According to the 2018 Small Business Risk Report, co-sponsored by The Hanover and Forbes Insights, 72% of small business owners acknowledge that they face employment-related risk. This risk can arise in a number of situations, from wrongful termination to discrimination to the increasing number of sexual harassment claims. Employee-related allegations don’t only impact large corporations — there is often a greater risk for small businesses who may not have updated policies, an outlined process to report incidents or a dedicated human resources department with protocols to address these situations. Small businesses can face a wide range of employee-related risks, including:
- Wrongful termination
- Discrimination or bias based on gender, age or ethnicity
- Sexual harassment
Small business owners may not realize that the coverage needed for financial damages related to these types of claims is not typically included on a standard business owners’ policy (BOP). Still, of those small business owners surveyed in the 2018 Small Business Risk Report, only 59% plan to expand or obtain employment practices liability coverage. Employment practices liability (EPL) coverage can protect against the financial damage of claims filed by employees or third parties by reimbursing companies for the costs of defending a lawsuit in court, and for judgments and settlements. Even if a lawsuit is frivolous, it can cost a business up to $15,000 to defend.
Allegations can lead to substantial loss
These claims scenarios* help illustrate employment-related allegations that, even if proven frivolous, can potentially lead to substantial loss for a small business without the proper insurance protection.
A female employee sued her employer, a small restaurant, claiming that she was subject to frequent sexual harassment by a male supervisor, who made physical contact with her while stating different sexual phrases to her. She further alleged her employer failed to examine or take any action concerning her allegations. The employer investigated the claim, and the supervisor was eventually terminated. Settlement costs: $75,000.
A female employee sued for racial discrimination, alleging three of her co-workers made inappropriate comments about her physical appearance. Defense costs: $20,000.
Disability discrimination and wrongful termination
When an employee was diagnosed with an illness, alternative work arrangements were made so he could receive proper treatment. After a few months, his manager let him know that his position was no longer needed. Shortly after, the position was filled by someone else. The prior employee filed suit for wrongful termination and discrimination. Defense costs and settlement were more than $100,000.
Getting the right solution
Even with thoughtful risk management, employment related allegations can still occur and lead to lawsuits that put small business’ reputations and assets on the line. This quick checklist can help small businesses choose the right employment practices coverage to ensure they have the protection they need:
- Types of covered lawsuits: It's essential to understand the types of allegations small businesses need to be protected against. There are policies with options to cover employee only lawsuits or broader policies available to cover both employee and third party employment-related allegations such as claims by independent contractors or vendors against the business. Ensuring the right level of coverage is granted is an important element in protecting many businesses.
- Coverage limits: Knowing whether coverage is provided through a sublimit or as part of a standalone policy with a dedicated limit is important. Depending on the size and needs of your business, the limits needed may vary. Small businesses can oftentimes add an endorsement to their BOP or commercial package policy that includes the limits they need.
- Valuable services: Preventing a potential loss is the first step in protecting your business. Many policies offer valuable services, including discount background checks and employee training about employment practices, to help educate businesses about these risks.
The foundation of protection begins with consulting with an independent agent to understand the small businesses’ risk and evaluating the right employment practices liability coverage. Learn more about The Hanover’s employment practices liability offering today.
About the author
Chip Hamann serves as The Hanover's Small Commercial chief underwriting officer. In this role, he leads a team responsible for determining the underwriting strategy, state management, product and point of sale offerings. He also oversees the field underwriting teams. He and his team partner with actuarial, product, technology, corporate underwriting and marketing to continually assess and evolve The Hanover's underwriting strategy and best practices to help position The Hanover as a carrier of choice for agents in Small Commercial.
*The examples in this material are provided as hypothetical and for illustration purposes only. They are not provided as possible outcome or result of any claims. Coverage of any claim is determined by the facts presented, the coverage terms, conditions, exclusions and limitations of the issued policy. Please refer to the issued policy for the coverage provided.
LC July 2018-336