During difficult economic times, small businesses and privately-held companies find it natural and sometimes vital to reduce costs in order to say competitive. Many of these businesses and companies have reduced costs in a number of unorthodox ways; unfortunately, the results of a recent survey by the Chubb Group of Insurance Companies entitled “Chubb 2010 Private Company Risk Survey” indicate that many privately-held companies are reducing costs by scaling back, eliminating and sometimes simply omitting Employment Practices Liability (EPL) insurance protection. While this may reduce costs in the short-term, it can lead to an increased risk of disastrous financial losses from EPL charges and lawsuits in the future. Chubb learned that the number of companies purchasing EPL policies fell from 2007 to 2010, which they note is a period that “roughly” encompasses the recent recession and financial crises in America. As of 2010, only one in four private companies are covered by EPL insurance policies.
Many executives, managers and owners of the surveyed companies are aware of the risks involved with EPL lawsuits – 36% admitted that such a lawsuit “would cause the most financial damage to their company”. In addition, 21% of the companies surveyed have “experienced an EPL charge or lawsuit in the past five years”, with the average total cost of each charge or lawsuit being $51,975. In 2008, successful EPL lawsuits resulted in a median compensatory award of $326,640. It is important to also note that EPL lawsuits have dramatically increased due to increased layoffs and other reductions in workforce – because of the negative impact on the employees affected, EPL charges and lawsuits are often filed in response that allege discrimination, retaliation, and wrongful termination.
Any company or business that chooses to bypass EPL insurance should be well-aware of the risks involved in doing so. While having good HR policies and procedures in place, in addition to comprehensive training programs and other EPL risk mitigation practices like written anti-discrimination and harassment policies, can reduce the risks of an EPL loss, these policies and procedures do not offer a guarantee or an “ironclad defense” against an EPL charge or lawsuit.