New Owner Review: Employment Practices Liability (EPLI)

Check five things about the employment practices liability insurance (EPLI) in the business you bought: whether it has any at all, whether it covers claims about the seller's era, how it handles wage and hour claims, whether it covers claims from customers, and what you pay first on each claim. EPLI responds to claims from employees and job applicants alleging discrimination, harassment, retaliation, wrongful termination and similar workplace wrongs. The changes that often follow an ownership change can prompt those claims. This guide is for new owners deciding whether the seller's EPLI fits the company they now run.

What does EPLI cover, and what does it leave out?

Employment practices liability insurance pays to defend and settle claims that the business, its managers or its owners treated an employee or applicant unlawfully. It is usually written on a claims-made basis, so the policy in force when the claim is made responds, subject to its retroactive date. See occurrence vs claims-made. Defense costs are often paid inside the limit, which means every dollar spent on lawyers reduces what is left for a settlement. See defense costs inside vs outside limits.

Size is not a safe reason to skip it. The U.S. Equal Employment Opportunity Commission (EEOC) says most employers with at least 15 employees are covered by the federal laws it enforces (20 for age discrimination), and state or local laws can reach smaller employers. Even a weak claim costs money to answer.

Why does buying the company raise your EPLI risk?

New owners change things, and change is what employees sue over. Common triggers in the first year include new managers, changed pay plans or benefits, a new handbook, combined roles, the exit of people loyal to the seller and layoffs that make the deal model work. Promises the seller made informally, such as a raise or a future role, can also turn into claims when the new owner does not honor them, and many EPLI policies exclude those as contract claims.

Liability can also follow the business. Federal courts apply their own successor liability test to some federal employment claims, and in Teed v. Thomas and Betts (Seventh Circuit, 2013) a buyer was held responsible for the seller's pending wage claims even though the purchase agreement excluded them. The decision binds courts in that circuit, and courts elsewhere may apply the test differently. Whether that could apply to you is a question for your employment counsel. Why ownership changes trigger employee claims covers the people side in depth; this guide is about the policy.

Does the policy cover claims about what happened before closing?

Two dates decide this. The retroactive date (the earliest date of conduct the policy covers) removes claims about acts before it. The prior and pending litigation date removes claims tied to lawsuits, charges or demand letters that existed before it. Both are on the declarations page or an endorsement. Many policies also treat related acts as one claim, so a claim about conduct that began before the retroactive date and continued after it may be excluded in full.

• Stock purchase: the same company and its policy continue, but EPLI change in control terms vary by policy and are not standardized. Read the wording, give the carrier any required notice and confirm in writing that coverage continues for conduct after closing.
• Asset purchase: your new company needs its own policy. Some carriers set the retroactive date at the new policy's start date, which leaves claims about the seller's era uncovered. Others grant full prior acts, relying instead on the prior and pending litigation date and an exclusion for matters you already knew about, so compare quotes on this point. Whether a carrier will cover a predecessor's past acts is an underwriting decision, so ask for it in the quote.
• The seller's side: a tail (extended reporting period) on the seller's policy usually protects the seller's entity, not your new one. See tail coverage.

A hypothetical example. A buyer acquires the assets of a 60-person business services company. The seller had no EPLI. The carrier quotes a $1 million limit with a $25,000 retention, with the retroactive date set at the closing date. The buyer accepts the quote, and the carrier binds the policy at closing. Four months later a former employee files a charge that names the buyer as successor employer and alleges harassment by a supervisor in the months before closing. Because all of the alleged conduct predates the retroactive date, the carrier declines the claim, and the buyer turns to the seller's indemnity in the purchase agreement. Had the buyer asked for prior acts coverage before closing, the carrier might have offered it after reviewing the seller's history, possibly at a higher premium.

Before closing, it is common to have the seller report known complaints and situations that may become claims to its current carrier. Prior acts and tail coverage after an acquisition explains the options in detail.

