Sometimes, 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 offer far more drawbacks than benefits. While marketed as comprehensive protection against employment litigation, they can actively sabotage your business interests.
Limited Scope of Coverage
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
- FMLA claims
Most EPLI policies also do not 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.
“Break the Glass Only in Case of Emergency”
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.
Insurance Carrier Has Exclusive Discretion Over Counsel and Strategy
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 get advance approval from the insurance company for every motion, settlement offer, or billable hour spent on your defense. Insurance companies hamper their ability to defend your case properly. This dynamic hinders defense counsel’s ability to strategize and prepare a proper defense and effectively blocks the insured employer from influencing legal strategy.
Claims Covered by EPLI Always Settle, Incentivizing Frivolous Claims and Creating Long-Term Legal Exposure
Many employment claims are readily defensible with proper documentation, but insurance carriers rarely pursue this strategy, preferring quick settlements instead, contributing to higher average settlement costs for employment claims.
Short-term gain often motivates these quick-and-easy settlements, resulting in a poor long-term legal strategy to mitigate liability and deter frivolous lawsuits. The explanation is perhaps obvious, though unfortunate: 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.
Even if you’re not responsible for the settlement cost, there are significant hidden consequences, including damage to your company’s reputation, forcing a reconsideration of workplace policies, and potentially causing the termination of essential managers implicated in the settled suit’s claims.
The Better Alternative
Businesses should build relationships with specialized employment counsel instead of relying on EPLI; this counsel can provide both preventative advice and robust defense when needed. If you maintain thorough records and promptly address employment issues, you can prevent them from escalating into major problems.
While EPLI might seem prudent, you’re paying for extraordinarily limited coverage while effectively forfeiting the resources to defend against most employment claims. Not all insurance is equal, and EPLI’s “package deal” is not worth buying.