I am an Entrepreneur: Do I need Employment Practices Liability Insurance (EPLI)?

By: Derek Toone

The short answer, YES. If you hire employees, it is in your best interest to have Employment Practices Liability Insurance. Why? Because Employment Practices Liability Insurance (EPLI) protects employers by covering the cost of certain employment lawsuits. While it may be a part of your Business Owners Policy (BOP), General Liability Policy, or other policy, often it is not. Included in this post are a few suggestions to help further protect your business and employees from the financial burden of employment-related litigation and future claims.

First, Employment Practices Liability Insurance (EPLI) has existed for decades as a risk management tool.[1] Insurance companies began offering “stand-alone” EPLI policies that included both indemnity and defense costs in the early 1990s.[2] During that time, lawsuits and policies ranged from wrongful termination, discrimination, and sexual harassment.[3] Since then, employment-related lawsuits have been on the rise, and the coverage areas EPLI protects have been expanding. For example, in 1992, there were 72,302 charges filed with the U.S. Equal Employment Opportunity Commission (EEOC), but by 2011, that number swelled to 99,947.[4] Moreover, EPLI now protects employers by covering such things as breach of employment contract, wrongful discipline, mismanagement of employee benefit plans, workplace harassment, and wrongful infliction of emotional distress.

Next, while it may seem like large corporations, with scores of employees, are more likely to need EPLI, employers of all sizes can benefit by having EPLI coverage. That is because most EPLI policies protect the employer from more than just claims by full and part-time salaried employees. Some policies go as far as protecting against claims from hourly, seasonal, and temporary employees. This is important because if you hire a third-party “temp help,” you may incur the type of liability EPLI is meant to protect. For example, a temp help agency usually handles hiring, firing, performance, and salary of the temp employee. Yet, if a claim for sexual harassment or discrimination arises between your business and the employee, though the employee works through the temp agency, your business can still be held liable for the cost of litigation. Or, if an employee’s actions negatively impact a customer, in such cases as sexual conduct or discrimination, your business may also be held liable and incur litigation costs. These examples are a few among many that demonstrate when others work for you, EPLI may be needed. So, if you think you are already covered under an existing policy, consider checking again to confirm EPLI coverage.

Finally, there is a bigger problem that lies outside the question of EPLI. An independent study by the EEOC found that “only 30% of employees experiencing harassment on the basis of gender, race, national origin, disability, and other protected classes make internal complaints, and less than 15% file formal charges.”[5]  If the EEOC’s 2011 research of 99,947 were applied to these findings, one can see that the number of filed cases compared to the supposed actual cases is staggering. So, what does this mean for an entrepreneur? To speak candidly, too many workplaces have a problem. Unless you as the entrepreneur have safeguards, it is easy to create a situation, even inadvertently, where an employee could be mistreated and likely have a good claim against you and your business. To help remedy this, some jurisdictions have imposed a legal duty on employers to conduct training on an annual basis. Generally, these trainings are required by law when an organization employs fifty or more employees. You may want to consult with an attorney to determine what is required of you as this law varies state-to-state. Nevertheless, even if your operation is small or just starting out, still consider the benefit of the following list as ways to help mitigate employment-related liability:

      • During the onboarding stage, set clear expectations. State that such things as sexual harassment, a hostile environment, hazing, discrimination, etc. are not allowed to any degree, by anyone within the company. The following is a good resource to consider as you create your Discrimination and Sexual Harassment Policies.
      • Create and provide employees and new hires with access to your company’s policies highlighting these expectations. The following link is a sample Sexual Harassment Policy.
      • Require employees to sign an Acknowledge of Receipt and Understanding of the Policy form once they have read the policy and have been given sufficient time to ask questions about it. Here is a Sample Acknowledge of Receipt for Your Business form.
      • Set future training dates, even if the training is a short presentation, dedicated solely to reminding employees your companies expectation. The following link offers additional resources for Workplace Harassment Training.

In conclusion, an entrepreneur who plans to hire help should heavily consider EPLI coverage—or confirm whether some sort of EPLI coverage is included in their current policy. Protecting the business by using EPLI, however, is only one part of mitigating employment-related liability; it is equally, if not more important, to place safeguards by creating a company policy to further protect your business and employees by preventing misconduct from happening altogether. Both are needed, and the entrepreneur should consider adopting both to mitigate their employment-related liability.

