Exclusive first look at Coalition’s new cyber claims dataGet the 2024 Cyber Claims Report
Cyber Incident? Get Help

Layoffs Lead to Liability – This Coverage Can Help

Coalition blog: Layoff liability — Executive Risks can help

Organizations have faced a seemingly infinite number of obstacles with their employees since COVID hit. Shifting to remote work, navigating the Great Resignation, and now businesses may have their biggest challenge yet with the possible recession looming. This economic uncertainty has put employers in the precarious position of taking cost-cutting measures, which (as we've seen in the headlines) can mean a reduction in their workforce. 

In 2023, more than 135,000 employees were laid off from technology companies in jthe first 90 days of the year. If the tech industry serves as a barometer, compared to an estimated 160,000 layoffs total in 2022, then this year will prove even more tumultuous for the labor market.

Most employers do everything they can to prevent downsizing, and brokers have the opportunity to step in as trusted risk advisors to explain how layoffs can create new risks for their clients. 

Let's explore how you can take a proactive approach to help your clients mitigate their exposures related to employment and layoffs, plus educate them on gaps in their current coverage to ensure they have protection when it's needed the most. 

How layoffs create liabilities for employers

When it comes to layoffs, business leaders need to consider their potential risks. We live in a litigious society where a lawsuit can be brought against an organization for countless reasons — including from a disgruntled former employee who believes they've been wronged.

Firstly, layoffs can be a sensitive issue for employees, and they may feel that they were mistreated or discriminated against based on their age, race, gender, or other protected characteristics. Suppose an employee feels that they were let go unfairly or illegally. In that case, they may file a lawsuit against the company, which can be costly in terms of legal fees, settlement costs, and damage to the company's reputation.

In addition, companies may face claims of a violation of state or federal laws if they do not follow proper procedures when laying off employees. Having clear and consistent employment policies and procedures documented is one way of accounting for these potential risks.

However, small and midsize businesses (SMBs) may lack the human resources experts who would be responsible for managing these considerations in a delicate situation such as layoffs. The good news is that even without a dedicated HR team, there are controls that can be put in place.

To help decrease the employer's risks related to layoffs, careful consideration must be taken to communication, compensation, and documentation. For brokers consulting their clients through the tumultuous time of a layoff or restructuring, here are a few talking points for your next conversation:

  • Have you established specific criteria for deciding which employees to let go, such as seniority, skills, and competency?

    • Have you previously conducted performance reviews to validate your decision when terminating employment?

  • Will you offer severance if the terminated employees waive their right to make future claims?

  • Do you currently have a plan for communicating the transition to all impacted employees? Is the reason they are being let go clear?

  • How do you plan to communicate this change to the rest of your organization?

  • How will you handle benefits administration, reference requests, employment verification, and unemployment claims?

And if the worst should happen and a former employee brings a lawsuit following a layoff, having the proper insurance coverage will be imperative for any small business.

What insurance policy provides the right Executive Risks coverage? 

The primary insurance to provide coverage in the event of a lawsuit related to layoffs is Employment Practices Liability (EPL). It's important for small business owners to know they're much more likely to experience an EPL claim compared to having their building burn down. 

If you have even a single employee, you need EPL. Having EPL insurance can help cover the costs resulting from a lawsuit related to layoffs. This type of insurance provides protection for a company in case a business is sued or accused of wrongful termination, discrimination, harassment, and other employment-related claims.

Layoffs are often one of the many issues a company could be facing if they're having financial issues, and the decisions that resulted in financial issues could result in claims against the directors and officers. D&O insurance helps protect the personal assets of business executives and often their spouses in the event they're sued based on the decisions made on behalf of their company.

These policies — protecting against breach of duties, negligence, errors, and misleading statements — often include coverage for legal fees, settlements, and other associated expenses. Since directors and officers can face personal liability for their role with the company (especially if they’re the owner of a small business), D&O coverage is often seen as a mandatory purchase for many directors and officers.

Having appropriate insurance coverage — in addition to following best practices regarding employment — can help a company mitigate its risks and focus on the actual business at hand. 

Brokers: take an active approach to help your clients navigate layoffs

Laying off employees can be an unfortunate, but necessary reality for many employers. By thoughtfully approaching layoffs, employers can minimize risk for the organization and ease the transition for affected employees.

Coalition provides Executive Risks coverage for SMBs that have just one employee and up to 250 employees.

More good news: Coalition empowers every policyholder with amazing benefits, like a pre-claims hotline where they can receive termination guidance at no additional charge. Policyholders can also access our resources, such as a checklist for layoffs, a library of state-mandated harassment and other training courses, templates for creating your employee handbook, and communications guidance. 

It's our mission at Coalition to protect the unprotected. We want to help protect your clients by keeping them in business.

To learn more about how to advise your clients on their risks related to layoffs and a myriad of other management liability risks, check out our new guide, Unlocking Growth with Executive Risks.