An agent's primary selling point for hammering away at reluctant employment practices liability insurance prospects is succinctly summarized by Kristina Mason, management liability broker and marketing and corporate communications manager for wholesaler Worldwide Facilities in Los Angeles: “As a business owner, you don't have to do anything wrong,” she said. “Someone just has to say you did.”
It would be hard to improve upon Mason's maxim. For the past 15 years or so, there has been no shortage of employees, former employees and non-employees willing to “say you did.” Recently, however, employment practices claims have been really coming into their own: Instead of griping about the boss around the water cooler, more folks now do their complaining at the local EEOC office.
Why? Because they can. “Word has gotten around that you can probably get a settlement for very little effort,” Mason said.
“Business is keeping us busy, let's put it that way,” agreed Carrie Brodzinski, management liability products manager for Beazley Group plc in Farmington, Conn.
That being the case, now is definitely the time for independent agents and brokers to actively promote EPLI to clients large and small. Failure to do so in the current environment is poorly serving not only your client but yourself, and in more ways than one. EPLI is a growth industry. Are you missing the boat?
A going concern
EEOC claims today are at their highest volume since 2002, and each charge category–discrimination, harassment, retaliation, etc.–has gone up by double digits since 2006, “which is really rare,” said Cathy Padalino, EPL product manager and vice president for Chubb Specialty Insurance in Warren, N.J. The monetary relief figure for 2007 was $345 milllion, up 26 percent over 2006. “We talk about EPL as having the frequency of workers' comp but the severity of D&O, all in one coverage,” Padalino said.
Win or lose, each of those claims maturing past the initial filing costs someone money. The cost of defense alone now averages $125,000, according to Pamela Ritz, president of Specialty Risk Management in Austin, Texas. The average jury award is $200,000, and employees win two of every three cases that make it to trial. And that's just the federal EEOC–plenty of claims are brought at the state and local levels, which are notoriously employee-friendly.
It's not a question of if you're sued, but when, Padalino said. A Chubb survey of private company executives indicated that one in three firms has experienced an EPL-related event in the past five years. As the size of the company grows, so does the likelihood of a claim or lawsuit: 80 percent of companies with 500 or more employees had an EPL event in the past five years, although only one in three bought an EPL policy. Of those surveyed with claims, 34 percent reported costs of between $11,000 and $300,000, with an average cost of $74,400.
Even if the employer is completely without fault, “it'll cost you a lot to prove it,” said Elena Ryzhkina, an underwriter for ProWest Insurance Services Inc. in Folsom, Calif. Guy Knapp, ProWest president, recalled a recent case where “we spent over $100,000 defending the insured, proving that everything we did was right. We won, but it cost us $100,000 for the privilege of winning.”
It'll never happen to me
With the stakes so high, selling EPL–a fairly affordable coverage, given the exposure–should be a laydown, right? Well, yes and no. There are certainly more people, including very small businesses, buying it now than before. “Business is booming, and it's been growing ever since the product was first introduced,” said Lana Miller, managing director of the Financial Risk Group Practice for AmWINS in Los Angeles. But given Americans' neverending love affair with suing the pants off anyone within reach, “more” really needs to be “everyone.”
There are problems at both ends of the sales spectrum. The largest employers grasp the growing need for EPLI, but have more options for managing the risks that don't necessarily include a comprehensive insurance program. In dealing with smaller clients ranging from companies with two to 2,000 employees, agents sometimes face a double obstacle: getting them to truly comprehend the exposure and then convincing them to purchase insurance when they do. “Our true competition in EPL is the nonbuyer,” Cathy Padalino said.
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| Guy Knapp |
In California at least, where 90 percent of EPL business heads to the E&S market, it is a laydown. Guy Knapp, whose company started a program of providing retailers with continuing education classes on EPL, said that if a broker is well versed in the topic and can explain it to prospects, “they buy it.” ProWest writes a lot of accounts of less than 10 employees, “and our renewal retention on those accounts is almost 100 percent. Once they understand it, they have to have it,” he said.
Apples and watermelons
An agent can't educate the client until he educates himself, of course. Those experienced in specialty lines have a good handle on EPL products, but agents more accustomed to churning out workaday policies on a conveyor belt will need to step back and have another look when it comes to employment practices. Whereas an agent can collect a dozen quotes on typical P&C risks and rest assured he's comparing apples to apples, with EPLI it's more like “apples and oranges and bananas,” said Ritz (“apples and watermelons,” added Mason). Each policy and its endorsements are different, and the differences matter.
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| Cathy Padalino |
Analysis is definitely required, said Chubb's Padalino. “There's a lot of difference with respect to claims made versus claims made and reported, whether breach of employment contracts are covered, or whether there are intentional act exclusions when EPL coverage is endorsed onto a GL policy,” she said. “There are a lot of nuances, and one of the challenges we face is making it easy enough to sell the product.” The nuances are why allowing a client to choose EPL solely on price can be a tragic error–for the client in terms of coverage, and for you in terms of E&O.
As for limits, too much is never enough–although anything over $5 million is rare. Worldwide's Mason said as a rule to go $1 million, or go home. “Clients will say that they'll look at a quote, but they only want $100,000. Well, that's nothing. You'll blow through that in one claim.”
Not quite so fast, says HSB's O'Shaughnessy. The reinsurer has gone after EPL business the past two years, with “overlooked” Main Street companies as its “power alley.” HSB is different from capacity insurers, he said, in that it owns and manages the product on the insurer's behalf. The goal was to create a program that would overcome the “too expensive” objection by offering limits as low as $25,000 and as high as $250,000. Mason is correct that a catastrophic claim could wipe that out in a week, but it is some protection against those claims that will never see full bloom.
“The small guys, whose entire insurance program might be $1,500, are not about to buy a stand-alone EPL policy for $3,000,” O'Shaughnessy said. “Our premium could be less than $250.”
The buzz phrase in ELP right now is wage and hour. Wage and hour claims–overtime, rest breaks, and so on–are not insurable, but defense costs are. “There's just been an explosion of litigation in that area, both on federal and state levels,” Beazley's Brodzinski said. “It's being brought on a class basis much more frequently than it's ever been.”
Mason said that carriers are now starting to include a sublimit of wage and hour coverage ranging from $100,000 to one market with a maximum of $3 million, and more will soon follow. “When markets visit us, we tell them we like your product, but you don't have wage and hour, so you'd better get on the bandwagon,” she said.
Third-party coverage has long been available with EPL, but interest in it seems to be peaking. Several sources reported seeing big spikes in third-party claims, while some employers are learning the hard way that third parties can be roughly defined as anyone with even a peripheral connection to their companies. Mason wonders if employers really understand their third-party exposures, which are increased because “a lot of companies simply don't hire and fire people very well.” For example, discrimination claims can be made by job applicants who weren't offered a position. “Imagine that,” she said. “Owners need to swallow the pill and learn about all their exposures.”
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Sidebar Style Points
EPLI has a number of little nooks and crannies that agents need to peep into. Here are some need-to-know and nice-to-know tidbits to keep in mind when talking to clients and prospects about EPLI coverage:
Jeff Beckner is managing editor of American Agent & Broker.
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