This post has been reproduced with the author’s permission. It was originally authored on February 12, 2022, and can be found here.


Derek Toone, at the time of this post, is a recently graduate from Penn State Dickinson Law. He completed a dual master’s in Human Resources and Business Administration at the Jon M. Huntsman School of Business. Prior to law school, Derek worked in Human Resources at USUHR. He also worked at the Salt Lake County District Attorney’s Office and Goldman Sachs. Derek is passionate about Business and Employment Law and seeks to help Entrepreneurs correctly leverage human capital through lean management and positive group dynamic training.

Sources:

[1], [2], [3] Stephanie D. Gironda & Kimberly W. Geisler, Employment Practices Liability Insurance: A Guide to Policy Provisions and Challenging Issues for Insureds and Plaintiffs, 33 A.B.A. J. LAB. & EMP. L. 55 (2017).

[4] Janet R. Davis & Gary L. Gassman, The Ins and Outs of Employment Practices Liability Insurance Coverage and Claims, 42 BRIEF 23 (2013).

[5] Lily Zheng, Harvard Business Review (2020) Do your Employees Feel Safe Reporting Abuse and Discrimination, available at https://hbr.org/2020/10/do-your-employees-feel-safe-reporting-abuse-and-discrimination.

Additional Sources:

[6] Jeffrey P. Klenk, Emerging Coverage Issues in Employment Practices Liability Insurance: The Industry Perspective on Recent Developments, 21 W. NEW ENG. L. REV. 323 (1999).

[7] Joseph P. Monteleone & Emy Poulad Grotell, Coverage for Employment Practices Liability under Various Policies: Commercial General Liability, Homeowners’, Umbrella, Workers’ Compensation, and Directors’ and Officers’ Liability Policies, 21 W. NEW ENG. L. REV. 249 (1999).

[8] SHRM, Anti-harassment Policy and Complaint Procedure (includes Dating/Consensual Relationship Policy Provision), available at https://www.shrm.org/resourcesandtools/tools-and-samples/policies/pages/cms_000534.aspx

Real Estate Rental Investing: How to Protect Your Insurance Blind Spot

By: Jacob Ryder

Investing in rental real estate provides two main financial benefits: monthly cash flow from rental income and appreciation in home values. While these are substantial benefits for building wealth, there are also significant risks. The risk of extended vacancies, tenants who damage your property, and – the largest risk of all – the threat of personal exposure, can be daunting. The risk of being forced to use personal assets to satisfy debts incurred through rental activity has driven many investors to form LLCs for real estate investing. These types of investors (let’s call them ‘traditional LLC’ investors) purchase the rental property through an LLC to protect what they have worked so hard for – their personal assets. Personal ownership of rental property gives a creditor a direct line to use your personal assets to satisfy debts, including legal judgments.

When done properly, an LLC forms a ‘brick wall’ to cut off the direct line between creditors and your personal assets. While a traditional LLC investor might have an ‘LLC wall’ to protect personal assets from creditors, what about protecting the real estate asset that generates their financial returns? This is where the ‘traditional’ LLC investor’s formation falls short.

Will Property Insurance Cover it?

The traditional LLC investor’s rental property is not without any protection. If the investor went through the process of forming an LLC to avoid risk, there is a good chance the investor has also purchased insurance. While general property insurance will protect the structure from damage caused by wind, fire, hail, or lightning, this discussion centers on liability insurance and its shortfalls.

While a good thing to have, liability insurance protects the real estate investment from only a few, although arguably the most common, kinds of creditor actions in real estate investing. Generally, insurance protects against negligence – claims that the entity did not exercise ‘reasonable care’ in actions concerning the real estate asset and that the creditor was injured as a result. This ‘partial protection’ will fully protect the real estate asset in circumstances where there is coverage, but it will provide no protection where there is none. Claims that may not be covered by liability insurance include breach of contract, fraud, and other claims alleging intentional conduct. Without coverage, a direct line remains between the creditor and the real estate asset. The investor who already formed an LLC and purchased insurance to minimize risk has to ask, “How do I protect myself from this insurance blind spot?”

