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

In most cases, we examined actual policy forms and endorsements provided by the carriers. Of course, the carriers are not responsible for our interpretation of their policies or survey responses.

In using this material, the reader should understand that the information applies to the carriers' standard products, and that it may be possible to negotiate coverage, cost and other variables.

We have been following the EPLI market closely since 1991. In the beginning, there were five carriers active in this market; now there are perhaps 50 to 55. While there are additional carriers offering EPLI, we believe they represent an insignificantly small part of the market. To test whether we are covering the key carriers, we have reviewed our list with some of the most prominent observers of the EPLI market, who have confirmed we did not omit any significant markets. Some markets not covered in this report may disagree.

In our 2001 survey, we noted that product innovation had slackened, as carriers concentrated on profitability. That also has been the case in 2002 and 2003. We think this is healthy for both carriers and insureds, since only a healthy market can protect employers against the financial consequences of EPL suits.

Most carriers plan to selectively increase rates and, to a lesser extent, retentions. They are doing so because of profitability problems stemming from claims frequency, as well as because of an insurance environment in which it has been possible to charge higher rates. However, we note signs of a leveling off in increases. 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 our survey.

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

Rates: After several years of fierce price competition, carriers raised rates significantly from 2000 to 2003. Rates are still rising but now far less uniformly. For other than the largest employers, rates are increasing only moderately and 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, six predicted 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 predicted increases of 30% to 40%, and one foresaw hikes of 40% to 50%.

Retentions and deductibles: Retentions and deductibles have leveled off, except for large employers. While there have been some noteworthy major losses among larger employers, profitability problems associated with continuing small-claims frequency and the increasing cost of defense have been the main drivers of higher retentions and deductibles.

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

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

Volume: Gross written premium continues to grow but more slowly than in EPLI's boom years in the late 1990s. Management liability products continue to divert much of the premium that in the past might have gone to monoline EPLI purchases. Much of today's growth seems due solely to rate increases, partly offset by reduced premiums resulting from higher deductibles or retentions.

We estimate that since last year, EPLI gross written premiums have 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 to face higher-than-expected claims frequency. There are two main problems: mass claims and wage-and-hour claims.

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

Carriers that have a lot of experience with such claims use a variety of tools to lessen their impact. Some require mandatory deductibles of $1 million or more, or impose 10% to 25% coinsurance requirements. Others apply the policy deductible to each plaintiff's claim in the mass claim, rather than to the group as a whole.

Carriers focusing on small to midsize employers have not been greatly affected by mass-claims litigation and generally have not applied any special restrictions. However, they are encountering more wage-and-hour claims than expected. These claims are brought by employees who allege they were not paid for all of the time they put in, or who say they were not paid the correct wage. Although individually they may be relatively small, wage-and-hour claims add up to a significant amount for some insurers.

Limits: Available limits have not changed much since last year. Many carriers seem satisfied that their catastrophe exposures are now at manageable levels, given the cuts they made in their limits in 2002 and their current reinsurance support.

Target markets: EPLI carriers continue to be interested in most types of insureds, except for employee leasing firms, educational institutions and public entities. (Specialty markets are available for these risks.) Some insurers also cite law firms and entertainment industries as undesirable EPL risks.

Continuing to creep into the list of undesirable employers are real estate/property management companies, auto dealers and technology companies. Technology companies sometimes are shunned simply because many of these businesses fail. Still, plenty of carriers continue to write such employers.

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

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

?Coverage for punitive damages or intentional acts: [

Several carriers are reluctant to disclose that they offer such coverage, fearing that regulators might attack their offshore solutions. We understand that 16 states prohibit or restrict coverage for either punitive damages or intentional acts, including New York, Ohio, Florida and California. Additional coverage of the sort afforded by the offshore alternatives is vital in those states.

?Coverage for suits brought by third parties: [

?Workplace violence coverage: As in 2002, few carriers offered this coverage in 2003. Those that do offer it as a separate policy.

