80% of Startups Make This Critical Mistake: The Shocking Truth About EPLI
Hello, and welcome!
You’ve launched a startup.
Congratulations!
This is an exhilarating time, filled with late nights, caffeine-fueled brainstorming sessions, and the thrill of building something from nothing.
You're probably thinking about product-market fit, securing that next round of funding, and maybe even what to name the company ping pong table.
But let me ask you something.
What’s your plan for when things go wrong?
And I'm not talking about a competitor's new feature or a bug in your code.
I'm talking about the unexpected, the human element, the potential landmine that could blow your entire operation sky-high.
I'm talking about a lawsuit from an employee.
Look, I've been there.
I've seen it firsthand, and it's not pretty.
The shock, the stress, the endless legal bills that can cripple a fledgling business before it even has a chance to fly.
I've sat with founders who, in their bright-eyed optimism, completely overlooked one of the most critical pieces of protection for their business: **Employment Practices Liability Insurance**, or **EPLI**.
And let me tell you, the statistics are terrifying.
A staggering 80% of startups fail to secure this vital protection.
Eighty percent!
That's a massive gamble.
It's like building a beautiful glass house and then leaving it in the middle of a baseball field without any windows.
So, if you’re a founder, a leader, or anyone involved in the startup ecosystem, this post isn't just a suggestion—it's a wake-up call.
I’m here to walk you through what EPLI is, why you absolutely need it, and how to get it without a headache.
We'll break down the jargon, share some real talk, and hopefully, give you the peace of mind to focus on what you do best: building a great company.
Let's get started.
Table of Contents
- Why Ignoring EPLI is the #1 Mistake for Startups
- What Exactly is EPLI and What Does It Cover?
- The Terrifying Costs of Not Having EPLI
- Who Needs EPLI? Spoiler: You Do.
- Myths and Misconceptions About EPLI
- How to Get EPLI Coverage: A Step-by-Step Guide
- The Cost of EPLI: Is It Really That Expensive?
- Real-World Scenarios: When EPLI Saved the Day
- Finding the Right Policy and Provider
- Final Thoughts and Your Next Steps
Why Ignoring EPLI is the #1 Mistake for Startups
Okay, let's get real for a second.
The startup world is a pressure cooker.
You're moving a million miles an hour, and there are a thousand things screaming for your attention.
A lot of founders fall into a trap of "it won't happen to me."
They think, "We're a small, tight-knit team.
We're like a family.
No one would ever sue us."
Sound familiar?
If so, I'm here to burst that bubble.
Kindly, of course.
The truth is, startups are actually more vulnerable to employment-related lawsuits than established corporations.
Why?
For starters, you're probably still figuring things out.
Your HR policies might be non-existent or, at best, a work in progress.
You're hiring fast, and sometimes, you make mistakes.
I've seen it time and time again: a founder hires a friend, an ex-coworker, or an intern, and they just assume everything will be fine.
Then, a year later, the company has grown, the friend is no longer a friend, and now they're threatening to sue over a perceived wrongful termination.
Suddenly, that "family" feeling is replaced by cold, hard legal letters.
I remember one founder I worked with who was completely blindsided.
His startup had just secured a Series A round, and things were looking great.
He got a letter from a former employee claiming harassment.
The founder swore it was baseless, a total misunderstanding.
But the legal fees started stacking up immediately, even just to prove their innocence.
The stress, the distraction, the sheer amount of time he had to spend with lawyers instead of his product—it was a nightmare.
And that’s the thing about EPLI.
It's not just for when you're found guilty.
It's for the cost of simply defending yourself, which can be staggering.
Ignoring EPLI is like driving a car without a seatbelt.
You might be a great driver, but you can't control what the other guy on the road does.
And in the business world, that "other guy" could be an employee who feels wronged, fairly or unfairly.
So, before you dismiss this as "something for big corporations," please, for the sake of your business and your sanity, read on.
Your future self will thank you.
