THIS article presents an over-view of Betterley RiskConsultants' recent survey of the market for employment practicesliability insurance. Twenty-five carriers, which we believe formthe core of the EPLI market, participated in the survey. We havetested their responses against our own experience and knowledge.Where they conflicted, we reviewed the inconsistencies with thecarriers. However, the evaluation and conclusions are our own.

In most cases, we examined actual policy forms and endorsementsprovided by the carriers. Of course, the carriers are notresponsible for our interpretation of their policies or surveyresponses.

In using this material, the reader should understand that theinformation applies to the carriers' standard products, and that itmay be possible to negotiate coverage, cost and othervariables.

We have been following the EPLI market closely since 1991. Inthe beginning, there were five carriers active in this market; nowthere are perhaps 50 to 55. While there are additional carriersoffering EPLI, we believe they represent an insignificantly smallpart of the market. To test whether we are covering the keycarriers, we have reviewed our list with some of the most prominentobservers of the EPLI market, who have confirmed we did not omitany significant markets. Some markets not covered in this reportmay disagree.

In our 2001 survey, we noted that product innovation hadslackened, as carriers concentrated on profitability. That also hasbeen the case in 2002 and 2003. We think this is healthy for bothcarriers and insureds, since only a healthy market can protectemployers against the financial consequences of EPL suits.

Most carriers plan to selectively increase rates and, to alesser extent, retentions. They are doing so because ofprofitability problems stemming from claims frequency, as well asbecause of an insurance environment in which it has been possibleto charge higher rates. However, we note signs of a leveling off inincreases. Several carriers report flat or even declining rates,and are suspicious that their competitors may be lowering premiums.This is a sure sign of a resumption of rate competition.

The rest of this article summarizes some of the findings of oursurvey.

Capacity: The number of carriersoffering EPLI is beginning to shrink. Reasons include globalchanges (the failure of Kemper and Royal's exit from the U. S.market) and performance.

Rates: After several years of fierceprice competition, carriers raised rates significantly from 2000 to2003. Rates are still rising but now far less uniformly. For otherthan the largest employers, rates are increasing only moderatelyand in some cases may be flattening.

We asked carriers whether they planned to increase (or decrease)rates in the coming year. Most offered their thoughts.

?Of 18 carriers focusing on small or midsize businesses, sixpredicted flat or decreasing rates, seven forecast increases of 10%or less, and five said rates would increase 11% to 25%.

?Of three carriers focusing on large employers, two predictedincreases of 30% to 40%, and one foresaw hikes of 40% to 50%.

Retentions and deductibles: Retentions anddeductibles have leveled off, except for large employers. Whilethere have been some noteworthy major losses among largeremployers, profitability problems associated with continuingsmall-claims frequency and the increasing cost of defense have beenthe main drivers of higher retentions and deductibles.

Deductibles and retentions seem steady, except for the largestemployers, who probably are better off self-insuring all but theircatastrophe exposure anyway. Small and midsize employers cancontinue to obtain reasonable retentions (or deductibles).

Of 10 carriers focusing on small or midsize employers, eightsaid they expect no change in their deductibles or retentions thisyear, while one predicted they would rise and another said theywould fall. Among 12 carriers that commented on their competitors'likely course of action, half predicted nominal increases, and halfforecasted that deductible and retentions would remain flat orfall.

Volume: Gross written premiumcontinues to grow but more slowly than in EPLI's boom years in thelate 1990s. Management liability products continue to divert muchof the premium that in the past might have gone to monoline EPLIpurchases. Much of today's growth seems due solely to rateincreases, partly offset by reduced premiums resulting from higherdeductibles or retentions.

We estimate that since last year, EPLI gross written premiumshave grown 25% to 30%. That puts volume right around $1.3 billion,which is a lot for a specialized line of coverage.

Claims: Carriers have continued toface higher-than-expected claims frequency. There are two mainproblems: mass claims and wage-and-hour claims.

Mass claims occur when multiple plaintiffs target brand-namecompanies, threatening coercive action unless the defendants settlequickly. Carriers have incurred large settlements for claims thatemployers refused to fight, fearing damage to their reputations.Such claims have made it difficult for brand-name companies to buyEPLI coverage at a price they would like.

