small business insuranceSmall business insurance goes beyond insuring your inventory and office space. All small business owners may, at some point, have a need to protect themselves from lawsuits. These lawsuits don’t just come from employees; they can also come from independent contractors and customers. Discrimination, sexual harassment, wrongful termination—these are just a handful of the claims that employees and others can file against a business at any time.

The average amount of damages recovered by plaintiffs in employment practices suits has soared. According to Jury Verdict Research, the median award for all discrimination claims payouts in 2011 was $317,000, up 46 percent from the 2010 median of $216,000. Million dollar payouts are not uncommon.

If you think employment practices liability (EPL) lawsuits are only filed against large corporations, think again. Nearly 50 percent of EPL charges are filed against small businesses, many of which do not have the funds to defend themselves. In fact, many small businesses often do not have human resources professionals to develop the formal personnel policies and procedures that can help prevent employment-related charges in the first place.

In your efforts to prevent employee lawsuits, you may want to consider:

  1. Creating effective hiring and screening programs to avoid discrimination.
  2. Having written guidelines, policies, or procedures related to employment at will, discrimination, sexual and other workplace harassment, and equal employment opportunity.
  3. Researching the Americans with Disability Act (ADA) and creating reasonable accommodations for disabled employees.
  4. Posting corporate policies throughout the workplace, placing them in employee handbooks so policies are clear to everyone, and requiring employees to acknowledge receipt of those guidelines.
  5. Showing employees what steps to take if they are victims of sexual harassment or discrimination by a supervisor.
  6. Documenting employee performance, as well as any steps your company is taking to prevent and solve employee disputes.
  7. Conducting human resources training for management employees.

You may also want to speak with an insurance professional about employment practices liability insurance (EPLI). This type of insurance policy protects an employer from employees’ claims alleging discrimination, wrongful termination, or harassment, including sexual harassment. It also pays for liability damages and defense costs resulting from charges brought by full-time, part-time, temporary, and seasonal employees.

Employers can obtain coverage for employment practices liability by purchasing a stand-alone policy, such as an EPLI policy or a management liability policy (MLP), or by an endorsement to an existing policy, such as a commercial general liability (CGL) or directors and officers (D&O) policy. Some insurers provide this coverage as an endorsement to a business owners policy (BOP), which is typically for small businesses (meaning 50 employees or less).

The cost of EPLI coverage depends on your type of business, the number of employees in your business, and a variety of risk factors, including whether your company has been sued over employment practices in the past. These policies will reimburse your company against the costs of defending a lawsuit in court and for judgments and settlements. They will also cover legal costs, whether your company wins or loses the suit. However, these insurance policies typically do not pay for punitive damages or civil or criminal fines, and workers compensation issues are also excluded.

No matter how well you run your business, a disgruntled employee might still file a claim against your business at any time. Keep in mind that defense costs can be significant—potentially well beyond what many small business owners can afford to pay out of pocket. In order to protect yourself, you may want to consider an insurance policy to cover these issues.

Loretta L. Worters is vice president of the Insurance Information Institute, whose mission is to improve public understanding of insurance – what it does and how it works. Ms. Worters is an author and woman’s advocate frequently quoted in leading publications including the Wall Street Journal, the New York Times, USA Today, Business Week, Forbes, and U.S. News & World Report, and she appears regularly on television networks including ABC, CNBC, CNN, and Fox. Follow her on Twitter at @LWorters.