A different world for EPLI. (Special Report: Employment Practices).
It wasn't long ago that insurers were banging on doors, aggressively seeking to write employment practices liability coverages. Today, their attitude has changed dramatically, and they are characterized by one broker as reluctant providers who now "hem and haw" over coverage terms and conditions.
Are there still a large number of EPL insurers offering a variety of product choices? Yes, report experts. But risk managers, having long grown accustomed to an EPLI environment clearly favorable to the buyer, are likely to see their position weakened as insurers raise rates, set stricter terms, and resist overtures by insurance buyers to fine-turn policies to meet their very specific needs.
"There is a big difference in the EPL market from just one or two years ago when the market was relatively soft and providers were giving away the store," says Gina M. Higgins, managing director, Marsh, a national broker headquartered in New York.
At the time, she recalls, the market was saturated with more established products, and insurers, looking to bring in additional income, aggressively sought to garner EPLI marketshare. Yet the passage of time, explains Higgins, has seen EPLI claims hitting reserves. She says EPLI claims are now both high in frequency and severity. Add to this an insurance and reinsurance marketplace that is hardening across the board.
Higgins, who is also the Marsh EPL practice leader for FINPRO (financial products, insurance programs, and transfer mechanisms), outlines several trends related to the EPLI marketplace included in the Marsh "2001 Insurance Market Review and Forecast." Specifically, she reports that upward pressure on EPLI rates will continue as losses threaten to erode insurance reserves and that retentions will continue to rise to help counter premium increases, with some estimates pointing to retention increases as much as fivefold.
Additionally, Higgins reports that while capacity will remain stable, multiyear policies may not be available at all. Risk managers, she believes, would be well advised to secure EPLI now and to take advantage of the terms and conditions that might still be available, cautioning that within the year, "the marketplace will be extremely hard. Looking forward, I don't see it getting any better."
In his "Employment Practices Liability Insurance Market Survey," Richard S. Betterley likewise points to plans by most EPLI carriers to increase rates and, in particular, retentions. This is a result, notes Betterley, president of Sterling, Mass.-based Betterley Risk Consultants, "of general unprofitability in the line, particularly frequency, as well as an insurance environment that is more willing to charge higher rates."
Betterley, whose management consulting company publishes "The Betterley Report" six times a year, also notes that the number of carriers offering EPLI, while still significant, is beginning to shrink, with this trend attributed to several factors. These include: decisions by carriers to consolidate their products, the exiting of the line by some carriers that either were unprofitable for EPLI or did not have sufficient volume, and industry consolidation.
Other EPLI trends cited by Betterley in his market survey include a reduction of limits of coverage by some EPLI providers, an increase in rates ranging from 5 percent to 50 percent, and a rapid change in the retentions or deductibles that carriers are willing to write. (For more from the Betterley report, see related story on page 20.)
Richard V. Rupp, vice president and EPLI product manager of Professional Indemnity Agency, concurs that the EPLI marketplace is changing, characterized by "continuous tightening and an increase in pricing."
"Clean accounts," as well as the smaller employer accounts generally not a big target of plaintiff attorneys, might not find the EPLI marketplace tightening as severely as do their larger employer counterparts, says Rupp. Yet he does caution that they are still likely to see retentions rise significantly, perhaps from $5,000 to $10,000, or if currently at $25,000 to $50,000. Larger accounts with a typical attachment of $100,000 could well see that requirement rising to $250,000.
According to Rupp, whose San Francisco-based specialty lines MGA has an emphasis on EPLI despite a decidedly hardening marketplace, demand for EPLI has not waned. In fact, he reports his agency has doubled its EPLI premium volume every year for the last four years. "More people are buying it," he observes, noting with some irony that the slowing economy, which can fuel EPL claims by laid off or terminated employees unable to find work elsewhere, is also the impetus behind many EPLI purchases. Many employers, he observes, foresee the probable reactions of workers as mergers, acquisitions, and large-scale layoffs force them out of a job. "In a good economy, terminated workers had another job to go to. But in a bad economy, more people are looking to bring an EPL claim. Employers are looking for protection."
Coverage Terms Tighter
Yet the protection employers seek is changing as EPLI insurers face the stark reality that it's difficult, at best, to be profitable with a product so high in frequency and severity and which is subject to "so much diversity across the courts," says Pamela J. Ritz, president of Specialty Risk Management, an independent risk management consulting company in Austin, Texas. Companies, continues Ritz, "know they have to sit down and look at their (EPLI) book." This closer scrutiny has revealed some unsettling trends that have likewise prompted EPL insurers to make changes in how they underwrite and price their product.
For example, Ritz points out that in the mid-1990s, EPLI was priced at an average of $125 per employee, declining steadily as the marketplace softened and falling to as low as $50 per employee as recently as two years ago. Now, reports Ritz, EPLI prices are edging back to the $80 to $100 per employee range and are likely to increase some 20 percent to 30 percent in 2002. And those industries with a typically high employee turnover rate, or with other unfavorable underwriting characteristics such as a highly decentralized work force, could find it difficult to obtain EPLI, or at best, see their rates "shoot through the roof," Ritz adds.
Coverage terms and conditions, Ritz continues, are also becoming tighter, with risk managers perhaps once again seeing the reintroduction of copayments on a portion of the loss. Coverage chargebacks such as punitive damage and downsizing exclusions and the decision by insurers to offer inception-only policies that no longer provide coverage for prior acts are also likely scenarios in the EPLI marketplace going forward, Ritz predicts.
