How Much EPLI Limit is Enough? 6 Reasons a Small Business May Need More Protection
November 14, 2019| By Mark Grubelic and Mindy Pollack
and Mark Grubelic
Region: North America
When a worker sues for sexual harassment or disability discrimination, will the employer discover that the insurance policy limit isn’t enough?
Most small businesses buy Employment Practices Liability Insurance (EPLI) protection with their core commercial covers. The policy may be added or quoted automatically for limits of $50,000 or $100,000, but many carriers make higher limits available, often $250,000 up to $1 million.
An insurance agent typically advises a small business on how much EPLI limit is appropriate for its exposures. How much limit is right for the operations of a particular insured?
There is no one answer or formula, but there are several risk factors that can guide the discussion and decision. The most important to remember is that defense costs are part of, or erode, the insurance limit and should be part of any calculation.
Our top three considerations to answer “how much EPLI limit is enough” are:
- Employee Salaries.
A claim settlement or verdict is heavily influenced by the employee’s salary or earnings, as it reflects how much the employee lost due to job termination. If sales executives or managers are paid more than $100,000, let’s say, then a limit of $250,000 or more may be appropriate. Companies with over 100 employees are now required to file salary and other employee information to the EEOC, and these details should be handy to the company. For smaller businesses, the owner or administrator can provide general salary levels or ranges, such as the number of employees earning over $50,000 or $100,000.
- Size of Business.
As the size of a business increases, so does the exposure to expensive lawsuits. When several employees perform the same or similar functions, they may join in a single lawsuit and the costs rise. The damages paid to one store clerk or restaurant waiter might be less than $50,000, but when three sue together, the claim value tops $100,000 and a low policy limit is not enough. The “deep pocket” effect can also play a role; plaintiffs are likely to demand more from companies they perceive are big enough to pay more.
- Location of Business.
Home values are driven by “location, location, location,” and so are the costs of an employee lawsuit. States and cities with employee-friendly laws and active plaintiff attorneys tend to generate higher awards and defense costs. We also find that urban areas with many employment specialist or “boutique” law firms can command major verdicts and settlements. Of course, employee salaries will also be higher in these areas. The economic reality is that defense costs and payments run higher in New York, Washington, D.C. and Los Angeles than they do in Baton Rouge, Bangor and Boise.
To find out three more factors to consider when calculating EPLI limits, watch our short video entitled “Will the Limit Be Enough When an Employee Sues?”
Gen Re clients can use this video to assist with their own agent education. Contact one of us if you’re interested.
The more an agent knows about EPLI, the more it can help its small business clients.