You Do Not Have to Do Anything Wrong to Face a Lawsuit
Between 36 and 53 percent of small businesses are sued in any given year, and 43 percent are threatened with a lawsuit even when one never reaches a courtroom. A growing share of that litigation involves employment claims: wrongful termination, harassment allegations, wage disputes, and discrimination complaints. What surprises most business owners is that you do not have to be at fault to generate a costly defense. The allegation alone triggers legal expenses, and those expenses start accumulating the moment a claim is filed.
The average cost to defend an employment claim through the EEOC is approximately $75,000, and that figure covers legal defense alone, before any settlement is reached. For a small business where every dollar is accounted for, a single employment lawsuit at that level is not a nuisance. It is a serious operational threat. And retaliation claims, which now account for more than half of EEOC filings, are among the most common. An employee who believes they were punished for raising a concern has a viable claim regardless of whether the underlying concern had merit.
The Coverage Most Owners Think They Have — But Don’t
This is where a common misconception costs business owners the most. General liability insurance does not cover employment-related claims. Neither does a standard business owners policy. These policies were built to cover things like bodily injury, property damage, and advertising liability. When an employee or former employee files a wrongful termination suit, a discrimination complaint, or a harassment claim, those standard policies are silent. They were not written for that exposure, and no amount of premium paid on them changes that.
Employment practices liability insurance, known as EPLI, is a separate policy built specifically to cover legal defense and settlement costs tied to claims like these. It covers wrongful termination, discrimination, sexual harassment, retaliation, failure to promote, and a range of other employment-related allegations. For businesses with fewer than 50 employees, which often lack a formal HR department, EPLI is especially critical because the internal structure to catch and resolve problems before they become legal matters is typically not in place.
How EPLI Works — And One Detail That Matters More Than Most
EPLI policies are almost always written on a claims-made basis, which means coverage is triggered when a claim is filed during the policy period, not when the underlying event occurred. This structure has a practical implication that many owners do not think about until it is too late. If you allow an EPLI policy to lapse and a former employee files a claim after the lapse, you may have no coverage for an event that happened while the policy was in force. Maintaining continuous coverage matters, and if you switch carriers, making sure there are no gaps or retroactive date issues matters just as much.
EPLI also pairs well with documented HR practices. An employee handbook that clearly states your policies on conduct, complaints, and discipline is not just a management tool. It is evidence. If a claim is filed, the ability to show that your business had written policies, that employees were trained on them, and that you followed them consistently is one of the strongest defenses available. Coverage responds to the financial exposure. Documentation reduces the likelihood of a claim succeeding in the first place.
Why This Risk Is Growing
Several forces are pushing employment claims higher. The Equal Employment Opportunity Commission has increased enforcement activity, particularly around retaliation, pay equity, and workplace harassment. Workforce dynamics have shifted as remote and hybrid work arrangements create new categories of disputes around scheduling, performance evaluation, and accommodation. And the legal environment has grown more accessible to employees, with more attorneys willing to take employment cases on contingency and more awareness among workers about their rights and options.
For small business owners, the combination of rising claim frequency, increasing defense costs, and evolving employment law makes this one of the most important conversations to have about your insurance program. donegan can help you evaluate whether you have EPLI coverage, whether your limits are appropriate, and whether your HR practices are positioned to reduce your exposure. It is worth checking before a claim forces the question.
Frequently Asked Questions
Does my general liability policy cover employment lawsuits?
No. General liability and standard business owners policies do not cover employment-related claims such as wrongful termination, discrimination, or harassment. EPLI is a separate policy designed specifically for these exposures.
What does EPLI typically cover?
EPLI covers legal defense costs and settlements related to claims of wrongful termination, discrimination, harassment, retaliation, failure to promote, and similar employment-related allegations. Policies vary, so reviewing the specific terms of your coverage with your agent is important.
Can a business be sued by a job applicant?
Yes. Employment practices claims can come from current employees, former employees, and job applicants. A claim of discriminatory hiring practices, for example, can be filed by someone who was never employed by your company. EPLI covers these claims as well.
