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Your company has employment practices liability insurance (EPLI), so it's covered in case of any employee lawsuit, right? Not so fast.

The fine print in an EPLI policy can turn an apparently strong lawsuit shield into a worthless piece of paper. As a result, a single lawsuit can easily wipe out the company and spell bankruptcy.

Unless you and your insurance agent understand the policy jargon, you may not be carrying the right EPLI policy. Be especially careful that the policy covers yet-to-be-filed and already filed claims.

So-called "claims made" policies cover employees' claims that are made during the policy period. In contrast, "prior-acts" or "claims-occurred" policies offer protection for problems that occurred before the policy took effect but haven't come to light yet.

Unless you have both types of coverage, you may find yourself with worthless insurance coverage and on the hook for a large jury award.

Recent case: LA Weight Loss Centers secured an EPLI policy with Lexington Insurance to cover any employment discrimination lawsuits that might be filed against it.

LA Weight Loss bought a "claims made" policy, which covered discrimination allegations made during the policy period. The policy didn't add the more expensive "claims occurred" coverage, protecting against any lawsuits during the policy period regardless of when the claims are made.

The court interpreted the claims-made policy to require that an employee's initial "claim"—not necessarily the lawsuit—be made during the policy period.

In this case, several LA Weight Loss employees had filed complaints with the EEOC before the EPLI policy went into effect. The EEOC then filed a class action lawsuit during the policy period.

The company tried to invoke the EPLI insurance, but because the employees filed the initial "claim" (the EEOC complaints) before the policy went into effect, the insurance didn't cover the case. (LA Weight Loss Centers v. Lexington Insurance, Philadelphia Court of Common Pleas, 2006)

Online resources: EPLI coverage

For more advice or quotes on employment practices liability insurance, contact your current business insurer or your chamber of commerce, or visit these sites:

  • www.iii.org/individuals/business/optional/epli
  • www.betterley.com/adobe/EPLI2002_nt.pdf
  • www.insurancefinder.com 

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