Does Employment Practices Liability Insurance Cover Vendor Fraud? Understanding Your Coverage Needs

As a small business owner, protecting your company from various risks is crucial for long-term success. Two important types of coverage that often cause confusion are Employment Practices Liability Insurance (EPLI) and Crime Insurance. Let's clarify what each covers and whether EPLI protects against vendor fraud.

Understanding EPLI Coverage

Employment Practices Liability Insurance (EPLI) specifically deals with workplace-related issues such as wrongful termination, sexual harassment, discrimination, invasion of privacy, breach of contract, emotional distress, and wage and hour law violations [1].

While EPLI is a growing insurance product that protects organizations against employee suits related to their rights, it's important to note that it has limitations. For instance, with the expansion of privacy laws, employee privacy concerns have become more prominent as private employee data is stored electronically. However, this isn't always covered under an EPLI policy, though the insurance industry has responded by offering cyber liability and network security policies [1].

For a detailed breakdown of what EPLI covers, visit our comprehensive guide on What Does Employment Practices Liability Insurance Cover?

Vendor Fraud: A Different Type of Risk

Vendor fraud is a type of financial crime that usually involves theft of money from a business. It often involves a trusted individual taking advantage of their position to steal funds or assets, typically over an extended period [2].

To learn more about protecting your business from vendor fraud, check out our detailed article on What is Vendor Fraud and How to Insure Against It

The Right Coverage for Vendor Fraud

EPLI does not cover vendor fraud. Instead, businesses should consider Crime Insurance for protection against such risks. Here's why:

Crime insurance provides coverage for property taken or destroyed by breaking and entering the insured's premises, burglary or theft, forgery or counterfeiting, fraud, kidnap and ransom, and off-premises exposure [3].

For specific protection against fraud and social engineering schemes, learn more about Crime Insurance, Social Engineering, and Fraud Coverage

The Importance of Proper Controls

Recent statistics show that 37% of employee fraud occurred due to a lack of internal controls or independent checks and audits, while 18% resulted from overriding internal controls, 18% from lack of management review, and 10% from a poor tone set by top managers [2].

Understanding Your Insurance Needs

When considering your business insurance portfolio, remember that general management liability coverage may include several components, such as:

Directors and officers (D&O) liability insurance
Employment practices liability (EPL) insurance
Fiduciary liability insurance
Special crime insurance

The Cost of Fraud [4]

The financial impact of fraud can be substantial.

In 2018:

The average embezzlement amount was $360,000
Companies brought charges in 45% of cases
85% of incidents involved an embezzler who was a manager or higher

Protecting Your Business [2]

To properly protect your business, consider these steps:

Get the Right Coverage: Visit our Employment Practices Liability page to understand EPLI coverage.
Implement Strong Controls:

To prevent embezzlement and fraud, ensure employees have properly delegated authority and clear control limits. Courts typically examine factors such as job titles, job descriptions, and the particular operational practices of the organization when determining control issues [2].

Regular Audits:

Insurance can influence the probability of losses through moral hazard, insurance fraud, and preventive steps by the insurance company [5].

Conclusion

While EPLI is crucial for protecting against employment-related claims, it doesn't cover vendor fraud. For comprehensive protection, businesses should maintain both EPLI and crime insurance coverage. This combination helps ensure protection against both employment-related claims and fraudulent activities.

Remember that

liability insurance typically covers only the risk of being sued for negligence or strict liability torts, but not any tort or crime with a higher level of mens rea. This is usually mandated by the policy language itself or case law or statutes in the jurisdiction where the insured resides or does business. Liability insurance does not protect against liability resulting from crimes or intentional torts committed by the insured [4].

Consider consulting with an insurance professional to ensure your business has the right combination of coverage to protect against all potential risks, including both employment-related claims and various types of fraud.