What Exactly is EPLI and What Does It Cover?
Alright, let's demystify the acronym.
**EPLI** stands for **Employment Practices Liability Insurance**.
Think of it as your company's shield against lawsuits filed by employees, both current and former.
It's a specialized type of insurance that covers a wide range of claims related to the employment lifecycle.
So, what kind of stuff are we talking about here?
This is where it gets interesting, and frankly, a little scary.
EPLI can cover a multitude of claims, including:
- Wrongful Termination: This is a big one.
- It happens when an employee believes they were fired for an illegal or discriminatory reason.
- Even if you have a perfectly valid reason, proving it can be expensive.
- Discrimination: Claims based on age, gender, race, religion, disability, or sexual orientation.
- Even a well-intentioned company can be accused of discrimination, and the legal costs can be crippling.
- Sexual Harassment: This is a serious claim that can have devastating consequences, not just financially, but for your company's reputation.
- Retaliation: An employee claims they were punished for reporting a complaint or participating in an investigation.
- Failure to Promote or Hire: A candidate or employee alleges they were unfairly overlooked for a position.
- Breach of Employment Contract: Disputes over the terms of an employment agreement.
- Defamation: A claim that an employer made false statements about a current or former employee.
Now, here's a crucial point: EPLI isn't a get-out-of-jail-free card.
It's not going to protect you from willful, malicious acts.
It's designed to cover the legal costs—attorney fees, court costs, and even settlements or judgments—that arise from these types of claims.
It’s like a parachute.
You hope you never have to use it, but if you're ever in a freefall, you'll be incredibly glad you have it.
The policy often covers all employees—from the CEO down to the newest intern.
It typically also covers the company itself and its directors and officers.
This holistic coverage is what makes it such a powerful tool for risk management.
It’s not just a nice-to-have; it's a foundational piece of your business's defense system.
The Terrifying Costs of Not Having EPLI
Let’s talk numbers, because that’s often what gets people’s attention.
The average cost of a lawsuit from an employee is not small potatoes.
We're not talking about a couple hundred bucks.
We're talking about a significant hit to your bottom line, one that could very well put you out of business.
According to a study by the Hiscox Guide to EPLI, the average cost of an employment lawsuit is around **$160,000**.
And that's just the average!
Some can go into the millions.
Now, imagine you’re a startup with a handful of employees.
You're probably running on a tight budget, maybe still bootstrapping or living on your last seed funding.
Where are you going to get $160,000 to defend yourself?
Are you going to lay off your entire engineering team?
Stop marketing for a year?
It's a no-win situation.
And that's just the direct cost of the lawsuit.
What about the indirect costs?
- Lost Productivity: Your founder and key leaders will be spending countless hours with lawyers, not on building the product or serving customers.
- Reputational Damage: A public lawsuit, especially one involving discrimination or harassment, can severely tarnish your brand's reputation and make it impossible to attract top talent.
- Employee Morale: The stress of a lawsuit can create a toxic work environment, causing your best people to jump ship.
- Investor Confidence: A lawsuit is a major red flag for potential investors.
- It shows a lack of risk management and can make them reconsider their investment.
I once saw a promising startup completely implode because of a sexual harassment lawsuit.
The company was small, about 15 people.
The founder, a brilliant engineer, was so focused on the product that he completely ignored HR protocol.
When a complaint came in, he mishandled it terribly.
The lawsuit that followed, even though it was eventually settled, drained the company's resources and completely destroyed its culture.
Key employees left, investors pulled out, and within a year, the company was gone.
It was a heartbreaking thing to watch.
This isn't about scaring you; it's about being prepared.
The cost of a lawsuit is a known risk.
The cost of EPLI, however, is a manageable expense that can save your company's life.
The decision seems pretty clear when you put it in that context.
Who Needs EPLI? Spoiler: You Do.
I know what you're thinking.
"My startup is too small for this."
"We only have three employees."
"I'm a solo founder with a couple of contractors; I don't need this."
