While an explosion in wage-and-hour lawsuits may bring moreemployers to the doors of their employment practices liabilityinsurance carriers, in most cases, those seeking coverage forsettlement costs will be out of luck, experts say.

Most carriers remain dead set against providing coverage forsettling employee suits in which workers allege violations offederal or state laws governing how they are paid.

In addition, while some carriers provide limited coverage forthe costs of defending such suits, not everyone agrees the coveragegrants are really adding protection for employers.

"The largest number of class actions coming in every carrier'sdoor are FLSA claims," said Lucy Ann Galioto, vice president atAIG's National Union in New York, referring to wage-and-houractions alleging violations of the Fair Labor Standards Act.

Such actions can deal with issues ranging from missed employeemeal breaks to improper classification of employees as exempt fromovertime pay, she said.

Costs to defend the cases reach as high as $3 million whenbrought as collective actions, she said. "Giving a sublimit of$150,000 is not going to do it," she said, suggesting thatdefense-only sublimits being offered by some carriers are a drop inthe bucket in terms of covering these costs.

"I think the way to go is through prevention, education and abuy-in from the [insured] that this is serious," she said. However,she noted that the issue is one that is very difficult foremployers to grapple with, especially those with temporaryworkforces or changing workforces scattered throughout thecountry.

AIG has one client that hired a person specifically charged withmonitoring all its California worksites to make sure all theemployees are properly classified and that all are taking restperiods and meal breaks, she said. "I think that [speaks to] theenormity of the problem."

Several experts pointed to Wal-Mart as a high-profile example ofan FLSA target that has served as a wakeup call even to muchsmaller companies that run the risk of being hit with wage-and-hourlawsuits. "All you need is that one employee," Ms. Galioto said,noting that a car wash in New York paid over $700,000 in awage-and-hour dispute.

At Philadelphia Insurance in Bala Cynwyd, Pa., where smallercompanies (averaging 500 employees) tend to populate a book whereEPLI is bundled in insurance packages with directors and officers,fiduciary, Internet liability and workplace violence coverages,Brad Lacey, assistant vice president-product manager for themanagement liability division, illustrated a potential exposure fora social services firm falling in Philadelphia's private andnonprofit company niche.

Group homes for mentally challenged children can have employeeson 24-hour shifts, he noted. "If you have some downtime on theshift, or you sleep over because you have a 24-hour shift, are youto be paid for your sleep? That has become an issue," he said.

Mr. Lacey noted that while the FLSA has existed for decades, thegovernment has become more active in enforcing it in recent years.He and other experts agree, however, that the plaintiffs' bar isthe biggest driver of a surge in FLSA suits.

"They started to pay attention to it and some cases got throughand established new case law," Mr. Lacey said. "It's just one ofthose things where the legal community starts to target it."

Ms. Galioto referred to an article she read in which plaintiffs'lawyers called these cases "low-hanging fruit" because they areeasy to file in states that are amenable to collective actions,requiring less work than regular discrimination class actions.

Analyzing workplace class actions for 2007 in a January report,the Chicago law firm Seyfarth Shaw, which defends employment cases,reported that FLSA collective actions pursued in federal courtproduced more rulings last year than either actions ofdiscrimination or actions under the Employment Retirement IncomeSecurity Act (ERISA). While $1.8 billion in ERISA costs dominated asettlement total of $2.7 billion for all 2007 workplace classactions tallied, the law firm reported that settlements ofwage-and-hour actions totaled $319.3 million, while discriminationclass actions brought $282.1 million in settlements.

"The volume of wage-and-hour litigation continues to increaseexponentially," the report said. While the U.S. District Courts forthe Southern and Middle Districts of Florida have morewage-and-hour filings than any other federal jurisdiction, thereport noted that the most explosive growth is at that state courtlevel, with California, Florida, Illinois, New Jersey, New York,Pennsylvania and Texas leading the way.

"You really don't have to be an expert" to bring these cases,Ms. Galioto said. "You just have to find one person."

She described a situation where a worker visits a plaintiffs'lawyer to complain about some form of discrimination and ends uptalking generally about his or her work duties and whether he orshe took breaks. The lawyer begins to get a sense "of how compliantor noncompliant that employer is, and pretty soon you have acollective action going."

Neither AIG nor Philadelphia Insurance cover settlement costsfor wage-and-hour cases, but Philadelphia does offer a $100,000sublimit of liability to provide defense costs.

"All carriers are different, but our own underwriting philosophyis that you're really in violation of the law" in these cases, Mr.Lacey said. "If a case comes up, we'll defend you because anybodycan be sued for anything. But we're not going to pay if [theemployer is] actually guilty of violating the law."

"Our stance right now is we do underwrite for it," Mr. Laceysaid. "We want to make sure [insureds] have some written proceduresin place [and] that their procedures are reviewed by outsidecounsel," he said, describing some of the underwriting factorsconsidered.

In addition, the insurer looks at the makeup of the employeebase--how many employees are exempt, nonexempt, salaried or notsalaried. Type of industry is another factor, he said, noting, forexample, that problems are more prevalent in the restaurantindustry than for office work.

Like Philadelphia Insurance, most carriers that offer coveragefor wage-and-hour claims provide defense-only sublimits, accordingto Richard Betterley, president of Betterley Risk Consultants inSterling, Mass., and author of "The Betterley Report." His December2007 survey of 25 EPLI products (which did not include PhiladelphiaInsurance) lists 10 with defense-only sublimits, while onlytwo--AVEMCO and Markel--cover settlements also.

