Author: Emily Loupee
As we began 2020, most employment practices liability (EPL) insurance policies were renewing with modest increases, often in line with employee count increases. When COVID-19 pandemic restrictions caused layoffs and furloughs — which are viewed by insurers as the largest exposure for EPL insurance claims — we did see further increases in the rates most EPL insurers charged at renewal, with most companies seeing between 10%–25% increases, and many companies seeing retention increases as well.
At the end of 2020, particularly in higher risk states such as California, Texas, Michigan and New York, and especially for those companies most impacted by COVID-19, we have seen more drastic shifts, with large EPL insurers pushing increases of 25%–75% and even higher, depending on the specific factors.
As we analyze premium changes in the EPL insurance marketplace, Gallagher's CORE360® framework is a useful tool to understand how this impacts companies purchasing EPL insurance. CORE360 framework identifies six cost drivers including:
- Insurance Premiums
- Program Structure
- Coverage Gaps
- Uninsured & Uninsurable Losses
- Loss Prevention & Claims
- Contractual Liability.
Increasing premiums impact the first cost driver, insurance premiums.
Looking toward 2021, we anticipate that EPL insurance rates will remain elevated and retentions will continue to increase.
- Most insurers are not looking to write new EPL policies, and the largest insurers are actively trying to shrink their EPL books. This reduction in competition, along with insurers continuing to seek rate and retention increases, will extend the hardening market through at least the beginning of 2021.
- In the context of CORE360, retention increases also increase a company's total cost of risk by transferring more exposure to the insured from the insurer. Often retention increases in this market are required, but insurers may also offer higher retention options to consider as well.
- Whether the increase remains in the lower 10%–25% range or the higher 50%+ range will depend on the location of employees, specific exposures and claims history. In any event, premium increases will continue into 2021 for EPL. Additionally, we have started to see restrictive terms introduced at renewals. The most notable in EPL is the addition of a privacy or biometric exclusion, which many insurers now require.
- When insurers force more restrictive terms, this also increases a company's cost of risk through the third cost driver, which focuses on coverage gaps. All insurance policies contain exclusions, and those will increase a company's cost of risk when claims may not be covered due to more restrictive terms in the policy.
- We also see some insurers failing to offer third-party discrimination and harassment extensions in industries like real estate where there is a higher exposure, further increasing cost of risk through the third cost driver in the CORE360 framework.
- We may see increases in the cost of extended reporting period and removal of multi-year discovery or extended reporting period terms.
- It is much more common to see insurers try to impose a higher retention for high wage earners, which can range from those with total compensation of $150,000 per year to $250,000 per year.
Trends increasing EPL insurance claims
Increases in claims is the main factor contributing to the hardening insurance marketplace for EPL. Employment litigation continued to be one of the leading exposures facing companies in 2021. Companies are always at risk for claims alleging wrongful termination, discrimination, harassment and retaliation, but the typical amount and size of employee lawsuits is higher than ever due to recent trends.
These trends include:
- Increased focus on racial injustice and social injustice
- Social inflation (the trend of increasing cost of defense and settlements due to changes in overall society sentiment)
- Employee classification (relating to independent contractors and exempt vs. nonexempt) further complicated by recent ballot measures relating to gig economy workers
- Changes to the interpretation of Title VII and other state/local anti-discrimination rules to include transsexual as a protected category
- Illinois' Biometric Information Privacy Act (BIPA) and similar statutes in status such as Texas, Washington and California, which allow for a private right of action alleging unlawful use or collection of biometric data
- The COVID-19 pandemic, which caused unprecedented disruption in workplaces introducing new exposures:
- Furloughs and layoffs
- Potential issues with Worker Adjustment Retraining and Notification Act (WARN)—a requirement for 60 days notification of any employment loss and similar state statutes
- Whistleblower lawsuits alleging violations of Office of Safety and Health (OSHA) violations, such as not having enough personal protective equipment (PPE) or forcing employees to work in unsafe conditions
- Treatment of those with COVID-19, such as disability pay and leaves of absence
- Fair Labor Standard Act (FLSA) issues
- Gender discrimination based on the unequal burden of child care on women workers
Gallagher's CORE360 framework focuses on reducing cost related to claims in the fifth cost driver, Loss Prevention & Claims. Using Gallagher's Claim Advocacy group, we help reduce conflict and increase coverage for companies by working with your insurer to maximize coverage.
Details of COVID-9 Impact on EPLI insurance claims
The chart below shows COVID-19-related employment complaints (from Jackson Lewis COVID-19 Employment LitWatch). Since the start of the COVID-19 pandemic, there have been 936 COVID-19-related employment claims as of 11/2/2020. The top allegations include:
The industries that have been hit the hardest by COVID-19-related EPL claims are healthcare (243), manufacturing (83), and retail and consumer goods (67).
Source: Jackson Lewis COVID-19 Employee LitWatch
However, some trends also are slowing employment-related litigation. The large increase in remote work is the most likely reason that we are seeing a decrease in the number of federal employment cases filed in the second and third quarter of 2020. The United States Equal Employment Opportunity Commission (EEOC) data shows a decrease in the total number of charge receipts and resolutions (see chart below). EEOC charges are not the same thing as employment litigation, so this divergence does not contradict the insurers' experience of increase of employment litigation, but may point to a future reduction in litigation. EEOC data may not include some COVID-19 allegations, such as workplace violations, whistleblower and disability-related allegations.
While COVID-19 and other trends are potentially increasing the frequency and types of EPL claims, social inflation is contributing to an increase in the severity of EPL claims, which is perhaps even more impactful on the EPL marketplace.
A recent report released by Kaufman Borgeest & Ryan LLP lists the reported settlements for employment practices-related claims in excess of $2 million. Most will recognize the largest claims from the press coverage, such as a large third-party EPL insurance claim which settled for $215 million. Notably, there is increasing social attention to allegations such as discrimination and harassment, and 25% of the top 100 EPL settlements over the last five years occurred in 2019–2020. The headline-grabbing large settlements directly impact the marketplace because one $10 million dollar payout may cause an insurer's entire EPL book to be unprofitable, and there has been an increase in less noteworthy single-plaintiff claims. For example, a single-plaintiff discrimination or retaliation claim that once settled for around $200,000 is now settling for around $500,000. These increases in all settlements significantly impacts insurers' profitability.
In conclusion, there are numerous events and trends impacting employment litigation, increasing EPL insurance claims and creating a hardening insurance market environment for EPL. To ensure that you are getting the broadest coverage with a strong insurer and the most competitive premium available, it is imperative that you place EPL coverage with a broker experienced in placing EPL coverage rather than a generalist broker — the difference could mean thousands in premium and millions in loss for uncovered claims.
Please note, a client's risk profile is the primary variable dictating renewal outcomes. Loss experience, industry, location and individual account nuances will also have a significant impact on these renewals. Reach out to Emily Loupee, Area Senior Vice President at Gallagher or your local Gallagher broker for more information.
Utilizing Gallagher Drive™, our proprietary data and analytics platform, our brokerage team can provide specific rate guidance for your line of coverage, industry and geography. Combined with deep expertise in your particular industry and business, Gallagher can help you navigate today's highly nuanced market.