Two-thirds of small business owners are worried employees might bring a discrimination claim or other employment-related charge against them, yet only 1.2% of small businesses recently surveyed by Hartford Steam Boiler actually purchase employment practices liability insurance.

Not having such coverage could be trouble for the 6 million or so small commercial businesses, defined as having 100 or less employees, in the United States. Jeffrey O'Shaughnessy, vice president of employment practices liability for Hartford Steam Boiler, told BestWire that claims have reached record numbers the past two years and could be on the way to doing the same in 2010. With the average employment practices liability claim ultimately being resolved for $22,000 to $40,000, small businesses could be walking a tight rope without a net.

"There's a tremendous gap and underserved need in those who do not have the coverage," he said. "As a small business owner, it can be pretty damaging if you have an unexpected payout of $22,000 to $40,000. Without coverage, businesses bear that burden themselves." Employment practices liability coverage provides access to specialty defense law firms.

The survey also found 60% of respondents underestimated the cost of a claim, pointing out the "unfamiliarity about how extreme that cost can be -- how severe that risk is," O'Shaughnessy said.

The lack of understanding when it comes to how much a claim can cost to defend and settle is likely a reason small businesses aren't buying the coverage. Plus, employment practices liability premiums were often more expensive than a commercial general liability policy or a business owner's policy. However, the coverage has evolved and can be added as an endorsement to these policies for a more affordable rate, O'Shaughnessy said.

That news may have come just in time for small businesses since the environment in which they operate has changed significantly the past two years due to the economy and developments in laws and regulations. Higher unemployment rates, lay-offs and a "trend toward employee-friendly" laws "expand the exposure" for small businesses, O'Shaughnessy said.

In 2008, about 95,000 charges were filed and in 2009, about 93,000 charges were filed with the Equal Employment Opportunity Commission -- more than ever before, O'Shaughnessy said. Layer in the economy and new laws, and 2010 "will probably continue the trend of a record year in terms of claims."

Claims include those for wrongful termination, race discrimination, retaliation, age discrimination and sexual harassment, O'Shaughnessy said.

Hartford Steam Boiler Group, a member of Munich-American Holding Co., currently has a Best's Financial Strength Rating of A+ (Superior).

To see the interview with Jeff O'Shaughnessy please visit http://www.ambest.com/conversations

(By Chad Hemenway, associate editor, BestWeek: Chad.Hemenway@ambest.com)