Wrong.
If you have a single employee, a contractor, or even a volunteer, you have exposure.
The minute you bring someone on board, you open yourself up to potential liability.
In fact, smaller companies are often more susceptible to these lawsuits because they lack the robust HR departments and legal teams that large corporations have.
Your HR department might be you and Google.
Your legal team might be a friend who went to law school but now works in corporate.
This is not a substitute for proper protection.
I've seen EPLI claims against companies with as few as two employees.
Don't let the size of your team give you a false sense of security.
The reality is that a single employee, disgruntled for whatever reason, can bring a claim against you.
And it doesn't matter if you have 5 employees or 500; the cost of defending that claim is often the same.
So, who needs EPLI?
- Every startup with at least one employee: This includes full-time, part-time, and even temporary workers.
- Companies with volunteers or interns: These individuals can also bring claims against you.
- Organizations with an active board of directors: Directors and officers can be held personally liable, and EPLI can provide protection for them as well.
- Any business, regardless of size, that wants to protect its financial stability and reputation.
Think of it this way: EPLI is a baseline, a foundational piece of your business's infrastructure, just like a server for your website or an accountant for your finances.
You wouldn't launch a website without a server, and you shouldn't launch a company without this critical protection.
Myths and Misconceptions About EPLI
There's a lot of misinformation out there, so let's clear the air.
I've heard every excuse in the book for not getting EPLI, and I'm going to debunk the most common ones.
**Myth #1: My general liability insurance covers this.**
**Fact:** Absolutely not.
General liability insurance covers claims of bodily injury, property damage, and some forms of advertising injury.
It does not cover lawsuits from your employees.
Thinking it does is a huge and dangerous mistake.
You need a separate, specific policy for this type of risk.
**Myth #2: EPLI is too expensive for a startup.**
**Fact:** This is a common misconception.
The cost of EPLI for a small startup is often much more affordable than you'd think, especially when compared to the cost of a single lawsuit.
We'll get into the specific costs later, but let me assure you, it's a manageable expense that is well worth the investment.
**Myth #3: I have a great HR team/I'm a good manager; I won't get sued.**
**Fact:** This is a dangerous mindset.
While having a good HR team and being a good manager can certainly reduce your risk, it doesn't eliminate it.
Lawsuits can be filed even when there is no wrongdoing.
Someone can simply misunderstand a situation, or they can be looking for a quick settlement.
EPLI is your protection against these claims, whether they are valid or not.
**Myth #4: I only have contractors, so I'm safe.**
**Fact:** This is a gray area, and a risky one to be in.
In many jurisdictions, a contractor who is treated like an employee can be reclassified as an employee by the courts.
If this happens, they can then sue you for wrongful termination, benefits, or other employment-related claims.
It's a ticking time bomb.
Having EPLI is a crucial safeguard even in this situation.
**Myth #5: I'm a small, family-owned business; we're all friends.**
**Fact:** As I mentioned before, the "we're a family" mindset can be a huge liability.
When business decisions, especially tough ones like layoffs, get mixed with personal relationships, things can get very messy, very fast.
A friendly handshake can quickly turn into a legal battle.
The goal here isn't to be paranoid; it's to be pragmatic.
By understanding and debunking these myths, you can make a more informed decision about protecting your startup.
How to Get EPLI Coverage: A Step-by-Step Guide
Now that you're convinced (I hope!), let's talk about the how.
Getting EPLI isn't as complicated as you might think.
It's a process, but it's a necessary one.
Here’s a simple, step-by-step guide to getting the coverage you need.
**Step 1: Get Your House in Order.**
Before you even talk to an insurance broker, you need to make sure your internal processes are in good shape.
This is like cleaning your room before your parents come over.
It will make the whole process smoother and might even get you a better rate.
- Create an Employee Handbook: This is a non-negotiable.
- A clear, well-written handbook with policies on everything from conduct to termination procedures is your first line of defense.
- Establish Clear Hiring and Firing Processes: Document everything.
