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SMALL BUSINESS | Financing and Insurance

Liability Coverage Can Offer Protection From Discrimination Claims

March 11, 1998|JUAN HOVEY

Do you carry employment practices liability insurance to protect your business from discrimination claims?

A single discrimination claim can ruin a thriving business, so if you don't carry this insurance, you probably should. If you do carry it, it pays to know just what your policy does and does not promise to do for you, since coverages vary.

Employment practices liability, or EPL, insurance is widely available at reasonable prices these days. Some two dozen insurers sell the cover to small and middle-market businesses at premiums ranging upward from $1,500 to $2,000 per year. A year and a half ago only a handful of insurers sold the cover at premiums starting at $25,000 per year.

"Right now it's a buyer's market," says Shay Neuman, vice president of the Pasadena insurance broker Sullivan & Curtis. Neuman specializes in selling EPL and similar coverages, including errors and omissions and professional liability insurance, to small and middle-market businesses.

"Premiums are down 40 to 50% in the last 18 months, and there's more capacity," Neuman says. "You can buy up to $25 million in coverage, but right now middle-market businesses buy $500,000 to $2.5 million in coverage."

In general, EPL insurance covers you against claims of:

* Sexual harassment in the workplace;

* Wrongful termination;

* Discrimination under the Americans With Disabilities Act;

* Failure to hire or to promote by reason of age, sex, race or religion.

If you employ others in your business, Neuman says, you stand a good chance that sooner or later an unhappy worker will sue you for one or another of these wrongs. Worse, settlement costs easily hit $100,000 and go up quickly. Jury verdicts reach into the millions.

Neuman counsels business owners to ask these questions when checking out EPL coverage:

* Does the insurance cover "prior" acts of discrimination--those occurring before you bought the coverage?

* Does it exclude coverage for intentional acts of discrimination?

* Does it cover actual and punitive damages to limits consistent with the size of your business?

* Does it carry a deductible reflecting your operations? Does your insurer waive the deductible if the suit goes to trial and you win?

* Does your policy saddle you with a "copay" of, for example, 10% of any damages exceeding your deductible?

* Is your coverage "stand-alone" insurance, or did you buy it as an endorsement to your professional liability or directors and officers coverage? If the latter, does the limit--the maximum benefit payable under the policy--apply to each coverage separately or together?

* Does the insurance cover your business entity as well as your managers and employees?

* Last but not least, does your insurer offer loss-control services to keep small claims from becoming big ones?

Neuman considers it particularly important to buy "prior-acts" cover--and to make sure that your insurance does not exclude coverage for intentional acts of discrimination. Until recently, she says, insurers excluded coverage for intentional acts of discrimination automatically, and even now some cover only certain acts, intentional or not.

Coverage for punitive damages is equally important, Neuman says.

"We live in the state of California, and California law does not permit insurers to cover punitive damages," she says. "But you can argue the point that if your insurer is not domiciled in California, you can cover punitive damages with insurance.

"We have yet to see whether the courts will allow this. Some do, some do not. Meanwhile, I tell my clients that it costs no additional premium to buy coverage for punitive damages, so it makes sense to get it."

She also considers it a good idea to buy stand-alone coverage. If your policy offers one limit for EPL and directors and officers coverage alike, she says, a discrimination suit may strip you of coverage for the latter risk.

"Employment practices liability insurance is the hottest issue in the insurance marketplace right now," Neuman says. "Two years ago everybody talked about it but no one wanted to pay the price, which basically started at $25,000.

"Now, if you have, say, 15 employees, you can get adequate EPL cover for $1,800. The cost per employee is relatively low, especially when you consider that if you go to court to fight a discrimination claim, the cost of defense and settlement starts at $100,000 and goes up.

"And that's just for settlements, not jury verdicts. You don't want any EPL case to go to a jury."

Neuman expects prices to soften even more in the coming months as the number of insurers offering the coverage increases. But no employer with a going business should wait to buy the insurance, she says.

"It's a buyer's market, but every business owner needs this kind of insurance," she says. "There's only one mandatory insurance, and that's worker's comp. Employment practices insurance isn't mandatory, but it should be."

*

Freelance writer Juan Hovey can be reached at (805) 492-7909 or by e-mail at jhovey@gte.net

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