"Generally speaking EPL insurers take the position that [they]do not cover anything related to wage-and-hour, but the reality isnot quite so clear," Mr. Betterley said, referring to the 13remaining insurers.

Describing "the reality" in wage-and-hour claims scenarios, hesaid there are usually several allegations against the insured."There's almost always something covered--like discrimination,"where an allegation might be that the employer only short-changedone class of employees.

"Therefore a number of carriers have been paying to defend casesthat were basically wage-and-hour because there were alsodiscrimination allegations," he said.

Those carriers that have come out and said, "We will provide adefense, but we will put a sublimit on," he noted, are notacknowledging that they would have had to provide a defense anywayin the multi-allegation-type situation he described.

"What's changed is now you've got a sublimit on that cost," hesaid. Without the sublimit, if an insured had a policy with a $1million limit of liability, and it had a wage-and-hour case wheredefense was covered because there was also a discriminationallegation, the insurer might have been on the hook for $1million.

Now, by putting a $250,000 sublimit on wage-and-hour, theinsurer may actually be reducing coverage, not increasing it, hesaid.

Peter Taffae, managing director of Executive Perils, a LosAngeles-based wholesale brokerage, offered a similar assessment.Noting that the availability of $100,000 defense sublimits isincreasing, he observed that "most people look at this as ifthey're getting an extra one hundred thousand" of coverage.

"That's not the way to look at a sublimit. A sublimit is anexclusion. Without the sublimit, you've got full limits," hesaid.

Mr. Taffae said the market is currently moving toward $250,000sublimits. "There's only one market, London, that will give $1million," he said.

As for carriers that don't offer any coverage, "the time hascome where you're just going to have to do it," he said. "A yearfrom now, it's just going to be like third-party," he said,referring to the fact that while carriers were slow to extend EPLIto include coverage for discrimination suits brought by nonemployeethird parties, they include this almost universally today.

"No one is going to buy a policy without it. You're at asubstantial disadvantage if you don't offer it," he said, addingthat carriers are "being smart" to limit coverage to defenseonly.

Mr. Betterley said that while there's been talk about morecarriers providing settlement coverage also, "the more thoughtfulEPL product managers don't want any part of [that]--"and they'reright because they don't want to be covering some employer'sdecision to short-change its employees."

While there's always a possibility that a competitive insurancemarket will force more carriers into providing the settlementcoverage, "I see it as a pretty high wall that's going to be toughto breach. From a product improvement standpoint, I think thecarriers are just not going to want to go there," Mr. Betterleysaid.

At AIG, Ms. Galioto said, "We don't cover it because these aredisgorgement claims. Essentially, the employer is keeping somethingit should have given the employee." She added that in a Californiacase, the appellate division has ruled it is against public policyfor an insurer "to pay earned but unpaid wages."

At Markel Shand in Deerfield, Ill., which offers a defense andsettlement product, EPLI Product Manager Robert Cap said "that's acurious argument on the part of some competitors," referring to thenotion that indemnification is against public policy.

"It's an admitted product," he explained, noting that Markel has"the green light in 45 states to offer the coverage."

With defense-only coverage, he said, the insured is "only halfprotected," adding that once the defense limit is exhausted, theinsured is on its own."

"The indemnification component is a nice feature because ifthere's an opportunity to resolve a case early and short-circuit aclass action, we're able to do that," added Mr. Cap, whose companyis a market for employers with 500 employees or less.

Acknowledging arguments of other carriers that this isuninsurable "because someone could consciously disregard the needto pay their workers properly," Mr. Cap said Markel's experiencehas been that the claims are simply "based on mistakes--amisclassification or a fundamental misunderstanding" of anemployer's legal compensation obligations to employees.

"In most cases, they're shocked that they made such mistakes,"he said. "There's ignorance on the part of employers with respectto the law," he said, referring to the FLSA. "It's a confusinglaw," he said.

"A lot of employers still don't understand the simple notionthat when employees work overtime, they need to be paid at atime-and-a-half rate, unless the state specifies otherwise," hesaid. "Or they say, 'You worked an hour over your regular schedule.Let me carry that over to the next pay period and I'll pay youthere,' which is a violation."

Mr. Taffae noted that in early 2004, the Department of Labor(DOL) updated the FLSA by changing the way employers shoulddetermine overtime exemptions and raising salary thresholds ofexempt employees.

"I think the intent was to decrease the number of DOL actions,but with the publicity of these changes, they rang a bell" for theplaintiffs' bar, substantially increasing the lawyers' interest inwage-and-hour suits, Mr. Taffae said.

Both Mr. Taffae and Mr. Cap said there's never been more claimsactivity than there is right now, citing a worsening economy asanother key factor.

"As people are laid off, they realize their former employers didnot pay them overtime or did not pay them properly. You see theseclaims surfacing," Mr. Cap said.

"Now is not a good time to be an underwriter," Mr. Taffaesaid.

Still, Mr. Cap said the number of carriers offering FLSAcoverage has risen in the last year. "For four years, we wereprobably the only carrier offering a sublimit of $100,000 on adefense-and-indemnity basis," he said, noting that threecompetitors jumped in with a similar product in the last 12months.

Will more enter in future years?

"Personally, I think the Johnny-come-latelies of the world...aregoing to feel the effects of offering the sublimit at a low price,and with the worsening economy and the increase in FLSA claims,you'll see the opposite take place," he said. "I think you'll findthat some carriers that jumped in and said we're willing to do thiswill pull out."

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