April 5th 2022
One of the trends over the last 12 to 24 months has been the hardening employment practices liability insurance (EPLI) market. Companies that may be accustomed to focusing on workers’ compensation risks are seeing large EPLI rate increases, rising retentions, or both. The goal of this article is to discuss ways companies can potentially mitigate these rising insurance costs. But first, it is helpful to understand what EPLI is and isn’t, then discuss market trends, and finally cover potential actions to take.
EPLI protects businesses against lawsuits alleging inappropriate or unfair acts related to any aspect of employment, whether in the hiring, active, or post-termination phase. As such, claimants can include applicants, full-time or part-time employees, leased/temporary workers, and former employees. Historically, the most common claims include discrimination, harassment, and wrongful termination.
Remedies are commonly financial, such as compensatory damages (back and future pay), but EPLI policies do not cover results of all claims. For example, EPLI coverages typically exclude penalties and punitive damages and criminal or civil fines. Most EPLI policies will cover legal fees incurred from defending a lawsuit in court, regardless of the suit’s outcome.
It is worth briefly noting that EPLI is not the same as errors and omissions (E&O) or directors and officers (D&O) coverages. While the coverages are similar in nature and do have some overlap, E&O and D&O typically protect insureds from claims made from outside the insured’s company, while EPLI addresses claims made from within the insured’s company. It is also worth noting that EPLI claims and/or accusations are typically not covered by general liability policies.
Insureds are seeing a wide range of rate increases, anywhere from 10 to 75 percent depending on jurisdiction, industry, claims history, and other factors. Further, we are seeing separate retentions, especially for California claims. Many insureds are seeing carriers push retention increases even in conjunction with rate increases, such that insureds are taking on more direct financial risk from EPLI claims. While market capacity is relatively stable as a whole, it is becoming more difficult for some healthcare and retail industries to find appropriate limits and for new EPLI insureds to find coverage at all.
One of the biggest drivers has been the pandemic itself. Industries that have experienced layoffs, furloughs, and/or remote work have experienced increases in related EPLI claims. For example, the Equal Employment Opportunity Commission (EEOC) reported that reasonable accommodation charges increased 400 percent between 2018 and 2020.1 In-person industries have not been spared either, with healthcare and manufacturing industries seeing significant increases as the pandemic emerged and progressed. There are many other pandemic-related impacts on potential EPLI claims, such as the presence and enforcement of vaccine mandates.
Another notable driver has been the impact of social movements, such as #MeToo and #BlackLivesMatter. Such movements have brought heightened awareness of improper behavior and treatment of applicants and employees to the forefront of the nation’s conscience. Claims and/or monetary benefits have risen as a result. For example, EEOC statistics show that monetary benefits arising from sexual discrimination claims have increased 60 percent from 2016 to 20202, with states such as California, Florida, New York, and Pennsylvania experiencing the largest increases in total charges by both women and men.3
Less prominent than the pandemic or social movements has been a rise in cases related to the Genetic Information Nondiscrimination Act (GINA). From 2016 to 2020, GINA-based cases and subsequent settlements related to prohibited medical inquiry/exam, discharge, and reasonable accommodation more than doubled between 2016 and 2020.1,4 While such cases could be viewed as isolated to insurance carriers and their insureds, the use of genetic information in hiring, firing, job placement, and promotion decisions are all relevant and applicable to PEOs and other non-carrier businesses. While case numbers are still low, we expect GINA-related claims to be a prospective risk with the potential to grow considerably in the coming years.
While EPLI rates are increasing, 2022 rate adequacy—or the level of expected losses relative to premium—may be similar to a few years ago. This perspective is based on the presence of the pandemic and social movements that did not exist or were not as impactful a few years back and have materially increased underlying EPLI exposure industry-wide.
With this in mind, the best way to mitigate rising insurance costs may be to consider changing EPLI program design. Businesses can retain more risk and potentially benefit if retained losses are ultimately more favorable than an associated insurer premium credit. PEOs can also consider passing on small deductibles or otherwise sharing risk with their clients to keep all parties mindful of the risk exposure.
If they have not already, businesses should also consider engaging a third-party actuary experienced in EPLI to help estimate claim liabilities, identify loss drivers, support discussions around program design changes, and facilitate conversations between the insured and insurer.
The EPLI landscape has changed in the last few years such that businesses and insurers are taking heed. While it is still prudent to ensure best risk management practices are being employed, businesses may be best served by looking to restructure their EPLI coverages and engaging a third-party actuary to help take control of their EPLI costs.
Frank Huang has more than 15 years of actuarial consulting experience serving a wide range of clients, including serving as ADP’s Chief Actuary.
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