EPLI market update: Avoiding the sting

As the economy slowly improved, EEOC claims dropped to pre-recession volumes by 2014′s end. Unfortunately for insurers, the long-tail nature of the Employment Liability business means that claims filed several years ago are still being handled. Carriers report a sustained level of both disability claims and retaliation claims, which involve allegations that employers terminated or demoted staff or took other retaliatory action because employees filed a grievance. Additionally, the EEOC has taken a more aggressive stance in encouraging and pursuing both individual claims and class action around employment discrimination, as outlined in its 2013-2016 Strategic Enforcement Plan.

"The EEOC is very vocal and transparent about what they are enforcing. They even have a LinkedIn feed, which is actually very helpful by showing what they are targeting," says David Zell, vice president and program manager specializing in professional liability at XL Catlin.

The EEOC's implementation of its plan has resulted in lawsuits around newer legislation, such as the Genetic Information Nondiscrimination Act of 2008 (GINA), as well as modern interpretation of older laws. For instance, in September 2014, the EEOC filed two lawsuits alleging violations of Title VII of the Civil Rights Act of 1964 based on transgender discrimination, marking the first time transgender issues resulted in EEOC action. In April 2015, the first of those claims was settled with a $150,000 payment to the transgender employee.

However, despite elevated public awareness of sexual-orientation issues—and June's U.S. Supreme Court decision regarding gay marriage—it's too soon to predict a new surge in EPLI-related claims.

"There has been a lot of discussion in recent months around LGBT issues, but we have not seen an onslaught of claims out of those issues," Zell says.

Wage and hour

Although discrimination and retaliation count among the most common types of EPLI claims, the largest number of complaints to regulators involves wage-and-hour allegations of improper payment of overtime wages or misclassification of hourly workers as exempt employees. Insurers have continued to restrict coverage for those claims in EPLI forms.

"The reality is there are fewer and fewer insurers looking to provide wage-and-hour coverage, and if they do they do it as sublimit, typically no more than $100,000," says Jim McErlean, sales manager at ELM Insurance Brokers Inc., a subsidiary of NSM Insurance Group.

Large employers seeking coverage may find it in standalone forms, often in the Bermuda marketplace. For instance, XL Catlin's Bermuda Professional Lines Unit launched its wage-and-hour form in 2013, offering up to $10 million capacity with a $5 million attachment point for Fortune 500 and other large, publicly traded companies.

Related: Sexual harassment suit against bakery owner a recipe for disaster for broker

"There is increased pressure to offer more wage-and-hour coverage, but we are very selective in who we will write," says Zell. Smaller employers will have trouble finding standalone coverage, but may find some carriers willing to offer sublimits in their EPLI forms. XL Catlin offers a $50,000 defense sublimit by endorsement within its form to qualified businesses outside of California.

Nationwide, carriers are trying to hold the line on rates and, in general, are achieving single-digit increases. Retentions have spiked dramatically nationwide.

"At one time, a typical retention was $2,500. Now it's $25,000 and up, and I believe it will continue to rise if we see the current claims trend continue," says Randy Hedlund, director of NSM Insurance Group's care providers insurance services program.

Large employers subject to mass or class-action claims are often seeing deductibles of $1 million plus and coinsurance of up to 25%, according to a 2014 EPLI Insurance Market Survey by Massachusetts-based management consulting firm Betterley Risk Consultants.

However, overall capacity in the market is strong, with towers of up to $500 million available. New entrants also have jumped into the EPLI market, for example, Allianz Global Corporate & Specialty (AGCS), which began writing financial lines business in North America in early 2015. AGCS writes a limited amount of EPLI as part of its program business issued through Fireman's Fund, primarily for larger, public companies. In September, AGCS expects to release its standalone EPLI policy and begin diversifying into smaller public and private companies, including nonprofits.

"If we are going to be a full-service provider, we need to offer all coverages within the management liability spectrum, including a comprehensive standalone EPLI policy," says Laura Coppola, AGCS' head of management liability commercial.

The exception to the strong capacity picture is California, which continues to be the toughest state in the country in which to write EPLI. "California was hit very hard by the economic downturn and is a very plaintiff-friendly environment. We've seen a wave of claims coming in, and particularly a wave of wage-and-hour coverage requests coming in," says Hedlund.

"Within California, the capacity issue is very real," adds McErlean. "There seems to be a carrier every month withdrawing from the state EPLI market or losing interest in providing wage-and-hour coverage."

Broker opportunity

Given the claim frequency, EPLI is a surprisingly undersold—or perhaps under-bought—coverage, particularly among small and mid-sized accounts.

"We feel market penetration is extremely low," says Zell. "There are many smaller employers who don't buy EPLI. They buy a BOP to cover the business and don't feel they need additional coverage."

In Chubb's most recent study of the EPLI market, only 30% of the 450 companies surveyed purchased the coverage. "That amazes us, particularly when employers understand the exposure but still don't purchase insurance," Tyson says.

Richard Betterley, president of Betterley Risk Consultants, believes many smaller companies view their human relations situation through rose-colored glasses.

Related: Reduce E&O with EPL

"There's the natural desire to believe that your employees love you and will never sue you, but that's unfortunately not the case," he says. "Some companies also fear that if they buy EPLI, employees will be more motivated to sue them, knowing that coverage is in place. Or, they may simply not want to shell out the money for a policy, which is unfortunate because one claim can put a small company out of business."

"A lot of people don't realize that even a well-run operation can end up with a problem because of the ways various laws are written and the jurisdictions that are favorable to plaintiffs," says Hedlund.

Part of buyers' reluctance is also that they believe they have coverage elsewhere.

"Sixty percent of non-buyers [thought] they were covered under General Liability. That tells you that there is an opportunity for brokers to go out and be the trusted adviser to clients, show them news about companies like theirs that are being sued, and show them that they don't have coverage under their current form," Tyson says.

Agents also can seize opportunity by demonstrating to clients and prospects that EPLI forms provide more than just coverage for claims."One thing that's undersold is the value of the risk management services and legal advice that come with most policies. In some cases, insureds are already paying for those services through HR or legal firms, so being able to eliminate payment to those firms will help offset the cost of the insurance premium," Betterley adds.

For instance, Chubb offers any insured that purchases an EPLI policy a suite of services, including the online resources of ChubbWorks.com, legal and HR consulting, and guidelines on loss prevention best practices.

XL Catlin offers two different EPLI forms—one for small businesses through its open brokerage distribution channel and one for program business—both of which offer employers legal resources, templates for employee handbooks and proper job applications, and more.

"We see over 60% usage of those services among our customer base, which is terrific," says Zell.

Although claim frequency remains high, brokers and carriers see a brighter picture ahead if current economic conditions hold.

"There were so many claims that occurred during the economic downturn that it takes time for them to make their way through the system. It's not unusual for a carrier to be paying today on a claim that occurred two or three years ago," Tyson says.

"If there's any light at the end of the tunnel, it's that the economy is better today than it has been, which could translate into a better environment for both employers and carriers affording EPLI coverage," he adds. "Unfortunately, for now, the improving economy has not yet proved to be our panacea."