Employment Practices Liability Insurance, or EPLI, is an insurance policy offered by most major insurance carriers and owned by a large number of employers based in the United States. In general, EPLI is marketed as a safety net for employers against the steep judgments that can result from employment lawsuits, which nearly every business faces at some point. Under these agreements, insurance carriers provide policies specifically intended to limit financial liability resulting from state and federal employment claims and to provide a direct line to employment counsel through the insurer’s network of referrals.
However, as an employment attorney who has witnessed the pitfalls of these policies from both sides, I believe EPLI agreements under the standard terms being offered have far more drawbacks than they offer benefits in terms of financial and legal protection. In fact, I consider it a harmful investment that can actively sabotage your business interests.
Employers seeing value in these agreements against litigation costs and potential judgments fail to recognize that they are, in fact, setting themselves up for a cycle of litigation by purchasing EPLI:
- Out-of-state, general practice insurance defense attorneys representing you who are unfamiliar with your state’s employment statutes and do not specialize in employment law.
- Insurance carriers who do not care about your business’s reputation and will encourage — or in some cases require, depending on the agreement — that you settle every frivolous lawsuit as quickly as possible.
- A false sense of security that you will be covered against future lawsuits, and an agreement that is costly and fails to cover the full scope of employment counsel services your business could benefit from, or may actually require in order to operate effectively.
I discuss each of these issues in turn.
Only for Emergencies: Failure to Cover Advice & Counsel
EPLI agreements are typically presented as comprehensive protection against employment litigation costs and potential judgments. While they may cover large judgments, they actually make it more likely you’ll end up facing such judgments in the first place. The fundamental problem is that EPLI policies treat employment law as a litigation-only practice. This is a dangerous misconception.
EPLI policies are inherently limiting because, in assuming employment law is a litigation-only practice, they typically partially or entirely exclude coverage for the valuable preventative costs or investment in preempting litigation at the outset, typically by engaging an employment attorney to review and revise your internal policies and procedures.
Put simply, employment law is not only a litigation practice, and insurance companies suggesting that you can be fully protected without proper advice and counsel are taking you for a fool, or are fools themselves. Employment law is litigation alongside advice and counsel, and obtaining adequate legal protection for your business requires the full suite of legal services that only employment counsel can offer.
Because of this misunderstanding by insurance carriers (whether willful or not), EPLI terms typically do not provide coverage for advice and counsel related to proper review of employment contracts, employee handbooks, written policies, or surrounding personnel discipline and terminations; in almost all instances, advice and counsel from employment counsel might preempt a lawsuit or other claim entirely and prevent the employer from making the kinds of typical mistakes that would hand a disgruntled employee a prima facie case to get into court with, or gain the attention of a regulatory agency’s enforcement arm.
The False Promise of Protection: Limited Scope of Coverage
Moreover, once you are embroiled in litigation, there is no guarantee that you will receive any coverage at all. There are far more claims arising from the employment relationship that are not covered under your standard EPLI agreement than those that are. In short, the scope of EPLI coverage is extremely limited. Here’s what’s typically excluded:
- Wage and hour claims (which can truly be a nightmare if you end up with a class action)
- Breach of contract
- Labor charges
- Workers’ compensation
- Certain statutory and common law claims like negligent training
- In some cases, even FMLA claims
Additionally, your average EPLI policy almost certainly does not cover retroactive claims. This means you do not get full protection until a few years after the policy date, when pre-policy incidents would fall outside the statute of limitations. Otherwise, the insurance company will refuse to cover a penny. This will be enforced to the day that the policy became active; I have seen employers get involved in litigation with their carriers or insurance agents over this very issue.
Restricted Choice of Counsel: Non-Specialized or Subpar Legal Representation
Without castigating an entire class of attorneys, it is not possible that your average insurance defense attorney who handles construction, premises liability, medical malpractice, personal injury, and other classic insurance claims will generally know how to properly litigate an employment case on the same level as an employment law attorney who exclusively handles such cases. They almost never do, and they never will, because employment law is a specialized field very different from other practices handled under insurance agreements.
By the same token, when you purchase EPLI, you’re typically assigned out-of-state, general practice insurance defense attorneys who are unfamiliar with your state’s employment statutes and do not specialize in employment law. Without castigating an entire class of attorneys, it is simply not possible that an out-of-state attorney can know all available defenses and causes of action to the same degree that an in-state employment law attorney would.
Furthermore, the problem is not only the attorneys; even the best of intentions can run headfirst into a wall when the insurance company decides that it will take the “steering wheel” and drive litigation strategy. It is typically necessary that an attorney representing an employer pursuant to an EPLI agreement obtain advance approval for every motion, every settlement offer, or every minute spent on litigation defense.
The focus of insurance carriers on settlements is a business decision based on their financial interests; not yours as the insured. This serves only to “cut costs” and not to enhance the likelihood of success at trial or in pre-trial motions for the employer. I have represented companies under EPLI agreements where my firm was the carrier’s choice of counsel, and I have never felt more hamstrung in my ability to defend a case while dealing with whichever individual at the insurance company has decided their legal perspective is superior to that of the attorney. However, because the insurance company is held out as the “client,” in that they are footing the bills and made the referral, an attorney working under such an agreement must ultimately adhere to the instructions of the carrier.
The fundamental conflict of interest experienced by an attorney when the objectives of the carrier diverge from those of the insured is not one the legal profession has come up with an adequate answer to. These conflicting interests are most often manifested in disputes over whether or not to settle a claim, which I call the “settlement trap.”
The Settlement Trap
Critically, insurance carriers at their core do not care about your business’s reputation in the same manner that you do and will encourage — or in some cases require, depending on the agreement — that you settle every frivolous lawsuit as quickly as possible. EPLI agreements are themselves the reason that average settlement costs are so high; insurance companies do not understand how to defeat a claim and don’t want to fight it.
Many employment law claims are readily defensible, including those that insurance carriers will eagerly settle. A legitimate justification documented in writing for an adverse employment action is enough to move for summary judgment in most cases. But insurance companies rarely pursue this strategy. A quick settlement is the most desirable outcome for insurance carriers in almost all scenarios, and they will generally opt for one as soon as it becomes available, even if the demand is disproportionate to the “merit” of the underlying claim.
Even if you are not ultimately responsible for the cost of a settlement, there are significant hidden costs to such arrangements under EPLI agreements.
When you settle a claim under EPLI:
- Your company’s reputation may take a hit (even “confidential” settlements may often become public knowledge or receive media coverage)
- You are typically put in a situation where you must reconsider your entire set of workplace policies (typically the one that the claim was based upon)
- You may need to terminate managers whose conduct might have been implicated (even if they are essential to your company)
The compromises necessary to receive the “protection” against financial judgments are frequently not worth the trade, particularly against claims that could have been successfully fought or preempted with proper advice and counsel.
Most fundamentally, I believe that an employer cannot sacrifice their right to defend their own workplace policies in litigation (which insurance carriers take away by choosing counsel and setting legal strategy) without fundamentally compromising their ability to run their business.
The Better Alternative: Having Employment Counsel On-Hand
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, it’s actually a worthless scam by insurance companies. You’re shelling out money in exchange for extraordinarily limited coverage while forfeiting the necessary resources to actually defend against most employment claims.
Not all insurance is equal, and the “package deal” of EPLI is not a good one. Don’t fall for it.