When reviewing an Employment Practices Liability Insurance (EPLI) policy, most business owners immediately look at one number: the policy limit.
For example, a policy may provide $1 million in coverage.
Many assume that means the insurance company has one million dollars available to pay a lawsuit.
However, that’s not always how an EPLI policy works.
One of the most important concepts to understand is Defense Inside the Limits, sometimes called eroding limits or burning limits. While the wording may sound technical, understanding it can help you make better insurance decisions and avoid surprises during a claim.
What Does Defense Inside the Limits Mean?
Defense inside the limits means that the money your insurance company spends defending a covered employment claim reduces your available policy limit.
In other words, your legal expenses and your settlement both come from the same pool of insurance.
Unlike some General Liability policies where defense costs are paid outside the policy limit, many EPLI policies include defense costs within the stated limit.
What Counts as Defense Costs?
Defense costs can include many expenses associated with responding to a lawsuit, including:
- Attorney fees
- Court costs
- Expert witnesses
- Depositions
- Investigation expenses
- Mediation costs
- Document review
Even if your business ultimately wins the lawsuit, these legal expenses can become significant.
An Example
Imagine your business purchases an EPLI policy with a $1 million limit.
A former employee files a wrongful termination lawsuit.
Over two years, your insurance company spends:
- $400,000 on defense attorneys
- $75,000 on expert witnesses
- $125,000 on depositions and discovery
Your total defense costs equal $600,000.
If your policy provides defense inside the limits, your remaining policy limit is now $400,000.
If the case settles for $500,000, your insurance policy may no longer have enough remaining coverage to pay the full settlement.
This is why understanding how defense costs affect your policy limit is so important.
Why Are Employment Lawsuits So Expensive?
Employment litigation often requires months or years of legal work.
Attorneys may need to:
- Interview witnesses
- Review employment records
- Respond to discovery requests
- Conduct depositions
- Prepare expert testimony
- Participate in mediation
- Prepare for trial
The cost of defending the lawsuit can sometimes exceed the settlement itself.
That’s one reason many insurance professionals spend just as much time evaluating policy language as they do comparing premiums.
Can Businesses Purchase Additional Defense Coverage?
Some insurance companies offer an Additional Defense Costs Endorsement.
This endorsement provides an additional amount of insurance that can only be used for legal defense after the original policy limit has been exhausted.
For businesses with larger workforces or increased employment-related exposure, this endorsement can provide valuable protection by helping ensure defense costs don’t completely erode the available policy limit.
Availability varies by insurance company, so it’s important to discuss your options with your insurance advisor.
Questions to Ask Before Buying EPLI
If you’re comparing EPLI policies, consider asking:
- Are defense costs inside or outside the policy limits?
- Does the carrier offer an Additional Defense Costs Endorsement?
- What endorsements are available?
- Are wage and hour defense costs covered?
- Does the policy cover third-party discrimination or harassment claims?
These questions often reveal meaningful differences between policies that appear similar at first glance.
Final Thoughts
A $1 million EPLI policy doesn’t always mean you have $1 million available to settle an employment lawsuit.
If defense costs are inside the limits, every dollar spent on attorneys and litigation reduces the amount remaining to pay settlements or judgments.
Understanding how your policy responds to legal expenses is just as important as understanding the policy limit itself. Before purchasing or renewing EPLI coverage, take time to review the endorsements and discuss how defense costs are handled. That conversation could make a significant difference if your business ever faces an employment-related claim.