In some cases, bad insurance can itself become a liability. As an employment attorney who’s witnessed the pitfalls of Employment Practices Liability Insurance (EPLI) from both sides, I believe these policies typically offer far more drawbacks than benefits. While marketed as comprehensive protection against employment litigation, they can actively sabotage your business interests.

EPLI is marketed as a safety net against steep judgments from employment lawsuits. However, the scope of coverage is extremely limited. Most policies exclude:

• Wage and hour claims (potentially devastating in class actions)
• Breach of contract claims
• Labor charges
• Workers’ compensation
• Certain statutory and common law claims
• In some cases, even FMLA claims

Additionally, most EPLI policies don’t cover retroactive claims, meaning you don’t get full protection until years after the policy date when pre-policy incidents fall outside the statute of limitations.

The fundamental problem is that EPLI policies treat employment law as a litigation-only practice. This dangerous misconception means they typically exclude coverage for valuable preventative services like reviewing employee handbooks, employment contracts, written policies, or advising on personnel discipline and terminations.

These preventative services from specialized employment counsel could preempt lawsuits entirely and protect you from making mistakes that hand a disgruntled employee a prima facie case.

When you purchase EPLI, you’re typically assigned out-of-state, general practice insurance defense attorneys unfamiliar with your state’s employment statutes. It’s simply not possible for these attorneys to know all available defenses and causes of action to the same degree as an in-state employment law specialist.

Even when competent counsel is assigned, they must obtain advance approval from the insurance company for every motion, settlement offer, or billable hour spent on your defense. This hamstrings their ability to properly defend your case.

Insurance carriers don’t care about your business’s reputation and will encourage—or sometimes require—that you settle every lawsuit as quickly as possible, even frivolous ones.

Many employment claims are readily defensible with proper documentation, but carriers rarely pursue this strategy. They prefer quick settlements, which is why average settlement costs are so high.

Even if you’re not responsible for the settlement cost, there are significant hidden consequences, including damage to your company’s reputation, forced reconsideration of workplace policies, and potentially necessitating termination of essential managers implicated in the settled suit’s claims.

The Better Alternative

Instead of relying on EPLI, businesses would be better served by building a relationship with specialized employment counsel who can provide both preventative advice and robust defense when needed. Proper documentation and proactive management of employment issues can prevent most claims from becoming serious liabilities.

While EPLI might seem like a prudent investment, you’re paying for extraordinarily limited coverage while forfeiting the necessary resources to effectively defend against most employment claims.

Not all insurance is equal, and the “package deal” of EPLI is not one worth buying.