Carriers that have a lot of experience with such claims use avariety of tools to lessen their impact. Some require mandatorydeductibles of $1 million or more, or impose 10% to 25% coinsurancerequirements. Others apply the policy deductible to eachplaintiff's claim in the mass claim, rather than to the group as awhole.

Carriers focusing on small to midsize employers have not beengreatly affected by mass-claims litigation and generally have notapplied any special restrictions. However, they are encounteringmore wage-and-hour claims than expected. These claims are broughtby employees who allege they were not paid for all of the time theyput in, or who say they were not paid the correct wage. Althoughindividually they may be relatively small, wage-and-hour claims addup to a significant amount for some insurers.

Limits: Available limits have notchanged much since last year. Many carriers seem satisfied thattheir catastrophe exposures are now at manageable levels, given thecuts they made in their limits in 2002 and their currentreinsurance support.

Target markets: EPLI carriers continueto be interested in most types of insureds, except for employeeleasing firms, educational institutions and public entities.(Specialty markets are available for these risks.) Some insurersalso cite law firms and entertainment industries as undesirable EPLrisks.

Continuing to creep into the list of undesirable employers arereal estate/property management companies, auto dealers andtechnology companies. Technology companies sometimes are shunnedsimply because many of these businesses fail. Still, plenty ofcarriers continue to write such employers.

Few carriers avoid specific states. While California often iscited as a challenge (some carriers require larger deductiblesthere), it is such a large market that it can't easily be ignored.Carriers also identify states in which their products might not beavailable because of regulatory restrictions. But theserestrictions can change, so it is advisable to contact an affectedcarrier before writing it off as a possible market.

Special coverages: Several specialcoverages are becoming more necessary, so we asked for moreinformation about them in this year's survey. The results aresummarized below.

?Coverage for punitive damages or intentional acts: [

Several carriers are reluctant to disclose that they offer suchcoverage, fearing that regulators might attack their offshoresolutions. We understand that 16 states prohibit or restrictcoverage for either punitive damages or intentional acts, includingNew York, Ohio, Florida and California. Additional coverage of thesort afforded by the offshore alternatives is vital in thosestates.

?Coverage for suits brought by third parties: [

?Workplace violence coverage: As in 2002, few carriersoffered this coverage in 2003. Those that do offer it as a separatepolicy.

Definition of an insured: Carriers'definitions of an insured continue to become more uniform. Allcarriers include employees, many specifically including seasonal ortemporary employees. Leased and contract employees may needcoverage; a number of carriers extend coverage to these individualsif they are indemnifiable like employees. Insurers continue todiffer, however, in their willingness to grant insured status tonewly acquired organizations and to subsidiaries, although here,too, we find less differentiation than before.

Definition of a claim: For purposes oftriggering coverage, an EPLI policy's definition of a claim isimportant. Most carriers' definitions are similar and includewritten demands, administrative processes and arbitration. Oraldemands trigger coverage under some policies.

Coverage definitions: How coverage isdefined greatly affects the quality of an EPLI policy, but it isincreasingly difficult to ascertain differences among carriers onthis issue. In just about all policies, the key sources of claimsare well covered; only by subjecting the policy wording to closescrutiny can one distinguish differences.

Most policies now have all-inclusive wording that eliminates theneed to enumerate perils. Once it was useful to compare policies,for example, on the basis of the types of discrimination theycovered. But now carriers frequently broaden coverage by includingsuch encompassing phrases as “and other protected classes.” This isa benefit for the insured and makes the need to compare lists ofperils less important.

In general, we encourage carriers to make more use ofall-inclusive terminology. In the definitions of coverage, we areseeing more “all risk” wording and view this as better for both thecarrier and the insured.

Claims reporting: Most carriersrequire the named insured to report a claim “as soon aspracticable,” which seems reasonable.

Extended reporting periods: The ERP isan under-appreciated feature in EPLI policies, but one that willtake on a growing importance if carriers lose interest in themarket. We noticed this year that many carriers have shortened thelength of ERP they are offering. The shortest ERP in our survey wasthree months. Numerous carriers offered ERPs of at least 1 year,and 11 provide ERPs of three or more years.

Selection of counsel: While mostcarriers continue to control the selection of counsel, almost allallow the insured to have input. If the insured requests specificcounsel at the right time (during proposal negotiations), thecarrier is likely to approve the insured's choice. A few carriersoffer the insured a choice of an indemnity policy, which allows theinsured full control over selection of counsel.

