It can happen to any business—a joke told in the break room, an employee you had to fire or the person you chose not to hire—but cases against employers are on the rise. It is estimated that three out of five firms will be sued by an employee. The Equal Employment Opportunity Commission reported that 93,277 workplace discrimination charges were filed in fiscal year 2009, and monetary relief for victims totaled over $376 million.

Employers are vulnerable from the pre-hiring process through the exit interview, even if the employee was never hired, or only with the company a few days. The best defense for business owners is Employment Practices Liability Insurance (EPLI), yet less than one quarter of eligible companies purchase the coverage. It is needed as soon as you begin to hire employees.

EPLI provides protection for an employer against claims made by current, former or potential employees. It covers a variety of workplace-related legal actions, including discrimination, sexual harassment, wrongful termination, breach of employment contract, negligent evaluation, failure to employ or promote, wrongful discipline, deprivation of career opportunity, wrongful infliction of emotional distress, and mismanagement of employee benefits plans. EPLI does not cover workers’ compensation, bodily injury or property-damage cases, nor does it cover cases specifically covered by another policy.

Even if the claim is groundless or fraudulent, the defense of a suit can be expensive in time, resources and money. New and quickly growing companies are often prey to these types of claims because their management team has not yet designed or implemented procedures for hiring, firing and disciplining employees.

EPLI rates differ from state to state and from company to company. Generally, an insurer calculates premiums by determining the amount of coverage a business needs and its perceived risk. An insurer will base rates on several risk factors, including the number of employees, turnover ratio, whether or not the business has a human resources department, and any past history of suits against the company. Businesses with 10 to 20 employees, good HR practices and a clean record can expect to pay approximately $1,500 a year for EPLI coverage. Most businesses will qualify, with the exception of government agencies, bars, nightclubs and adult entertainment facilities.

Employers can lower their company’s liability exposure and keep insurance rates down by taking certain precautions:

• Institute zero-tolerance policies toward workplace harassment, discrimination, and alcohol and drug abuse.
• Develop an employee standards handbook that defines the skills and performance expected for each position.
• Measure employees’ performance on a regular basis.

Insurers generally review a company to check for workplace liability before they issue a policy. And since insurers hate risk, they’ll usually recommend changes that reduce a business’ exposure to lawsuits. iBi