Employment Practices Liability Insurance: A Must-Have for Employers in the Hospitality Industry

Employment Practices Liability Insurance:
A Must-Have for Employers in the Hospitality Industry
 Oregon Lodging Association’s "Lodging News"
by Matthew Lowe
March 2005

Employment practices liability insurance ("EPLI") is a form of insurance that covers many employment-related claims that would otherwise be excluded from coverage under a comprehensive general liability insurance policy. Covered claims generally include claims related to race discrimination, age discrimination, disability discrimination, sexual harassment, and other forms of claims arising in the employment context. Many small and medium-sized lodging facilities, and even some large lodging facilities, do not have EPLI, often because of the perceived cost of such a policy or because the property owner does not know that the property’s comprehensive general liability insurance policy does not cover such claims. This article will discuss the reasons why we highly recommend an EPLI policy given the nature of the hospitality industry and certain provisions which should be included in such a policy.

Certain characteristics of the hospitality industry as compared to other industries dictate the increased need to obtain an EPLI policy. The following are just a few of these characteristics:

  • The higher proportion of single female employees, including an estimated 78% of wait staff at restaurants.
  • The often relaxed atmosphere of the working environment in hotels and restaurants.
  • A generally younger workforce in hotels and restaurants.
  • A considerably higher proportion of minorities in hotels and restaurants.
  • The labor intensive nature of most jobs in hotels and restaurants.
  • The vulnerability of the hospitality industry to market pressures resulting in increased layoff rates.
  • The higher proportion of claims under the Age Discrimination and Employment Act given the youth of the workers in the hospitality industry.
Because of these characteristics, the hospitality industry traditionally has a much higher rate of employment-related claims compared to other industries. We estimate that the cost of defending most of these types of claims would be between $60,000 and $80,000, and possibly much higher depending on the circumstances.

Once you have made the decision to purchase an EPLI policy, or for those of you who already have such a policy, it is critical that you carefully evaluate and analyze the terms of the policy. The following will help determine whether your EPLI policy is adequate:
  • Does the policy allow you to choose your own legal counsel?
  • Does the policy cover an award of punitive damages?
  • Does the policy contain an "intentional acts" exclusion?
  • Does the policy contain a "prior acts" exclusion?
  • Who are the eligible claimants under the policy? For example, the policy may not apply to claims by applicants for employment.
  • Does the policy cover negligent hiring?
  • Is the policy a "claims made" or an "occurrence" policy?
  • What are the reporting periods in the policy?
  • What warranties are you required to make in the application?
Analyzing an EPLI application and policy for these issues can be quite difficult as many of these items are often hidden in various provisions within the policy. We highly recommend you undertake this analysis in consultation with your legal counsel.

Finally, the failure to obtain EPLI can expose corporate directors and officers to substantial liability. The failure to obtain an adequate EPLI policy or to otherwise under-insure the business can constitute a breach of a director’s or officer’s fiduciary duty of care to the business entity that owns the property, which in turn can expose a director or officer to personal liability for claims made against the business. Given the significantly increased scrutiny of business governance practices over the past couple of years and the passage of the Sarbanes-Oxley Act of 2002, directors, officers, and business owners in general must take great care in their exercise of their fiduciary obligations to minimize such risks. Furthermore, these concerns apply equally to both publicly-traded and closely-held corporations, as well as to other forms of business entities.

We cannot overstate the importance of EPLI to the long-term protection of your business as well as your personal assets. This is further evidenced by the fact that employment-related claims of all types increasingly dominate court dockets around the country given the huge expansion of employee-friendly laws on the local, state and federal level.