Spike in Discrimination Claims Won't Raise Rates--for Now

Companies have plenty of capacity to tap in the employment practices liability insurance market, so rates could drop despite higher frequency.

By CYRIL TUOHY, managing editor of Risk & Insurance®

The 7 percent spike this year in private-sector employment discrimination and retaliation complaints as measured by the U.S. Equal Employment Opportunity Commission (EEOC) isn't likely to increase employment practices liability insurance (EPLI) rates in the short term given the glut of market capacity, a trio of insurance brokers said. But that won't stop some carriers from trying.

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"In terms of immediate market pricing, the EEOC numbers don't have an immediate impact," said Ann Longmore, an executive vice president with Willis North America. "The best carriers can do is to push for higher retentions for class- or mass-action coverage, but even that is questionable. Capacity is what it is."

Or perhaps for some, the effects will be felt sooner rather than later.

"In the immediate future, these EEOC numbers are likely to have an effect on the (EPLI) market for smaller employers," said Tom Hams, EPLI practice leader for Aon. "Long-term, these numbers may affect (EPLI) for the market's larger employers."

Bruce Simmons, senior underwriter with responsibility for stand-alone employment practices liability insurance for XL Insurance in Hartford, Conn., said that his company would "try to push for rate" in the EPLI marketplace in 2011 "because we see a direct correlation with the EEOC complaint numbers and our claims frequency."

Nationwide, the average nuisance value EPLI settlement should be between $5,000 and $7,500, according to Simmons, but in California, for example, "we're now seeing payouts north of $25,000."

For fiscal year 2010, the EEOC received a record 99,922 new private-sector charges of employment discrimination, a jump of 7 percent over 2009, the agency reported. The spike comes after a slight decline in 2009, when total charges fell 2.2 percent to 93,277 from a total of 95,402 charges in fiscal year 2008. This year's numbers might just be the tip of the iceberg.

"There's easily another 200,000 complaints filed under state statutes," Simmons said.

The increase in complaints during the 2010 fiscal year, the EEOC said in a report, is due in part to its expanded authority under the ADA Amendments Act of 2008, the Genetic Information Nondiscrimination Act of 2008 and the Lilly Ledbetter Fair Pay Act of 2009.

Still, brokers said that buyers need to keep in mind that dozens of the 99,922 new private-sector complaints filed in the 2010 fiscal year will never become claims as they'll either be dismissed or settled.

Even the occasional payout of up to $1 million isn't going to be enough to alter prices. said Adeola Adele, employment practices liability produce leader for Marsh's FINPRO unit.

"Payouts of $100,000 here, and $25,000 there, or even $1 million, aren't going to mean much," Adele said. "In order to see a big shift, you have to see severity, and we've not seen that as of yet."

"There's a lot of capacity for the smaller insureds," Adele said. "There's a ton of capacity even for the larger companies. The capacity is there, the competition is there, and there's incentive for carriers to provide coverage enhancements and carriers looking to differentiate themselves."

WHAT IT MEANS IN RATE

Hams said the EPLI marketplace going into 2011 is projected to be "flat to down 5 percent" over 2010, and may even soften some more next year.

Buyers who might not ordinarily purchase employment practices liability coverage will show more interest in it, which could help grow the market.

"Small employers are still a small spectrum of the entire overall market but they are also the least-tapped market, and some people out there are rethinking their coverage decision," he said.

Brokers and underwriters are watching the pipeline of pending cases, and expect the U.S. Supreme Court to make an announcement before the end of the year whether it will hear arguments in Dukes v. Wal-mart Stores Inc., the largest class-action sexual discrimination case ever filed.

"Whatever happens, it won't have an impact on pricing in the (EPLI) marketplace right now, but it does have implications for product litigation, environmental coverage, security and D&O, in addition to employment practices," Longmore said.

The dispute, Longmore also said, could embolden more plaintiff firms to pursue large class-action suits in federal courts or seek redress through state courts.

December 3, 2010

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