup should issues arise.

It’s also a good practice to display all corporate policies as they relate to hiring and worker conduct in employee handbooks so the policy is available to everyone and can be reviewed when necessary. Many companies also ask employees to sign a document affirming they have read the employee handbook.

Unfortunately, all of the education and training in the world can’t stop a customer or vendor from claiming harassment or discrimination by one of your employees. But a carefully developed third-party EPLI plan that assesses your exposure and helps you completely cover your business can minimize your risk.

The Riskiest States for Employee Lawsuits

In 2014, U.S. companies had at least an 11.7% chance of having an employment charge filed against them, according to the new 2015 Hiscox Guide to Employee Lawsuits. The firm’s review of data from the Equal Employment Opportunity Commission and its state counterparts found that the risk also varied notably by state, as local laws creating additional obligations—and risks—for employers led to charge rates up to 66% above average.


State laws that are driving some of this increased employee charge activity include heightened anti-discrimination/fair employment practices, the use of E-Verify in the private sector, pregnancy accommodation, prohibitions on credit checks, and restrictions on inquiring about or requiring background checks.

Key state laws driving increased employee charge activity

These cases can be especially damaging for small- and mid-sized enterprises, with 19% of employment charges among SMEs resulting and defense and settlement costs averaging $125,000 and taking about 275 days to resolve. The average self-insured retention for these charges was $35,000, Hiscox found, and without employment practices liability insurance, these companies would have been out of pocket an extra $90,000. What’s more, 81% resulted in no insurance payout, giving even nuisance charges the potential to be a serious financial hit. While the majority do not end up in court, when they do, the median judgment is about $200,000, not including defense costs, and 25% of cases result in a judgment of $500,000 or more.

During the hiring process, written procedures that outline and comply with federal and state laws can help minimize risk, as can maintaining a customized employee handbook that all staff acknowledge in writing they have reviewed. In addition to risk transfer, such as an employment liability insurance policy, Hiscox offered several tips to best mitigate the risk of employment charges, including:

Independent contractors

Be careful when designating independent contractors. There are variations among states and areas of law as to the test for an independent contractor. It is possible for a worker to be considered an independent contractor for some purposes and an employee for others.

Leaves of absence and accommodation for disabilities

A medical condition can trigger federal and state leave and disability laws, which vary, as well as workers compensation laws. Make it a policy to recognize events or discussions that create an obligation to discuss accommodations or a possible leave of absence.

Employee performance

Ensure that all supervisors and managers are aware of the procedure for addressing unacceptable employee performance. Communicate to the employee about what they are doing (or not doing) that is unacceptable, and make sure they understand what constitutes acceptable performance. Document all communications. Conduct factual, honest performance evaluations. Develop and maintain a procedure for corrective action plans.


To minimize litigation around termination, avoid surprises. Make sure that all guidelines have been followed for addressing unsatisfactory performance, particularly the corrective action plan. Prior to termination, assess the risk for litigation: is the employee a member of a protected class, involved in protected labor activities, or a potential whistleblower? Is the employee under an express or implied-in-face employment contract? Gather and review the documentation that supports the termination and interview relevant players.

The Basics of Employment Practices Liability Insurance

Although employers can face employment litigation at any time, employment-related lawsuits tend to increase during a stagnant or faltering economy. In order to best insulate themselves from costly verdicts, settlements and defense costs, policyholders need to understand the basics of employment practices liability insurance (EPLI) policies. In their latest Risk Management online exclusive article from Anderson, Kill & Olick, attorney Darin McMullen covers what you need to know about EPLI coverage.

EPLI policies are relatively new, having been introduced less than 20 years ago. Although an approved ISO form EPLI policy exists, EPLI policies are most often sold as manuscript policies and can have varying coverage terms and exclusions. Because EPLI policies are not uniform, a policyholder must carefully read a proposed policy prior to purchase. The key is assessing whether, based upon the policyholder’s business, the policy will provide coverage for the employment claims that it is most likely to deal with and for whom such coverage will be provided.

Whether EPLI policies are new to you or if you simply need a refresher, don’t miss this informative article only on RMmagazine.com.