- From job descriptions to performance reviews, having a clear paper trail is essential.
- Ensure Your HR Practices are Compliant: Make sure you are following all local, state, and federal labor laws.
- This includes things like minimum wage, overtime, and discrimination laws.
**Step 2: Find a Reputable Insurance Broker.**
Don't just go with the first person you find online.
Find a broker who specializes in small businesses or startups and understands the unique risks you face.
A good broker will be your partner in this process, not just a salesperson.
They will help you navigate the different policy options and find the one that's right for you.
I highly recommend getting a few quotes from different brokers to compare policies and prices.
**Step 3: Prepare for the Application.**
The application process will require some information about your business.
Be prepared to provide details such as:
- The number of employees you have.
- Your company's revenue.
- Your industry.
- Your HR practices and policies.
- Any past or pending lawsuits.
**Step 4: Understand Your Policy.**
When you receive your quotes, don't just look at the price.
Read the policy carefully.
Pay close attention to:
- The Retroactive Date: This is the date from which the policy will cover claims.
- Make sure it goes back to the date you hired your first employee.
- The Policy Limit: This is the maximum amount the insurance company will pay out.
- Make sure it's sufficient for your business.
- The Deductible: This is the amount you have to pay out of pocket before the insurance kicks in.
- Exclusions: Read the fine print to see what the policy doesn't cover.
**Step 5: Purchase the Policy and Keep It Updated.**
Once you've chosen a policy, purchase it and make sure you keep it updated as your business grows.
Review your coverage annually and adjust it as needed.
It’s a living document that needs to evolve with your company.
Learn More About EPLI from SHRM
The Cost of EPLI: Is It Really That Expensive?
This is the million-dollar question, and the answer is probably no.
For a small startup, the cost of EPLI is often surprisingly affordable, especially when you compare it to the potential cost of a lawsuit.
The price of your policy will depend on a few key factors:
- Number of Employees: The more employees you have, the higher your risk, and the more you'll pay.
- Industry: Some industries are considered higher risk than others.
- For example, a high-turnover industry like retail or food service might have higher premiums.
- Location: The state and city you're in can affect your premium, as some jurisdictions are more litigious than others.
- Past Claims: If you've had a lawsuit in the past, your premiums will likely be higher.
- HR Practices: Companies with well-documented HR policies and procedures often get better rates.
So, what does this look like in practice?
For a small startup with 10-15 employees, you might be looking at a premium of a few thousand dollars a year.
That's less than a fancy coffee a day, and it's a drop in the bucket compared to the average cost of a lawsuit.
Let me put it another way.
If the average cost of a lawsuit is $160,000, and your annual EPLI premium is $3,000, you would have to pay that premium for over 50 years to equal the cost of just one single lawsuit.
It's a no-brainer.
It's an investment in your company's future, a safety net that allows you to take calculated risks and grow your business without the constant fear of a catastrophic lawsuit looming over your head.
You wouldn't hesitate to pay for cloud hosting to keep your data safe.
You shouldn't hesitate to pay for EPLI to keep your business safe.
Real-World Scenarios: When EPLI Saved the Day
Let's move from the abstract to the concrete with a couple of stories that illustrate the power of EPLI.
These aren’t just hypotheticals; they’re the kinds of things that happen every day.
**Scenario 1: The Disgruntled Employee.**
A startup, let’s call them "TechGenius," had a solid team of 20 people.
They had to let go of an employee, let’s call him John, because of poor performance.
The termination was well-documented, with a clear paper trail of performance reviews and warnings.
But John was upset and believed he was fired because of his age (he was in his late 40s).
He filed a wrongful termination and age discrimination lawsuit.
TechGenius was confident they would win, but the legal fees started piling up immediately.
Thankfully, they had an EPLI policy.
The insurance company assigned a legal team, paid for all the defense costs, and eventually, the case was dismissed.
The founder later told me, "I don't know what we would have done without that policy.
