While there is sizable demand from insureds for coverage against the increasing tide of wage-and-hour claims made under the Fair Labor Standards Act, carriers remain largely reluctant to write policies—fearing a good chance of losing their shirts if they do.
Costl
y—and highly unpredictable—litigation is mushrooming over the issue, and if an underwriter is not careful, it can be "a great way to lose money," says William Boeck, senior vice president, insurance and claims counsel for Lockton Financial Services, a unit of Kansas City, Mo.-based insurance broker Lockton.
Some carriers are withdrawing wage-and-hour coverage altogether, while others are withdrawing coverage in certain jurisdictions or for certain industries, observes Helen Savaiano, president, management liability at the Hanover Insurance Group, which offers EPLI coverage aimed at middle-market accounts nationwide.
And for the few insurers providing coverage, limits remain restricted overall and what coverage there is primarily covers defense costs.
Defensive Posture
Right now, most insurers offering coverage under EPLI for employee wage-and-hour claims are willing only to provide for defense costs because these are the risks that are easiest to quantify.
"[Covering] defense is an easier decision for the insurer to make," says Boeck.
Typically, coverage for defense stands at around $100,000, although Boeck has heard rumors that one unnamed insurer has defense limits of $1 million.
The plaintiffs' bar has become quite savvy about what can be included in allegations over an employee complaint over an employer, according to several of the experts interviewed by NU. Someone may walk into an attorney's office claiming discrimination and walk out with a wage-and-hour complaint in their lawsuit because evidence may be more compelling on those grounds than discrimination alone.
And because this area of litigation can be so susceptible to large and hard-to-predict judgments, insurers for the most part do not want to cover settlement costs, says Thomas Hams, managing director and EPLI national practice leader for Aon Risk Solutions, a unit of Chicago-based insurance broker Aon.
In a recent poll of 30 carriers that provide EPLI insurance, 18 say they provide defense costs for wage-and-hour claims. Most provide it as sublimit endorsement. Only eight provide any form of defense and settlement coverage—and this is on a very narrow basis, according to "The Betterley Report, Employment Practices Liability Insurance Market Survey 2010," produced by Betterley Risk Consultants in Sterling, Mass.
Opportunity Knocks
With such a potentially large market for policies (the Department of Labor reports that 80 percent of employers are not compliant with wage-and-hour rules), the process of developing profitable insurance programs in this area has begun in some carrier circles. But this involves the difficult trick of trying to figure out how to differentiate the good risk from the uninsurable.
"It's like inching a boulder up the hill to educate the market on the risk," Hams says.
Richard Betterley, president of the consulting firm Betterley Risk Consultants, believes there is a great opportunity for insurers here if they can figure out how to underwrite the risk: If they can put the proper controls in place, they could find a new, money-making market.
Betterley says insurers will probably steer away from a Walmart-size risk, but they should be able to insure small businesses where the limits they would need to put up would be "less risky."
It is also the small business that is "overwhelmed with regulations" that would be more likely to make a mistake and where the demand for such insurance would be greatest, he says.
As far as tying an effective risk-management program to wage-and-hour coverage as a way of reducing risk, the experts say that no insurer has come out with such a component that could be an effective way to control the risk.
Savaiano notes that from an insurer's perspective, it would probably be "an expensive proposition."
"I have not seen a cost-effective tool, but there may be something in development," she says.
Efforts are also underway at the Department of Labor to get the situation fixed, with the government producing literature and promoting road shows to educate employers about the issue.
"Government does not want to be seen as the hammer; it wants to be part of the solution," Hams says.
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