Two LLC Formation

As the traditional LLC investor, you already formed one LLC to protect your personal assets. Why not form another LLC to protect your real estate asset? Using two LLCs can offer protection for the insurance blind spot. The set-up is simple. The first of the two LLCs, the ‘traditional’ or ‘holding’ LLC, will only own the rental property. The second LLC, the ‘operating’ LLC, will handle everything, including every interaction with a tenant, repairman, or property management company. This LLC should have a bank account with enough money to pay for repairs as they become necessary. Therefore, the investor’s exposure is limited to the amount of money in the ‘operating’ LLC’s bank account. This protects in a similar way to the ‘LLC wall’ explained in the ‘traditional’ formation, but this time, it separates the rental property itself from creditors.

Illustration

Suppose Stacy, an investor, owns a multifamily rental property in town. The unit is valued at $100,000, and she used $30,000 of her own money to finance a purchase through an LLC. She has two happy tenants and collects $1,200 a month in rental income. Unfortunately, a tenant misunderstands what was promised in the lease, and the tenant brings a claim for breach of contract. While likely unrealistic, assume a court awards the tenant $75,000 in damages for the LLC’s breach of contract.

In the first scenario, let’s assume Stacy has the ‘traditional’ LLC formation to own her rental property. The lawsuit, in this case, would be against the same entity that owns the rental property. This is terrible news for Stacy. The creditor can attach the judgment against the property and possibly force the LLC to sell it. In this scenario, Stacy will only keep the rental property if she can fund the LLC with $75,000 and satisfy the debt. Otherwise, her best course of action will likely be to sell the rental property.

In the second scenario, let’s assume Stacy created the two LLC formation. In this case, the tenant will sue the entity it interacted with, the ‘operating LLC,’ which, as described above, only owns a bank account. Let’s assume there is $6,000, or five months of rental income, in the operating LLC’s bank account. By using two LLCs, Stacy has put up another ‘LLC wall’ between the creditor and her investment. Stacy’s risk in this scenario, instead of $75,000 worth of the rental unit, is only $6,000. Stacy can rest easy knowing that the creditor cannot force her to sell her rental property to pay off the debt.

Benefits and Costs

The two LLC formation not only protects personal assets, but it can also protect the rental property – something the investor worked equally hard for – when insurance does not. However, this is not a perfect solution. LLC ownership risks still exist, including the risks that a court will disregard the entity if the investor mixes business and personal funds and the risk that the individual will be directly liable for any acts they personally commit. There are also additional costs to form and maintain another LLC.

The ‘traditional LLC’ may protect your personal assets, but it leaves only the partial umbrella of insurance to protect your investment. Forming two LLCs can protect what insurance does not. Before choosing a form of entity, an investor should always weigh its costs and benefits. No solution fits every investor, and as always, an investor should always consult with an experienced attorney before making any legal decision.

This post has been reproduced with the author’s permission. It was originally authored on February 11, 2021, and can be found here.


Jacob Ryder, at the time of this post, is a 2021 graduate of Penn State Dickinson School of Law. Prior to moving to Carlisle, Pennsylvania to attend Dickinson Law, he was a resident of Olney, Maryland. He attended Towson University in Baltimore, Maryland where he earned his bachelors degree and played four years of Division 1AA football. Jacob was a comment editor for Dickinson Law Review and a research assistant for the professors who work in the Law Library. Following graduation, he will be pursuing his interest in business law as an associate at Morris, Nichols, Arsht & Tunnell in Wilmington, Delaware.

 

Sources

Smith v. Wells, 212 A.3d 554, 557 (Pa. Super. 2019).

Ward and Smith, P.A. (October 14, 2016) https://bit.ly/3p8aPiU.

Hyojung Lee, Joint Center for Housing Studies of Harvard University (August 18, 2017) https://bit.ly/2MRiy80.

Allstate, Homeowners Insurance vs. Landlord Insurance for a Rental Property (Updated January 2019) https://al.st/2Z2et3q.

Pennsylvania Department of State, Business Fees & Payments (last visited February 10, 2021) https://bit.ly/3p6ZyPV.

Photo Sources

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