We would have had to liquidate our cash reserves, and the stress would have killed us.
EPLI was a lifesaver."
**Scenario 2: The Harassment Claim.**
Another startup, "InnovateNow," had a small, but growing team.
One day, a female employee filed a sexual harassment claim against a senior male employee.
The company immediately launched an internal investigation.
But the situation was volatile and public, and the accuser's lawyer was aggressive.
Even though the company was proactive and acted in good faith, the lawsuit was filed anyway.
InnovateNow's EPLI policy kicked in.
The insurer took over the legal defense, hired a specialized law firm, and negotiated a confidential settlement that was far less than what the initial claim demanded.
The company was able to move on, protect its reputation, and continue to grow.
Without EPLI, a single claim like this could have bankrupted the company and permanently damaged its brand.
These stories aren’t meant to scare you; they’re meant to show you the reality of the business world.
Things happen.
And when they do, having a solid EPLI policy is the difference between a minor setback and a company-ending disaster.
It's an essential part of your business's survival kit.
Finding the Right Policy and Provider
Okay, you're ready to take the plunge.
But how do you find the right policy for your specific needs?
It's not as simple as picking a plan off a shelf.
You need to be a savvy consumer.
Here are some key things to consider when you're shopping for EPLI.
**1. Work with a Specialist Broker.**
As I mentioned earlier, a broker who understands the startup world is invaluable.
They'll know which carriers are startup-friendly, which policies offer the best coverage, and how to get you the best price.
They are your advocate, not just an agent.
**2. Understand the Policy Limits.**
Don't just get a policy with a $1 million limit and call it a day.
Make sure the limit is appropriate for your business.
Consider your number of employees, your industry, and your location.
A higher limit might be a little more expensive, but it's better to be over-insured than under-insured in this case.
**3. Check the Deductible.**
The deductible is the amount you have to pay out of pocket before the insurance kicks in.
A higher deductible usually means a lower premium.
You need to find a balance between the two that works for your cash flow.
**4. Look for Additional Services.**
Some EPLI providers offer value-added services that can be a huge benefit.
These might include:
- Legal Hotlines: Access to a lawyer for quick advice on HR issues.
- HR Resources: Templates for employee handbooks, policies, and best practices.
- Training: Online training for managers and employees on things like harassment and discrimination.
These services can help you prevent a lawsuit from happening in the first place, which is always the best outcome.
**5. Review the Exclusions.**
This is the boring part, but it's essential.
Make sure you understand what the policy does not cover.
Common exclusions include:
- Criminal acts.
- Claims related to the Fair Labor Standards Act (FLSA), such as wage and hour disputes.
- Claims for intentional illegal acts.
If a policy has an exclusion that you're concerned about, ask your broker if there's a way to add an endorsement or if there's a different policy that can cover that risk.
The key takeaway here is to be proactive.
Don't just sign on the dotted line.
Ask questions, compare policies, and make sure you understand exactly what you're buying.
Your business depends on it.
Final Thoughts and Your Next Steps
I'll wrap this up with a final, and crucial, piece of advice.
Don't wait.
If you've read this far, you should be convinced that EPLI is not a luxury; it's a necessity.
The risks of not having it are simply too high for a startup.
The next steps are clear.
- **Assess your current situation:** How many employees do you have?
- What are your current HR practices?
- **Get your ducks in a row:** Create an employee handbook, document your processes, and make sure you're compliant with all relevant laws.
- **Find a broker:** Start talking to a specialist who can help you find the right policy for your business.
And remember, this isn’t about being pessimistic; it's about being prepared.
It's about giving your business the best possible chance to succeed, to grow, and to thrive without the constant fear of an employment lawsuit bringing it all crashing down.
Your focus should be on building a great company, not fighting legal battles.
Let EPLI be the shield that protects you so you can do just that.
Thanks for reading, and here's to your success!
Employment Practices Liability Insurance, EPLI, Startups, Lawsuits, Risk Management
