When Should Startups Purchase EPL Insurance?

As a startup grows and faces various challenges, one important factor is the purchase of Employment Practices Liability Insurance (EPLI). This insurance is designed to protect businesses from claims related to employment practices, policies, and misconduct. However, the timing of when a startup should purchase this insurance isn't always clear. Let's explore the factors that determine the appropriate time for a startup to secure this invaluable coverage.

The Viagra Effect

The term 'Viagra Effect' in this context may seem surprising at first, but it refers to the significant impact growth can have on a startup's risk exposure. When a startup anticipates a wave of hiring or firing within the next 12-18 months, it might be a wise move to consider an EPLI policy.

Planning for Expansion

Entrepreneurs often conceive rapid expansion as a key part of their business plan. This rapid growth can lead to a variety of challenges, including increased risk of employment-related issues such as discrimination, harassment, and wrongful termination. Therefore, taking on an EPLI policy at this stage can provide much-needed protection against potential claims.

Show Me the Money

EPLI is typically one of the most expensive insurance policies, which can be a major factor in deciding the timing of its purchase. If a startup has limited financial resources and a short runway of cash, delaying the purchase until the company secures funding or wins contracts might be a sound financial decision. However, it's important to evaluate the cost-benefit analysis and risk tolerance of the company.

Cash Flow Management

In many cases, EPLI doesn’t directly contribute to the top line but can play a strategic role in ensuring the company’s growth isn’t impeded by potential legal issues. Policies like EPLI and Directors Officers (DO) insurance may be requirements for new clients or investors, which can bring additional funding to the company. Pricing out the EPLI policy and validating the expense against potential risks can help startups make informed decisions.

Ship of Fools

The name 'Ship of Fools' is a nod to the need for a properly structured and qualified Human Resources (HR) team. This doesn't mean an inexperienced and unqualified HR person or a temporary solution. Instead, it emphasizes the importance of having a dedicated, experienced HR professional or team who can handle various employment-related issues effectively.

Qualifying Your HR Department

Having a qualified HR team can significantly reduce the risk of employment-related claims. A professional HR team can conduct fair and thorough interviews, manage disciplinary actions, maintain employee records, and provide training to avoid harassment and other violations of employment laws. If your startup lacks such a team, purchasing EPLI might be a prudent step to mitigate potential risks.

Everybody Get Up

As a startup grows, the complexity of managing employees and offices also increases. Around 20-25 employees, and especially if you have multiple office locations or sparse on-site management, are prime candidates for considering EPLI. With more employees and diverse work environments, the risk of harassment and discrimination lawsuits can rise significantly.

Employee Dynamics

The dynamics of a startup often involve younger, less experienced employees who may not adhere to standard work hours or professional boundaries. Late nights, casual interactions, and social activities outside of work can increase the potential for claims. An EPLI policy can provide coverage for such risks, ensuring that the company remains legally and financially secure.

Ultimately, the decision to purchase EPLI should be made in consultation with a reputable insurance broker. Every situation is unique, and a professional can provide tailored advice based on the specific needs and risks of your startup. By carefully considering the factors mentioned above, startups can make informed decisions and protect themselves from the potential legal and financial implications of employment-related issues.