Definition of an insured: Carriers' definitions of an insured continue to become more uniform. All carriers include employees, many specifically including seasonal or temporary employees. Leased and contract employees may need coverage; a number of carriers extend coverage to these individuals if they are indemnifiable like employees. Insurers continue to differ, however, in their willingness to grant insured status to newly acquired organizations and to subsidiaries, although here, too, we find less differentiation than before.

Definition of a claim: For purposes of triggering coverage, an EPLI policy's definition of a claim is important. Most carriers' definitions are similar and include written demands, administrative processes and arbitration. Oral demands trigger coverage under some policies.

Coverage definitions: How coverage is defined greatly affects the quality of an EPLI policy, but it is increasingly difficult to ascertain differences among carriers on this issue. In just about all policies, the key sources of claims are well covered; only by subjecting the policy wording to close scrutiny can one distinguish differences.

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

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

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

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

Selection of counsel: While most carriers continue to control the selection of counsel, almost all allow the insured to have input. If the insured requests specific counsel at the right time (during proposal negotiations), the carrier is likely to approve the insured's choice. A few carriers offer the insured a choice of an indemnity policy, which allows the insured full control over selection of counsel.

Carriers primarily interested in large employers are more likely to permit insureds to select counsel than those catering mainly to small ones. But in general, carriers seem willing to allow the use of the insured's choice of counsel, as long as they are clearly qualified.

Consent to settle: Carriers are still reluctant to allow insureds much control over settlement. That's understandable, given that EPL suits often get emotional. Both employer and employee are often willing to continue their fight long after it makes economic sense to settle. Carriers are reluctant to fund such battles, of course.

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

Neither insureds nor insurers have been completely satisfied with hammer clauses. Consequently, so-called “soft” hammer clauses have been developed. They call for the carrier and client to share any costs exceeding a rejected settlement. Originally offered by Royal, soft hammer clauses now appear in many insurers' EPLI policies. Following is a list of those carriers in our survey who offer 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 Carolina Casualty), St. Paul: Negotiable.

A few policies continue to allow the carrier to settle without the insured's consent, which is dangerous to the employer. In practice, if the insured has a good reason to continue the defense, carriers usually will not enforce a hammer clause.

Prior acts coverage: Most carriers include prior acts in their standard coverage, although some insurers may limit the exposure via retroactive dates. Even those that do not include prior-acts coverage in their standard forms can add it by endorsement.

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

Risk management services: Innovation in value-added services has slowed but is still a primary source of EPLI product improvement-and one in which numerous vendors, including law firms, also are competing for business. Risk management services benefit both carriers and insureds. We hope such value-added services do not take a back seat as product innovation slows and expense control increases in importance. Among the risk-management services offered by insurers participating in our survey are the following:

?The services of separate EPL consulting firms offering auditing and employment practices legal advice.
?Toll-free risk-management consultation services. A certain amount of free time (e.g., 30 minutes per month) may be provided. In some cases, 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 as discrimination and harassment awareness for supervisors, and diversity awareness for all employees.
?Risk management and compliance materials on CD-ROM.

Summary

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

The puzzling question is: Why don't more employers buy this coverage? Is it because they can't afford it, because they don't understand it, or because they don't think they'll ever be hit with a claim? We think it may be the latter. How often have we heard “My employees love me; they would never sue,” or “We have the best HR practices and great employment attorneys, so we have nothing to worry about”? Too often, we fear.

Still, there should be substantial growth ahead for EPLI, but we don'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 2004 issue of The Betterley Report, which is published five times a year by Betterley Risk Consultants. The complete report, which contains charts showing the responses of individual carriers, can be purchased for $95. Annual subscriptions are available for $347. For more information, contact Richard S. Betterley, CMC, at (877) 422-3366 or at rbetterley@betterley.com

Special Reports /

An overview of the employment practices liability marketplace

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