Carriers primarily interested in large employers are more likelyto permit insureds to select counsel than those catering mainly tosmall ones. But in general, carriers seem willing to allow the useof the insured's choice of counsel, as long as they are clearlyqualified.

Consent to settle: Carriers are stillreluctant to allow insureds much control over settlement. That'sunderstandable, given that EPL suits often get emotional. Bothemployer and employee are often willing to continue their fightlong after it makes economic sense to settle. Carriers arereluctant to fund such battles, of course.

The so-called “hammer clause” allows a carrier to limit itsclaim payment to no more than the amount for which it could havesettled, plus defense costs. This protects the carrier from a“litigate at any cost” insured. (Meanwhile, consent-to-settleclauses protect employers from “settle it and who cares about theprecedent” carriers.)

Neither insureds nor insurers have been completely satisfiedwith hammer clauses. Consequently, so-called “soft” hammer clauseshave been developed. They call for the carrier and client to shareany costs exceeding a rejected settlement. Originally offered byRoyal, soft hammer clauses now appear in many insurers' EPLIpolicies. Following is a list of those carriers in our survey whooffer them, along with the insured's required participation.

?AIG/National Union (larger employer product), Great American,Gulf (larger employer product), Houston Casualty, Liberty, NAS(Lloyd's), RLI: 50%.
?Chubb Specialty, Travelers, Zurich: 30%.
?XL Insurance: 25%
?CNA, Hartford, Monitor Liability Managers (Admiral and CarolinaCasualty), St. Paul: Negotiable.

A few policies continue to allow the carrier to settle withoutthe insured's consent, which is dangerous to the employer. Inpractice, if the insured has a good reason to continue the defense,carriers usually will not enforce a hammer clause.

Prior acts coverage: Most carriersinclude prior acts in their standard coverage, although someinsurers may limit the exposure via retroactive dates. Even thosethat do not include prior-acts coverage in their standard forms canadd it by endorsement.

Territory: All policies reviewed offer coverage for suitsbrought in the U.S., its territories and Canada. Most carriers alsooffer the option of true worldwide coverage (for suits broughtanywhere).

Risk management services: Innovationin value-added services has slowed but is still a primary source ofEPLI product improvement-and one in which numerous vendors,including law firms, also are competing for business. Riskmanagement services benefit both carriers and insureds. We hopesuch value-added services do not take a back seat as productinnovation slows and expense control increases in importance. Amongthe risk-management services offered by insurers participating inour survey are the following:

?The services of separate EPL consulting firms offering auditingand employment practices legal advice.
?Toll-free risk-management consultation services. A certain amountof free time (e.g., 30 minutes per month) may be provided. In somecases, unlimited free time is offered.
?Toll-free hot lines for employees to report complaints.
?”Best practices” manuals and seminars.
?Assistance with the creation of employee handbooks.
?Web-based interactive risk-management training on such subjects asdiscrimination and harassment awareness for supervisors, anddiversity awareness for all employees.
?Risk management and compliance materials on CD-ROM.

Summary

EPLI should be a vital part of almost all employers' insuranceplans. Although carriers remain challenged by the high cost ofdefense and higher-than-expected claims frequency, EPLI is a bigenough line to encourage them to stick with it until they find theproper price/benefit trade-off.

The puzzling question is: Why don't more employers buy thiscoverage? Is it because they can't afford it, because they don'tunderstand it, or because they don't think they'll ever be hit witha claim? We think it may be the latter. How often have we heard “Myemployees love me; they would never sue,” or “We have the best HRpractices and great employment attorneys, so we have nothing toworry about”? Too often, we fear.

Still, there should be substantial growth ahead for EPLI, but wedon't know whether it will take the form of monoline (stand-alone)insurance or a coverage component of management liability products.The last few years make us think that it may be the latter.

This article was derived from the December 2003/February 2004issue of The Betterley Report, which is published five times a yearby Betterley Risk Consultants. The complete report, which containscharts showing the responses of individual carriers, can bepurchased for $95. Annual subscriptions are available for $347. Formore information, contact Richard S. Betterley, CMC, at (877)422-3366 or at [email protected]