By Jared Shelly
When U.S. Department of Labor Secretary Hilda Solis announced that the department is "back in the enforcement business," risk managers surely took notice. Since that proclamation in 2009, the Dept. of Labor has been much more active in enforcing wage-and-hour violations and offering assistance to workers complaining of unfair treatment.
Meanwhile, new employment regulations are issued every year and risk managers have had a notoriously tough time complying with existing regulations. The regulations are hard to understand and hard to conform to.
How do you ensure that you're not misclassifying employees as independent contractors? How do you know that you're not misclassifying nonexempt employees as exempt?
It turns out that many employers don't have those answers. "A significant number of employers would currently be found to be in noncompliance," with Labor Department regulations, said Bertrand Spunberg, senior vice president and management liability product head at Hiscox.
Therisk is amplified by the slew of laid off workers looking to file lawsuits against their former employers. For some, legal action is perceived as a better option than searching for jobs in the difficult job market. That environment may lead to expensive class-action lawsuits or lots of single-plaintiff suits, which may pop up in the wake of the Walmart v. Dukes Supreme Court decision that made it tougher for employees to be recognized as a class.
So it would seem a natural fit for employers to protect themselves with employment practices liability insurance coverage, specifically wage-and-hour policies that protect them from errors like misclassifying employees.
The problem is that insurers are running from wage-and-hour coverage. XL Group, for example, stopped offering the coverage more than a year ago, said Bruce Simmons, vice president at XL Group PLC in Hartford, Conn.
"We had a $100,000 wage-and-hour defense-only sublimit. We weren't even picking up indemnity and we have millions of dollars of loss coming in, so that's a lot of single-plaintiff losses that are coming to roost," he said.
Many carriers are simply unwilling to cover something they see as a business risk under the control of the employer. A lack of transparency into and control over employment practices seems to be the barrier.
"There's definitely an interest by some carriers, I just don't know if they're ready to start underwriting this exposure without having the proper education, knowledge and understanding to write this product profitably," said Melissa Mattioli, vice president of employment practices liability insurance (EPLI) at Liberty International Underwriters, a company that offers EPLI on a case-by-case basis only.
EPLI coverage, apart from wage and hour defense coverage, is still abundant, however, providing protection for liability resulting from sexual harassment, wrongful termination and other employment risks. The current environment is forcing EPLI limits to get smaller while deductibles and premiums are surging.
In fact, rates are increasing by 5 percent to 10 percent over 2010, according to the Employment Practices Liability Insurance Market Survey 2011, a December 2011 report by Betterley Risk Consultants Inc.
Rates had been trending downward from 2005 to 2010. "We have been concerned for the past several years that the ongoing soft market did not permit EPLI insurers enough margin to continue to provide a quality product," said the report, which just mentions price, not increased scrutiny from the Dept. of Labor, as its explanation for the market conditions.
Underwriting EPLI policies takes plenty of careful thought. Hiscox, for example, takes into account the type of industry that a company does business in. If it's one that the Labor Department identified as susceptible to misclassifying or mistreating employees -- such as construction, janitorial work, hotel/motel services, food services or home health care -- premiums are likely to be high or coverage may be denied altogether, said Hiscox's Spunberg.
"It's very obvious that some industries are in the cross-hairs of the Department of Labor. Those can be clearly identified by EPLI carriers as higher risk," he said. "Some carriers clearly have pulled back," said Spunberg.
For a construction company to get EPLI coverage, for example, they'd have to show carriers that they're addressing problems typical of that industry -- like a failure to record hours actually worked, shorting an employee's hours because of a rain delay or not compensating for meal breaks, said Mattioli.
A company's size can also scare away a carrier, since problems at larger businesses are more likely to lead to expensive and time consuming class-action lawsuits. In turn, smaller companies are much more likely to receive coverage than larger ones.
"The indication is that, for a class to be formed, you would need at least several hundred employees," said Spunberg. "Insureds that are below that employee threshold would be a better risk from an underwriting standpoint."