Will EPLI pay for unpaid overtime or misclassification claims?

Claims for unpaid overtime, off-the-clock work, missed breaks or workers wrongly paid as exempt or as independent contractors are among the most common employment claims, and they often come as group actions. Most EPLI policies exclude them. Some give a defense cost sublimit (a small, separate amount that pays lawyers but not back wages), and a few carriers write separate wage and hour coverage for some businesses.

Treat wage and hour exposure as a compliance problem first. If the seller paid technicians a flat day rate or treated regular workers as contractors, fix the practice and talk to employment counsel about the past. Wage and hour exposure you inherit from the seller covers what to look for.

Do you need coverage for claims from customers and vendors?

Third-party coverage responds when a customer, patient, tenant or vendor says your employee harassed or discriminated against them. It matters most for businesses whose staff work in customers' homes and offices or serve the public: home care, cleaning, property management, restaurants, retail, healthcare services and field service trades. Some policies include it, some add it by endorsement and some leave it out. It is often limited to harassment and discrimination, so read the definition.

What will you pay on a claim, and who controls the settlement?

Check four terms before you need them:

• Retention: the amount you pay before the carrier pays, usually per claim. Some policies set a higher retention for certain claims, such as group actions or claims by highly paid employees. See deductible vs self-insured retention.
• Consent to settle: many policies limit what the carrier pays if you turn down a settlement it recommends. Know how much of later costs would fall on you.
• Choice of counsel: carriers often require lawyers from their approved panel. If you already have employment counsel, ask whether they can be approved.
• Shared limits: if EPLI shares a package limit with directors and officers (D&O) coverage, one bad employment claim can use limit the directors need. Crime usually has its own separate limit. A commercial umbrella usually does not sit over EPLI.

What HR practices do underwriters look for?

EPLI applications ask about your people practices, your claims history and your plans. As a new owner you may not know all the answers yet, so gather them early. Answer the question about planned layoffs or reorganizations honestly, because an inaccurate application can create coverage problems later.

For pricing context, see what EPLI costs. Morrow can review the employment practices coverage you inherited and request quotes where it makes sense; any terms depend on carrier underwriting.

Keep reading

• Why Ownership Changes Trigger Employee Claims (and How EPLI Responds)
• Wage and Hour Exposure You Inherit From the Seller
• Prior Acts and Tail Coverage After an Acquisition: Who Pays?
• New Owner Review: Directors and Officers (D&O) Insurance
• Key Employees Leaving After an Acquisition: Insurance and Retention
• All guides for new business owners

Frequently asked questions

How much EPLI limit should we carry?

There is no standard number. Look at headcount, the states where your staff work, any planned layoffs or restructuring, customer or investor requirements and whether defense costs sit inside the limit. Ask your broker for options at two or three limits with the premium for each, and remember that a limit shared with D&O coverage can be used up by other claims.

What if the seller misclassified workers as contractors?

EPLI usually will not help. Most policies exclude wage and hour claims, including misclassification, and some offer only a small sublimit for defense costs. Treat it as a compliance fix: correct the practice and ask employment counsel about the past.

Can I buy EPLI after an employee has already complained?

You can usually still buy a policy, but complaints, charges and demand letters that exist before the policy starts are typically excluded as prior or pending matters. Disclose them on the application; leaving them off can cause bigger problems.

A former employee just filed a charge after closing. What do I do first?

Tell your broker and the carrier promptly, in writing, even if you think the claim is weak, because late notice can reduce or void coverage. Talk to employment counsel before you respond to the agency or the employee, ask the carrier about its panel of approved lawyers, and check whether the conduct falls before the policy's retroactive date.

References

• U.S. Equal Employment Opportunity Commission: Overview
• Stevens and Lee: Buyer Beware, Successor Liability Extended to Fair Labor Standards Act Claims
• Kilpatrick Townsend (via Law360): Top 10 Things Corporate Attorneys Should Know About Insurance

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.