THE COST OF NOT HAVING EMPLOYMENT PRACTICE LIABILITY INSURANCE

5According to insurance industry estimates, fewer than 50% of companies carry EPLI -- and the smaller the employer, the lower the percentage. Although the cost of coverage varies, a $1 million policy with a $5,000 deductible usually costs from $50 to $250 a year per employee. When you think about obtaining EPLI, weigh the cost of this protection against the likelihood of a claim, settlement, verdict, etc.

Check out the cost figures on claims, derived from Jury Verdict Research and other sources:

  • Median award (2004-2010:) $199,600
  • Mean award (2004-2010): $632,589
  • Median settlement (2004-2010): $85,000
  • Mean settlement (2004-2010): $515,816
  • Nearly two in four plaintiffs' verdict (39%) ranged from $100,000 to $500,000 range; 12% of verdicts were $1 million or more. Note: Verdicts tend to be higher in state cases than in federal ones.
  • Legal fees, stress, additional exposures, etc. -- a minimum of $25,000 per claim and going up from there.
  • Loss of pre-claim non-productivity due to the fear of not letting a poor performer go because you might get sued -- hard to quantify.
  • Impact on the company's loss of reputation among all stakeholders -- priceless.

Note: The mean is the arithmetical average of a group of scores. The mean is sensitive to extreme scores when population samples are small. Means are often used with samples of larger sizes. The median is the middle score in a list of scores; it's the point at which half the scores are higher and half the scores are lower. Because medians are less sensitive to extreme scores, they're probably a better indicator with smaller samples.

That's the potential exposure. What's the potential of getting hit with it? According to CNA, an employer is more likely to face an EPLI claim than a Property or General Liability claim. Almost 75% of litigation against corporations involves employment disputes. Nearly 100,000 sector charges were filed in 2011 against private employers under EEOC statutes, leading to more than $450 million in settlements and charges. This does not include statistically-based claims or settlements that never see the EEOC, state agency or courtroom. More than 40% of Employment Practices claims are filed against companies with 15-100 employees.

Doing some rough math, there are about 6 million companies in the U.S. Although many of these firms are too small to bother suing, some 2.5 million businesses have 15 or more employees. My experience tells me that tripling the number of EEOC claims give a fairly realistic number of total claims filed. Dividing 2.5 million companies by 300,000 claims comes to roughly a one in eight chance of experiencing a claim during a given year -- which means the firm can expect to face at least one employment-related claim over an eight-year period (of course, this probability depends on the size of the company, location, compliance practices, culture, etc.).

By purchasing EPLI, you not only cap your risk at $5,000 to $10,000 a year, but you allow yourself the freedom to let go of poor performers without the threat of litigation. Let's say a 50-person company pays $7,200 a year (an average of $120 per employee) for EPLI coverage. Over an eight-year period, this comes to a total cost of $57,600, plus the time value of those dollars. The chances are that the company will face a claim at some time during those eight years, which will cost an average of $85,000 just to settle, plus another $25,000 in legal fees, for a total of $110,000 (see the average premium cost and settlement figures above). You'd still come out $52,400 ahead -- not to mention eliminating the hassle. If the case goes to verdict, those numbers can easily triple. Bear in mind that there is no way you can amortize this expense! Of course, you might easily face more than one claim during the policy term.

The bottom line: Not getting EPLI is a gamble that could significantly impact or even wipe out your cash flow at any time.

If you're interested in a checklist for purchasing EPLI, please contact me don@hrthatworks.com.

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