While the Wal-Mart v. Dukes decision, which makes it tougher for employees to be considered a "class" was clearly welcomed by employers, it could lead to lots of smaller cases popping up. Those can still be plenty expensive and time consuming, and result in a virtual death by a thousand cuts.
Carriers also may be more hesitant to underwrite coverage to companies in states with high rates of Fair Labor Standards Act litigation like California, New York or Florida.
That said, experts believe strongly that EPLI coverage is here to stay. Yes, the risks are hard to insure, but employers are clamoring for the coverage, so insurers and brokers will find a way to keep offering it.
"I think every single employer in the U.S. should have EPLI coverage," said Spunberg, noting that the coverage may change to include exclusionary language or higher deductibles.
"If there's any exposure that's crying out for a solution, it's this. If (carriers) are not here to tackle serious issues, what are they here to do?" said Adeola Adele, Marsh Inc.'s US Employment Practices Liability Leader in New York.
Brian Dunphy, managing director at Frank Crystal & Co. puts the need for EPLI coverage another way: Companies can't create a fool-proof defense mechanism against litigation so they might as well have insurance protection against it.
"If you fire somebody, they're going to very likely come back and allege wrongful termination," said Dunphy. "They're going to throw the kitchen sink at you to get some handout. It's a better than the alternative of trying to get a job."
XL's Simmons doesn't blame the Department of Labor's increased pressure for the scarcity in coverage, he blames the companies that are misclassifying workers or not treating them properly.
And he thinks insurers and brokers could be doing a much better job educating their clients about the patchwork of state and federal regulations.
"It's easy to point to the Department of Labor increasing its budgets and going after enforcements. But it comes down to the organizations knowing the laws in their states and the federal laws," he said. "They should get that guidance from their EPLI providers and D&O providers."
But others say it is the active Department of Labor that is causing the coverage crunch. Robert A. Boonin, a shareholder practicing in Butzel Long's Ann Arbor, Mich., office points to the Dept. of Labor's Bridge to Justice plan, which connects workers with established plaintiff's attorneys. The Labor Department has also stopped advising employers on whether they are in violation of the law.
It's all leading to "more litigation, more lawsuits and more class actions," said Boonin. "Risk managers and adjusters are going to have to be prepared for these collective actions and prepared to hire firms that are a little more sophisticated in dealing with these perspective actions."
Before underwriting coverage, carriers may require that a company hire an attorney to conduct a wage-and-hour audit to find out where the potential hazards exist.
"The best offense is being proactive and getting everyone into compliance," he said.
While EPLI coverage is still widely available, though perhaps not quite as easy to obtain as a few years ago, coverage limits are drifting downward and wage-and-hour coverage remains scarce.
Phil Norton, vice chairman of the Midwest region for Arthur J. Gallagher Risk Management Services Inc., said that he was trying to get coverage for a financial institution operating in California, but faced a 20 percent price increase.
Norton countered by showing the carrier that the employer had a robust way of dealing with employee claims and that its claims history was sparse. In the end, the carrier agreed to a flat renewal. "Carriers are willing to listen," he said, noting that they want to underwrite the coverage.
"It's plausible that risk management activity is producing better results. If you have a lot of big claims it's obviously not working," said Norton. "We basically got the carrier to say, 'You've got a good story, we'll change the rate but you're on notice and if you get hit with a big claim, I may respond with a big increase.' "
Jeffrey Lattmann, a managing director at the Atlanta-based broker Beecher Carlson, said that the best weapon in his arsenal is to show that a company has proactive employment practices. Training and educating employees, offering them ways to air grievances, and having a protocol for handling of employee complaints will all come into effect when trying to attain the right coverage, he said.
"They want to understand how progressive you are in hiring, tenure, promotion and exiting people," he said. "They're going to look at all those procedures at make a determination about coverage."
JARED SHELLY is senior editor/Web editor of Risk & Insurance®. He can be reached at firstname.lastname@example.org.
April 13, 2012
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