"All insurance markets are in a hardening mode, and while financial services products might be lagging behind other casualty areas, they are also experiencing rate and attachment improvements. The inertia going forward is for higher rates, more attachment selection, and a firming of terms," adds Paul C. Cunningham, vice president, casualty, at Boston-based Lexington Insurance Co.
According to Cunningham, whose company is a wholly owned subsidiary of AIG and a writer of EPLI, this hardening tend, which was evident in 2001, is expected to continue. Brokers, having grown accustomed to an EPLI environment very receptive to tweaking a policy, perhaps by endorsing on third-party coverage or broadening key definitions or terms, are now likely to see more resistance to these requests by underwriters.
"In the past, a broker would come up with 40 things they wanted changed (in an EPLI policy)," recalls Cunningham. "Now underwriters are not as willing to make these changes. It will be more difficult for brokers to manuscript their own language beyond what underwriters think is sound."
There are also a number of troubling external forces weighing upon EPL insurers that are impacting their attitudes about the coverage and the terms and conditions under which they'll offer it, Cunningham and other experts point out.
For example, Cunningham says that the plaintiffs bar, in general, has focused more squarely on the employment practices arena, with multiparty and class-action litigation on the rise.
He likewise reports that a visit to cyberspace can easily locate Web sites that specifically target Fortune 500 companies, providing a forum for disgruntled employees to vent about their company. These electronically posted missives, as well as inappropriate internal company e-mails or misuse of questionable sources gleaned from the Internet, "creates a whole new tool that plaintiffs lawyers can tap into to get evidence," Cunningham observes.
Workplace Safety Issues
The terrorist attack on the World Trade Center and Pentagon has also created the specter of new EPLI claims arising out of safety-related concerns in the workplace, adds Jeff Tanenbaum, senior shareholder in the employment and labor law firm Littler Mendelson, San Francisco.
Following September 11, says Tanenbaum, growing numbers of workers are wondering if employers are taking sufficient steps to protect them. Increasing anxiety about bioterrorism, sparked by the identification of anthrax spores at several federal and media offices, also holds the potential to impact the EPLI arena. For as Tanenbaum points out: "To the extent an employee becomes sick--that would fall under workers' compensation. But the fear of becoming sick may fall outside of workers' comp." Alleged mental anguish, an employee's refusal to perform certain functions (such as opening mail or traveling by airplane) resulting in termination or transfer, alleged harassment of employees of Islamic faith--these are just some of the byproducts of September 11 likely to blossom into employment practices litigation, he adds.
Another potentially troubling Catch 22 for employers arising out of the terrorist attack centers around their responsibility to provide employees with a safe and secure working environment, Tanenbaum continues. For while some employees may demand increased security, others may allege privacy violations or discrimination if such security procedures are not applied uniformly across the entire employee population. While no one can yet quantify the potential impact of these potential claim scenarios on EPLI loss experience going forward, Tanenbaum is convinced that "down the road, litigation will result from the actions employers are taking right now."
While new potential exposures deriving from the events of September 11 may be garnering the most speculation among insurers, the more traditional sources of claims also continue to whittle away at the product's performance, experts say.
For example, Tanenbaum reports an increase in ADA (Americans with Disabilities Act) claims, observing that a backlash on the state level has in some instances broadened the federal definition of what constitutes a disability under ADA. "Definitions by some state legislators are often surpassing the ADA in terms of coverage," says Tanenbaum, with the end result being greater potential liability facing employers and their EPL insurers.
Claims arising out of the treatment of employees who fall under the protection of the Family and Medical Leave Act (FMLA) are also a significant source of EPLI claims, adds Jim McSherry, president and CEO of the workplace HELPLINE, a Boston-based company offering virtual human resources consulting primarily to EPLI employer policyholders.
Small and midsized employers are more vulnerable to running afoul of their obligations under FMLA, observes McSherry, noting that "it's a complicated issue. Employers have many technical questions about the act as well as about how they should deal with (employee) disabilities, pregnancy, and intermittent leave. They also need to know what their particular states require, which may be different (from the federal statute). They can't act arbitrarily."
Additionally, McSherry reports that employers continue to wrestle with dilemmas surrounding the legality of withholding pay as a form of discipline and under what circumstances an employee should be deemed exempt or nonexempt. The Fair Labor Standards Act, which addresses these and other key employment practices issues, continues to be a major source of EPL claims, McSherry adds.
An employer's responsibility to military reservists, often not fully understood by employers or perhaps deemed irrelevant, now becomes more glaring, McSherry cautions, particularly since the terrorist acts of September 11 prompted President Bush to mobilize some 35,000 military reservists into active duty. While employers have always been held to specific responsibilities under the Uniformed Services Employment and Reemployment Rights Act (USERRA), "there is no better time (than now) to understand your organization's obligations under the act," stresses HELPLINE.
As EPLI insurers look to the future, there is a cloud of uncertainty that hovers over the coverage.
Heather Fox, assistant general counsel and vice president, National Union Fire Insurance of Pittsburgh, Pa., a member company of the American International Group, notes that while frequency and severity have both taken a toll on EPLI, both current and looming exposures could further erode its performance going forward.
According to Fox, whose company specializes in management liability products, insurers that have failed to maintain "retention integrity" are already seeing unfavorable loss ratios. Premium rate increases and higher retentions are inevitable if insurers hope to be profitable, says Fox, cautioning that those insurers who fail to make significant adjustments will be hit hard.
Risk managers, she stresses, must adapt to a changing environment, while those who have resisted purchasing EPLI would be well advised to acquire the protection, even if they are no longer operating in a buyer's market. "Those risk managers who believe everything in their company is perfect--that they've instituted good employment practices policies and training--should still obtain EPLI," cautions Fox.