Managing Risk with Employment Practices Liability Insurance

The government’s white-collar fraud case against Theranos Inc. founder, Elizabeth Holmes, seemed clearcut: she persuaded investors to commit $700 million—catapulting to stock valued at $10 billion—based on the false premise that their finger-stick technology would revolutionize blood-testing by needing only a small amount of blood for rapid and accurate results.?

Holmes led investors to believe that the technology had big Pharma's seal of approval by using their logos, that the military was already using the product, and estimated a revenue stream of $990 million for 2015, further misrepresenting to investors that they had already succeeded in developing the product.?

But apparently it might be caveat emptor as the line between proper due diligence and fraud is not necessarily as bright as one might expect. The Wall Street Journal reported that some legal experts were not certain about verdict. Holmes was convicted on only four counts out of 11 counts of conspiracy and fraud. While investors won, she was acquitted on the counts against patients.?

One law professor, a former federal prosecutor, stated that proving Holmes’ fraud against patients was difficult since “you can’t show she directly communicated with them and intended to defraud them.” Civil cases may be a different matter, with a lower threshold of guilt.?

Yes, most businesses are honest; Enron, Bernard Madoff and Theranos represent a very small minority. This story, however, is still a reminder that laws do not always coincide with our concepts of justice.

What can businesses take away from this? One reality is that even though civil litigation has pitted trial attorneys against insurers more frequently over the last few generations, many small- and medium-sized firms are still willing to assume potentially large risks that can be effectively managed with relatively low premiums.

Take Employment Practices Liability Insurance, which covers a host of exposures:?

o???Sexual Harassment

o???Wrongful Termination

o???Discrimination based on age, disability, gender, national origin, race, religion

o???Retaliation

o???Defamation

o???Invasion of Privacy

o???Failure to Promote

o???Deprivation of a Career Opportunity

o???Negligent Evaluation

o???Possibly Wage and Hour Claims Involving Overtime or Misclassification as an Independent Contractor

A CEO might be surprised to learn that her firm could be liable when two employees have had a discreet, mutually agreed upon relationship outside the office, but since one was a higher-ranked manager, the lower-ranked employee could win bring a suit and win—even though the CEO never had any knowledge of what was going on.

Yet, according to Nerdwallet.com, only about 3% of US businesses with fewer than 50 employees have EPLI coverage. There’s a 10% chance of being sued—the odds are greater for those firms with high turnover— with an average claim costing $160,000.?

EPLI policies providing unlimited coverage for defense costs are better, as are those that cover claims:?

o???Resulting from conversations during the job application process

o???Breach of Contract

o???Derogatory comments made about colleagues over the internet

o???Punitive Damages (if the state allows)

o???Third-Party Coverage for Sub-Contractors and Vendors

One of the best coverages to seek is where the insured has the option to bring a case to trial even when the insurer believes that settling out of court may be the better strategy (known as “duty to defend” versus “duty to reimburse”).

Another important coverage is one that gives the insured the right to choose defense counsel.?

For those who prefer to self-insure: How many hours would it take for an employment practices attorney’s rate to exceed a typical $2500 deductible? Best of all, coverage applies even if claims have no merit.?

Elizabeth Holmes illustrates the damage done by the occasional wrongdoing of entrepreneurs. Unfortunately, certain behaviors between employers and employees can lead to litigation too.